The pension reform, the essence of which is to raise the retirement age, has caused a clear negative reaction in society. The “A Just Russia” faction in the State Duma voted almost entirely against the relevant law and is now seeking the abolition of the pension reform from July 1, 2021.
Latest news - a corresponding bill has been submitted to the State Duma of the Russian Federation, but has not yet been considered or adopted. Let's tell you in more detail.
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Is it possible to lower the retirement age?
The retirement age is fixed in federal law, which is in force throughout the Russian Federation. This is Federal Law-400 dated December 28, 2013. In 2021, amendments were made to Federal Law-350 of October 3 and the gradual implementation of its provisions began (the age is raised gradually, there is a transition period). Thus, the increase in the retirement age was carried out completely legally, this decision was made by legislators.
In order for the retirement age to be reduced in 2021, a federal law must also be adopted. These are the principles and hierarchy of the legislative system in the Russian Federation. Neither the president nor the government can change the retirement age by decrees or resolutions.
Introduction of a new surcharge for pensioners
From 2021, it is planned to restore the previously temporarily suspended additional payment for elderly people who have worked in agriculture for more than 30 years. And yet they still live in rural areas. The increase in pension benefits will be 25%. But 25% is not from the pension, but from the fixed payment. And only pensioners who are not officially employed and live in rural areas have the right to apply for such an additional payment.
If we take into account the size of the fixed payment, which was approved for 2019 (5,334 rubles), the additional payment to pension provision will be 1,333 rubles.
Initiatives to cancel pension reform
In recent years, despite the implementation of pension reform, legislative initiatives on returning to the old retirement age (in whole or in part) have periodically appeared:
- in November 2021, it was proposed to return the pre-reform retirement age to residents of the Far Eastern Federal District. This proposal by Nikolai Kharitonov, head of the State Duma Committee on Far Eastern Affairs, was not discussed further;
- in March 2021, representatives of the Communist Party of the Russian Federation faction introduced a bill to the State Duma to return the “Soviet” retirement age to teachers and doctors. Bill No. 1126427-7 has not even passed the first reading;
- a little later, the LDPR announced the formalization of a similar legislative initiative for all firefighters (now only employees of federal services can retire early), but so far it has not been documented;
- Finally, the reduction of the retirement age from July 1, 2021 was provided for in bill No. 1145526-7, which was introduced by deputies of A Just Russia.
This document already proposes a complete rejection of all provisions of the pension reform.
Pension size in 2022
At the moment, the average insurance pension in Russia is 17 thousand 536 rubles. It increased by 7.3% compared to last year’s pension. 2.9 million people received additional payments to pension payments. Indexation of pensions for non-working pensioners is calculated until 2024 and will have the following values:
- in 2022, the pension will be increased by 5.9%;
- by 2023 it will grow by another 5.6%;
- in 2024, pension indexation by 5.5% is provided.
As for employed pensioners, indexation is not provided for them, although the government does not rule out that if there are appropriate funds in the country's budget for this category of pensioners, the pension will also be indexed.
Prospects
Will there be a reduction in the retirement age? Obviously this won't happen. Pension reform is in its first step; the authorities have not commented on even a partial return to pre-reform levels for some categories of citizens. Thus, the bill of the Communist Party of the Russian Federation and Kharitonov’s proposal remained unheeded.
Moreover, these proposals have no economic justification. The authors of the latest bill expect that the reduction in transfers to the Pension Fund due to the implementation of the reform over two years is already sufficient. These statements are populist in nature and are not supported by serious calculations.
In addition, the head of A Just Russia, Sergei Mironov, proposed eliminating the Pension Fund altogether, pointing out the lack of need for mediation between the state and the population. However, this statement also cannot be called justified, since it is obvious that in one form or another the government agency for considering pension issues will remain.
It is possible that for some categories of citizens the issue of returning to the old retirement age will be considered, but a complete repeal of the provisions of the reform will not take place.
Increase in pension payments
It is for this reason that changes were made to pension legislation. Pensions will increase from 2021. But not in the way many Russians would like. The Government already has a plan for the next six years until 2024 inclusive. It implies double indexation of pension benefits. It will be held in April and February.
