Bloomberg News

Russian Pension Gap to Double Next Year, Weighing on Budget

November 02, 2011

Nov. 1 (Bloomberg) -- Russia’s pension deficit will double to 3 percent of economic output in 2012 as tax cuts kick in and net retirees jump by half a million, increasing the strain on public finances that are becoming more reliant on energy prices.

Next year’s pension shortfall will reach 1.75 trillion rubles ($58 billion) from 875 billion rubles in 2011, Deputy Health and Social Development Minister Yury Voronin said. That’s 3 percent of the Finance Ministry’s 2012 gross domestic product forecast. Rather than raising the pension age, Russia may switch to a system where citizens can claim payments in proportion to the time they worked and their salaries, he added.

“Next year, we’ll prepare a strategy for the long-term development of the pension system through 2050,” Voronin said in an Oct. 24 interview, adding that Russia is seeking “recommendations” from the International Labor Organization, which will attend a conference on global pension trends in Moscow today. “The strategy will be implemented in 2014.”

Increases in government spending are endangering Russia’s public finances, former Finance Minister Alexei Kudrin warned as he was fired in September following a spat with President Dmitry Medvedev over military expenditures. After cutting payroll taxes and bolstering benefits for retirees, the world’s largest energy exporter needs an average oil price of $116.2 a barrel to balance its 2012 budget compared with $108 this year.

Public Finances

Eastern European nations are changing pension rules to help trim public spending and budget deficits. In July, Ukraine approved increasing the retirement age for women to 60, while Poland’s Labor Minister Jolanta Fedak said the next month that Poles should work longer.

Russia’s government will review changes to the pension system after a presidential vote in March at which Prime Minister Vladimir Putin, 59, is seeking to return for a third term, with Medvedev, 46, a possible replacement as premier.

Medvedev has ordered a reduction in the 34 percent payroll tax that employers pay on salaries, which helps fund Russian pensions. In 2012 and 2013, small and medium-sized companies will pay 20 percent, while everyone else will pay 30 percent.

The shortfall from the tax breaks may be 304 billion rubles, Voronin said. Russia is also shouldering the burden of an additional 500,000 retirees, including military pensioners.

Life Expectancy

While exceptions based on career or disabilities allow many Russian men and women to retire before they reach 60 and 55, the official thresholds for eligibility, increasing the pension age is tricky because of the country’s low life expectancy, according to Voronin.

“Raising the pension age is only possible if people have clearly started living longer,” he said. “A simple increase of the pension age is an antiquated method.”

Russian men born today have a life expectancy of 63 years, the least among the so-called BRIC nations, while women will live to 75, according to the United Nations. That compares with 64 for Indian men, 71 in Brazil and 72 in China.

The Health and Social Development Ministry is studying revisions that would focus on the number of years worked rather than the age when retirees start collecting benefits, Voronin said. Time worked may also include other periods deemed socially significant, such as time spent raising children, studying or serving in the military, he added.

Under this system, “a person can decide for himself when to retire,” according to Voronin.

Fighting Poverty

Russia’s deteriorating demographics may put its sovereign credit rating under “rising pressure” after 2015, while state debt may surge to 585 percent of GDP by 2050, Standard & Poor’s said this year. The Finance Ministry forecasts government debt may rise to 17 percent by end-2014 from 11.2 percent this year.

While increasing the pension age may improve the system’s balance for about five years, it would also place a further burden on the labor market as Russians who would otherwise have retired may continue working, Voronin said.

Russia, which is trying to diversify its economy away from oil and gas, should seek to double per capita GDP during the next decade, Putin said in May. This would help raise pensions by increasing incomes and the amount people are able to save as they work, according to Voronin.

“To achieve acceptable pension levels, we’ll need to fight against poverty and the high differences in people’s incomes,” he said.

--Editors: Andrew Langley, Alan Crosby

To contact the reporters on this story: Alena Chechel in Moscow at achechel@bloomberg.net Scott Rose in Moscow at rrose10@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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