Dmitry Butrin, Pyotr Netreba, Darya Nikolayeva
Cabinet officials held the final discussion on the key component of Russia's economic strategy.
Under the guise of a final discussion on pension reform led by Prime Minister Vladimir Putin in the White House last night, the Cabinet officials, including Deputy Prime Minister Alexei Kudrin and Economic Development Minister Elvira Nabiullina, decided the fate of Plan-2020. Their decision concerning this key component of the economic policy will be announced at the Cabinet meeting scheduled for today.
Yesterday afternoon, Prime Minister Vladimir Putin convened a meeting dedicated to the reform of the pension system. The meeting was attended by First Deputy Prime Minister Igor Shuvalov, Deputy Prime Minister Alexander Zhukov, Deputy Prime Minister and Finance Minister Alexei Kudrin, Government Chief of Staff Sergei Sobyanin, Economic Development Minister Elvira Nabiullina, and Minister of Healthcare and Social Development Tatyana Golikova.
The meeting was held behind closed doors and no information about the meeting was made available beforehand. According to the official statement issued by the White House, decisions are to be announced today. The meeting would likely have remained unnoticed had it not been for Mr Putin's slip of the tongue at the pre-scheduled meeting with chairman of the Federation of Independent Trade Unions of Russia Vladimir Shmakov, when he mentioned a forthcoming discussion of "measures designated to ensure long-term stability of the pension system" at a meeting to be attended by the ministers.
Mikhail Shmakov told Kommersant that, in Mr Putin's waiting room, he ran across a "group of ministers ready to discuss the pension reform". The ministers described their waiting room consultations as "lobby prattling".
There was hardly any prattling in the waiting room, however. This was the final discussion of the key aspect of the economic policy - the concept of long-term social and economic development of Russia through 2020 - held on the eve of the Cabinet meeting scheduled for today.
"The pension issue" is the sole aspect of the concept that prevents Deputy Prime Minister, Finance Minister Alexei Kudrin and Economic Development Minister Elvira Nabiullina from reaching an agreement. The concept was to have been accepted on September 29, but (as Kommersant said yesterday) the meeting of the Cabinet Presidium was postponed, and Mr Putin set another deadline: the concept was to be improved and accepted before the Cabinet meeting scheduled for October 1.
The concept is based on the strategy of the pension reform, and particularly on the source of its funding. The draft concept presented by Ms Nabiullina assumes that average pensions will exceed the living wage 2.5-fold, although her draft cautiously bypasses any changes in the Unified Social Tax rate as the basic source of pension funding. Her draft concept suggests investing the National Welfare Fund proceeds (up to $100 billion by the end of 2008) into the innovative economy. The Cabinet may cut the VAT rate, but only if the proceeds of the National Welfare Fund are put to work. Alternatively, the Ministry of Finance wants to invest the National Welfare Fund proceeds into the pension system, to raise the Unified Social Tax rate in lower increments and to postpone the Unified Social Tax rate rise. The Ministry of Finance proposes replacement of United Social Tax payments by insurance contributions payable by employers and the indexation of the Unified Social Tax schedule driven by the wage push. The Ministry of Finance cannot agree with Ministry of Healthcare and Social Development and the Ministry of Economic Development on the period of the pension rise. According to the Ministry of Healthcare and Social Development, the average pension will exceed the living wage 2.5-fold in 15 years, whereas the Ministry of Finance suggests that the average pension will exceed the living wage 3.75-fold by 2023. Against this backdrop, any VAT rate cuts meet strong objections.
A compromise is unlikely. According to the information obtained by Kommersant, the day before the meeting was chaired by Prime Minister Putin, the Cabinet made an attempt to moderate the debate by excluding discussion of potential Unified Social Tax rates from the agenda (this issue is very sensitive for employers, and the Russian Union of Industrialists and Entrepreneurs supports the Ministry of Economic Development, since this concept bears a lower risk of the Unified Social Tax rise). According to Kommersant, the political solution was to discuss the Unified Social Tax rate after the concept was accepted. However, this solution only further heated up the discussion that arose at the meeting chaired by Mr Putin, as it had the decision made by President Medvedev back in September when he suggested that the VAT rate reduction be discussed in 2009, when the concept was accepted.
It is no wonder, then, that the Cabinet did not have the courage to hold a public discussion: despite multiple technical details associated with the VAT, Unified Social Tax and the National Welfare Fund, the key social issue of Russia's economic policy was in question. The point is that the budget strategy developed by the Ministry of Finance is the sole proposal that guarantees the implementation of the most ambitious social project developed by the Ministry of Finance together with the Ministry of Healthcare and Social Development: valorisation of pensions awarded between 1991 and 2005. It is noteworthy that in August, the Ministry of Healthcare and Social Development announced its proposals concerning the reform of the pension system, including re-evaluation of pension rights obtained before 2002, known as "valorisation", to be implemented starting in 2010. This is a programme that would result in a substantial rise in pensions, including those awarded in the days of the USSR.
In his interview to Kommersant, Mr Kudrin made a statement that the cumulative pension system would be efficient by 2023, and until then, any pension-related problems must be resolved by the state at the expense of the National Welfare Fund.
In the event that the concept proposed by Ms Nabiullina is accepted, the valorisation will require a steep rise in social taxes and contributions payable both by employers and employees. Rather, the Ministry of Economic Development believes that the pension system problem is an excuse that masks the unwillingness of the Ministry of Finance to boost the economy by making state investments. This is the key idea of the concept, along with the tax cuts. In other words, the core issue discussed at the meeting held by Mr Putin is the choice between pensioners and industrialists, a choice that will be debated for a long time, and that once made, cannot be reversed. Discussions were over at 9 pm, although the White House press service made a statement that the outcome would be announced the following day.