The highest indexation percentage is planned for next year, and it will be 7.05%. In subsequent years, the coefficients will gradually decrease.
If we take into account that in 2021 the VAT rate will increase, and along with it the cost of goods and utilities will increase, then the joy of increasing pension payments is somewhat darkened.
What changes await labor veterans after the pension reform?
Provisions of the bill on the abolition of the retirement age
The bill on lowering the retirement age from the A Just Russia party proposes the following:
- recognize Federal Law 350 on the introduction of pension reform as no longer in force;
- state Part 1 of Art. 8 FZ-400 in its previous, pre-reform form. That is, it is proposed to return the retirement age to the old values, for men – 60 years, for women – 55 years;
- prohibit revision of the retirement age until 2035.
This is the first article of the bill. The second is dedicated to its entry into force. It states that the new law comes into force on July 1, 2021. The news that a bill to lower the retirement age from July 1, 2021 has been submitted to the State Duma appeared on April 7, 2021. On the same day, the bill was registered in the State Duma system, and on April 8 it was sent to the committee for consideration. The date for consideration in the first reading has not been determined.
The proposed entry into force date of 07/01/2021 has already passed, the bill has not been adopted. This is another reason to doubt a positive decision on this bill (although the date of entry, of course, can be easily changed).
Pension reform in Russia: to be or not to be?
The negative public reaction to the government's plans to raise the retirement age
is not surprising - international experience suggests that pension reforms: a) are announced on average 5 years before their immediate introduction, b) take place in conditions of higher economic growth and c) affect a smaller share of the population. Although the parameters of pension reform in Russia seem quite strict, the net effect on the budget could amount to only 0.1 trillion rubles. by 2024, and the labor market will be replenished by only 1.6 million people. We cannot exclude the risk that part of the burden from the reform will be transferred to the corporate sector, which could become a limiter for economic growth. The continuing deficit of the Russian Pension Fund...
Soon after the re-election of President Vladimir Putin, he announced new May decrees, which, among other things, provide for an ambitious plan, the implementation of which requires about 8 trillion rubles. in the next six years – approximately 1.3 trillion rubles. in year. This forced the government to come up with a number of initiatives, including pension reform. However, the implementation of pension reform is an inevitable process, already included in the economic agenda, because The deficit of the Russian Pension Fund is growing: it increased from 1.1% of GDP in 2006-2009. up to 2.0-3.5% of GDP in 2010-2013. against the backdrop of a significant increase in Pension Fund expenses during this period (see Fig. 1). The Pension Fund deficit poses a risk to the stability of the consolidated budget, especially given
...and the aging population dictate the need for pension reform.
In addition, there are demographic challenges - over the past decade, the share of the population over 55 years of age has increased from 22% to 29% of the population, and the ratio of the population over 65 to the labor force has reached a record 27% (see Figure 3) against 19% on average worldwide . Now the number of old-age pensioners totals 36 million people, or 25% of Russians, versus 29 million, or 20% in 2000. In fact, due to the large number of pensioners, it is difficult for them to guarantee a high standard of living. Although annual Pension Fund expenses now amount to approximately 8% of GDP, which corresponds to the world average, the replacement rate (level of pension income to pre-retirement income) in Russia is only 34% versus 54% on average worldwide (see Figure 4). Further demographic pressure will lead to a reduction in unemployment, which is already only 4.7%, and stimulate wage growth, which, given the current state of affairs, will continue to put pressure on the ratio of pension and pre-retirement income.
The plan to raise the retirement age from 55/60 to 63/65 for women/men accordingly looks ambitious.
Despite the fact that the need for pension reform is beyond doubt, it was surprising that the government came up with a tough proposal. According to the plan, starting from 2019, the retirement age should gradually increase from the current 55/60 years (women/men) to 63/65 years by 2034. As a result of the reform, the number of pensioners will be reduced from the current 36 million people and the expected 43 million by 2034 according to Rosstat’s base scenario, only up to 31 million by 2034 (see Fig. 5), which means a very noticeable change in the macro picture of the country.
