Mir Novostei: “Putin promises worthy old-age pensions”
Author: Andrei Polunin
For those waiting for new pensions
The pension reform talked about by Kremlin officials for years has failed miserably. Since its inception, the Pension Fund budget has been increasingly unable to make both ends meet. Addressing a monthly Government meeting, Prime Minister Vladimir Putin outlined a new pension system.
Under the Putin Plan, employers will have to finance current pensions through insurance premiums. However, nobody seems to care that such premiums will become a heavy burden for small and medium businesses. Nor is the Government concerned about short-term pension-reform.
The Putin Plan does not index the lowest pensions to the subsistence minimum. Consequently, Russian retirees would once again be forced to eke out a miserable existence if the Government does not accomplish its objectives.
This scenario seems possible because the Government's bailout programme for banks is causing runaway inflation.
However, the Cabinet prefers to pursue immediate, rather than long-term, goals. We should probably be happy that the Putin Plan makes it possible to raise pensions in the short-term.
The Government has failed to clarify the mechanism for calculating three-component pensions. Prime Minister Putin has completely overhauled the existing pension system. From now on, all individuals age 41 and younger will be entitled to basic and contributory pensions in the future and will have to pay 6% of the substantial unified social tax (UST) levied on employers.
The Putin Plan prioritises the UST issue. Although ordinary Russians will continue to pay 13% income tax, employers will find themselves in the lurch.
Current UST funds depend on individual wages. 26%, 10% and 2% UST is charged on annual wages of up to 280,000 roubles ($10,700), between 280,000 and 600,000 roubles ($23,000) and over 600,000 roubles, respectively. It is clear that the system is working in favour of oil and gas companies, whose employees make huge money, and these companies can economise on taxes.
Putin proposes charging 26% UST on annual wages of up to 415,000 roubles ($16,000) and no UST at all on larger sums. Consequently, UST proceeds are expected to soar.
20%, of the 26% mentioned above, of UST proceeds were previously spent on pensions and the remaining 6% channelled into other social funds.
However, the Government now proposes spending the entire UST on pension payments.
Employers will have to channel 2.9% and 5.1% of individual wages into the social insurance and medical insurance funds, respectively.
However, employers are not very happy about the prospect of financing unprecedented pension raises. The Russian Union of Industrialists and Entrepreneurs emphatically opposes this approach and wants the state to compensate its expenses.
The Government is vaguely promising to discuss this issue in the future and has ordered the Finance Ministry and the Economic Development Ministry to reconsider.
The probable result of this scheme is that employers will once again start paying under-the-table wages, without making any deductions to the Pension Fund. Moreover, inflation will devalue the 6% contributory pension share.
Unfortunately, only extremely naïve Russians expect long-term projects to succeed.
Natalia Rimashevskaya, the director of the Institute of Socio-Economic Problems of the Population, said more substantial pension raises were needed, and that average pensions should not be pegged to the subsistence minimum (as proposed by Putin) because the latter was used to calculate minimum pensions.
She said minimum pensions should match the subsistence minimum, and that they should total at least 40% of individual wages under UN and International Labour Organisation standards.
Plans to attain 40% levels by 2020 are not an impressive achievement because minimum pensions now account for 70% of industrial-world wages, Rimashevskaya told the paper.
She called the proposed 415,000 rouble ceiling appropriate because many other countries stipulate similar restrictions in order not to pay excessive pensions to people in the high-income brackets.
Rimashevskaya said the pension reform fiasco was a result of the ill-conceived 2002 decisions to replace the non-contributory system with contributory pensions, and that all analysts considered this an absurd approach.
I would like all officials who disagreed with the scientists and undermined the pension system be made accountable, she said.
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For your information
Projected pension raises
On March 1 and December 1, 2009, basic pensions will be raised by a total of 37.1%. Starting with April 1, 2009, insured pensions will be indexed by 15.6%. Consequently, average pensions would match old-age subsistence minimum levels by late 2009.
Starting in January 1, 2010, all pension rights acquired before 2002 will be indexed by another 10%, plus 1% for every 12-month Soviet-era work record before 1991.
This means that all Soviet citizens will receive an extra 1% for every 12 months of their work record.
Insured employees with a 30-year work record will receive pensions amounting to at least 40% of average nationwide wages. This would match minimum pension levels in the European Union.
