The Third Pension Reform in Russia: Origins and Criticisms

On October 1st, Dmitry Medvedev signed a new strategy for reforming the pension system. The reform was initiated ‘from above’, as upon his election, President Putin, promised to increase social spending and ordered a detailed plan of a new pension system, in order to meet the long-term interests of his nation. In reality, the reform was needed due to formal factors, such as the ageing population, which is exerting more pressure on the state budget, declining birth rates and general inefficiency linked to high costs of financial management. An informal reason is the fact that the Russian government is currently faced with hard choices: military and social expenses are set to rise and thus more funds are urgently needed. Hence, looking from various angles, the conservative route, denying reform, was not a viable option.

In 2012, the preliminary reform plan looked rather gloomy. The system would require a contribution for forty years with a twenty per cent contribution. In return, it promised twenty years with a pension at approximately forty per cent of one’s income. The numbers, by international standards, appear to be fairly acceptable. However, one of the criticisms was the evident underestimation of the current social reality in Russia. If an average male employee luckily gets a job straight after completing his degree, at the age of twenty-four, he has to work up to the age of sixty four in order to qualify for a state pension. The most obvious problem with the plan is that, as the current state retirement age is set at sixty and has not been increased, four years further employment would have to be found. For women, the situation is complicated by childbirth. Only a year and a half is ‘written away’, while sociological studies emphatically point to three years needing to be taken off, given how poorly the system of nursery schools is run at the moment. The proposition confronted immediate criticism, even from the President. In 2013, a new draft came out, which contained some of the previous plan’s defects, such as the point system, and a new one – rebalancing of the whole pension portfolio.

Firstly, under the new system, future pensions will be calculated according to a system of points. The point system will lead to greater dependency of the ordinary people on the state and bureaucracy. Furthermore, the reason why the proposition of this reform came under vehement criticism is that the state funded component of pension contributions is to decrease from six per cent to two per cent. This four per cent contribution is expected to flow into the stabilisation fund, bearing strategic importance for the country’s long-term domestic investment. The sum is seemingly negligible but, as experts argue is, economically vital. It is also politically crucial if the authorities want Moscow to develop as a prospering world financial centre. The discussion on finance continues, since another, far more serious, implication is that this reform solution will stop the looming pension deficit for six years at the most. This temporary rearrangement will not solve long-term problems of pension financing that faces Russia today.

Is this an economic mistake? Perhaps, there is also a hidden political cost. Since the last elections in 2012, Putin made promises of social guarantees. Given the economic situation, they are now trying to reconcile an increase in social spending, with tight budget requirements. These attempts at reconciliation only offer up short-term solutions, with the problem of an unsustainable future deficit remaining unsolved.

It must be noted that the plan is still in its preliminary stages. There is a fair amount of opposition coming from the Ministry of Finance, with whom the reforms have not been extensively negotiated. The left-wing politicians and intellectual elites also disapprove. Even so, it seems that the opposition will simply melt down as a blob of spring snow: the dilemma will be hard to solve under today’s system of government and depressing economic circumstances.

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