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ESCIRRU Working Paper No. 25 Pension Reform Options for Russia

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ESCIRRU Working Paper No. 25 Pension Reform Options for Russia View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics ESCIRRU Working Paper No. 25 Pension reform options for Russia and Ukraine: A critical analysis of available options and their expected outcomes Marek Góra (Warsaw School of Economics and CASE) Oleksandr Rohozynsky (CASE) Oxana Sinyavskaya (CASE) Berlin, February 2010 ESCIRRU A European Research Project Funded by the 6th Framework Programme and Managed by DIW Berlin DP4. Pension reform options for Russia and Ukraine: A critical analysis of available options and their expected outcomes (with a focus on labour market, industrial restructuring and public finance) Marek Góra, Oleksandr Rohozynsky, Oxana Sinyavskaya Jel codes: H53, H55, H69, J11, J18, J32, J 38, P36. Table of Contents Abbreviations ............................................................................................................................ 3 Introduction ............................................................................................................................... 4 General background .................................................................................................................. 6 Demographic and economic issues ........................................................................................... 7 Transition and economic development .......................................................................... 7 Russia ................................................................................................................................8 Ukraine............................................................................................................................ 10 Financial markets............................................................................................................. 11 Russia .............................................................................................................................. 12 Ukraine............................................................................................................................ 13 Demographic issues........................................................................................................ 14 Russia .............................................................................................................................. 14 Ukraine............................................................................................................................ 16 Pension system and reforms in Russia and Ukraine ............................................................... 18 The common past ............................................................................................................ 18 Deterioration of post-Soviet arrangements in the 1990s........................................... 19 Russia .............................................................................................................................. 19 Empirical section related to the past/present situation .............................................. 22 Factors influencing the probability to work on pension in Russia ................................. 22 Ukraine............................................................................................................................ 24 Current situation: Attempts to create a new reality .................................................... 26 Russia .............................................................................................................................. 26 Ukraine............................................................................................................................. 41 1 The pension system in Ukraine introduced in 2004......................................................... 41 Concluding remarks and recommendations ............................................................................ 46 Annex: Tables ......................................................................................................................... 48 References ............................................................................................................................... 66 2 Abbreviations CIS Commonwealth of Independent States CEE Central and Eastern Europe DC Defined-contribution DC Defined-benefit FSU Former Soviet Union GDP Gross domestic product ILO International Labour Organization NDC Non-financial (or notional) defined-contribution (so called ‘insurance’ part of labor pensions in RF has some similar features) NPF Non-governmental (private) pension fund PAYG Pay-as-you-go pension system PFR Pension Fund of Russian Federation RF Russian Federation Rosstat, Official abbreviated names of Russian state statistical agency Goskomstat UN United Nations UST Unified Social Tax (payroll tax for social purposes in Russian Federation) VEB Vnesheconombank – RF Bank of Development 3 Introduction Russia and Ukraine are in the process of many changes stemming from economic transition, restructuring, demographic change and other various ongoing challenges. In terms of the ongoing challenges in each country, there are specific problems related to historical developments, such as large scale heavy industry, but also potential opportunities that rarely occur in other countries such as the significant additional income from the countries’ abundant natural resources. Both countries have good prospects for the future despite the many challenges.1 Among the challenges is industrial restructuring taking into account the social dimension, which includes adjusting the current arrangements of pension systems. In the best scenario this could mean a pension reform. The term ‘pension reform’ can be understood in various ways. In this paper we analyse a wide variety of possible pension system designs. The designs vary by target as well as the various ways to reach those targets. In all cases there may be costs and/or savings problems (as well as liquidity problems, which are not a “cost” from the economic viewpoint as liquidity is accounted as if additional cost were created) and various positive and/or negative economic, financial, and social externalities associated with the pension system designs. Pension systems face problems all over the world. The demographic transition is a world- wide phenomenon leading to population ageing, which in turn leads to financial problems in pension systems which influence public finance. In reality, public finance is affected not only by population ageing via pension and other social expenditures but also via many other channels. Demographic transition describes the shift from high fertility and high mortality rates until the 18th-19th century, high fertility and low mortality rates until the second half of the 20th century, and low fertility and low mortality rates in the present day and in the near future. This transition has taken place in all OECD countries as well as Russia and Ukraine (and many other countries not analyzed here). However, different mortality dynamics are observed in Russia and Ukraine. Instead of an increase in life expectancy rates, as is happening in most OECD countries, there has been a decrease in both countries.2 This especially applies to male life expectancy. The demographic transition is occurring in a specific way in both countries, which creates an additional factor to be taken into analysis on top of other issues related to restructuring. In both countries, workers exit labour markets relatively early. This applies to both formal and actual labour market deactivation3. In both countries, a large portion of economic activity is performed in the shadow economy. Factors associated with the former Soviet pension system, ageing, and economic transition (e.g., the sharp drop in real incomes due to inflation and an increase in poverty rates) are the same for both Russia and Ukraine. 1 The current financial and economic crisis has strongly undermined economic activity in many countries, including Russia and Ukraine. However, in the long run, their effect will probably be absorbed. 2 There are signs of a slight increase in life expectancy in Russia in recent years 3 In Russia, workers enter the pension system very early compared with Western countries; the average pension age of both sexes is 53. But the retirement age is higher because of the right to both get full pension and work. According to LABORSTA (ILO), in 2007, in Russia 50.7% of 55-59 years old women were employed compared to 80.1% in Sweden, 66.6% in the USA, 55.3% in France and 34.76% in Italy. Among 60-64 year old women, 23.8% worked in Russia, 59.1% in Sweden, 47.9% in the USA, 15.2% in France and 10.8% in Italy. Among 60- 64 year old men, 38.5% were employed in Russia, 67.7% in Sweden, 59.2% in the USA, 29.7% in Italy and 17.5% in France. 4 The shortcomings of the pension systems in both countries have remained basically unchanged since the Soviet era. They include: • Extremely high rate of budget financing; • Paternalism; exclusion of employees from directly contributing to their future pensions; • Weak link between benefits and former employment records (seniority, wage, contributions); • Inequalities among different groups of pensioners unrelated to their contributions to the pension system; • Low level of pension benefits which forces an increase in the incomes of the poorest and leads to low benefit differentiation; • Actual pension age is even lower than official age, which is still 55 for women and 60 for
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