The pension fund can save 0.8 trillion rubles.
annual expenses by 2024, but almost 80% of the savings will go to maintaining the well-being of pensioners:
The reduction in the number of pensioners, in accordance with the pension reform, will clearly affect the level of expenses of the Pension Fund - all other things being equal, they will be reduced by approximately 0.3 trillion rubles . every two years. By 2024, that is, by the end of the current presidential term, annual savings in pension costs will amount to approximately 0.8 trillion rubles. However, as mentioned above, the government must prevent a deterioration in the replacement rate, and therefore potential savings in Pension Fund expenses will be directed to increase pension payments. At the moment, members of the government are saying that as a result of the reform, the average monthly pension is 13 thousand rubles. will increase 8% per year; such a step should allow the replacement rate to stabilize at approximately 35%, but in turn this will require spending approximately 0.7 trillion rubles. per year by 2024 and will take approximately 80% of the Pension Fund's potential savings from the reform (see Figure 6).
…supply in the labor market could increase by about 1.6 million people.
Another question is the extent to which raising the retirement age might ease labor market constraints. At the moment, the average employment of the population group that will be affected by the reform, for example, women aged 55-63 years and men aged 60-65, is approximately 40% (see Figure 7). Potentially, if the retirement age is raised, the employment rate of women aged 55-63 years and men aged 60-65 years could increase to 70%, increasing the labor market by 4 million people; however, firstly, some people in this group can take advantage of benefits for health reasons (it is estimated that every fourth Russian over 50 years of age has a chronic disease, and this indicator continues to grow). Secondly, the demand for employees over the age of 50, according to surveys, is very limited: 52% of employers prefer to hire employees aged 30-45 years, another 41% - under 30 years old, and only 7% of employers have nothing against hiring older people (see Figure 8). Thus, we are not sure that the pension reform will have a significant impact on the labor market and slow down wage growth. We estimate that employment of women aged 55-63 and men aged 60-65 is likely to rise to just 50%, increasing the labor supply by about 1.6 million people in the best-case scenario.
Raising the retirement age could put a strain on companies.
In its current rigid form, pension reform could be a burden for Russian companies. The direct effect of the reform on companies is not so great - for 1.6 million additional employees, companies will pay only about 70 billion rubles. per year of insurance premiums, which is approximately 1% of company profits. However, we do not exclude that companies will be forced to hire older people - Dmitry Medvedev recently instructed the Ministry of Labor and the Ministry of Finance to develop a number of measures to ensure employment of the population of pre-retirement age, which, in our opinion, is undoubtedly negative for the Russian business climate .
World experience indicates that pension reform is announced long before it begins.
Fears of a negative reaction to the reform appear to be justified, given global experience. Firstly, Russia is starting the reform at a rather difficult moment: the growth rate of the Russian economy is far behind global growth and lower in comparison with countries that are/have already carried out pension reform (see Figure 9). Secondly, cross-country analysis indicates that the typical time between the announcement of a reform and the start of its implementation is on average five years (see Figure 10), while in Russia the first proposal to raise the retirement age appeared only in 2021. Thirdly , the parameters of the reform are strict by international standards - on average, countries increased the retirement age by 2/5 years for men and women, respectively (see Figure 11), which means that the reform affected a much smaller share of the population.
There is no final decision yet; we believe that the chances of changes in the reform are quite high.
The scale of the negative reaction to pension reform is significant: President Putin's electoral rating has dropped from 66% at the end of 1Q18 to the current 48%, or to its lowest level since 2013. Despite the fact that the announcement of pension reform took place on the first day of the World Cup football, which was supposed to facilitate its adoption, rallies against the reform were held in 30 Russian cities, and according to the latest FOM polls, approximately 80% of Russians are against raising the retirement age (see Figure 12) and 43% are ready to go to rallies. It now appears that the adoption of the pension reform will be postponed until the autumn, which increases the likelihood that changes will be made to it. We have previously indicated that since the tax burden on business in Russia is approximately at the world average level, and the burden on the population is lower, it is the increase in the tax burden on the population that will bring the least harm to economic growth. However, such a negative reaction from the population to the reform increases the chances that the authorities will prefer to compromise, thereby shifting part of the burden to the corporate sector, which is unlikely to have a positive impact on economic growth.
