By Vadim Potapenko/Mikhail Khazin

Translated by Ollie Richardson and Angelina Siard

cross posted with
Original title: “About a fair pension system”
The full version of this study authored by Vadim Potapenko that this article is based on can be read here (in Russian only)

The pension system can be considered fair when it can maintain an acceptable standard of living for pensioners and at the same time doesn’t cause significant negative effects on economic development. Increasing the retirement age in itself isn’t capable of solving the long-term problems of the Russian pension system. Reformation of the pension system is being constantly discussed in the government of the Russian Federation and in the expert community. Discussion is quite often splashed out in the public space. Specific decisions haven’t yet been made, but it is easy to notice that Russian society perceives this topic with extreme sensitivity. First of all because it is impossible to recognise the past attempts at forming a long-term pension system model in our country as being successful.

The lay observer can have the impression that pension reform is nearly the key element of the economic agenda that the successful development of the economy in the next few years depends on. But is this so?

The need for the soonest changes in the model of providing pensions is substantiated by three main theses.

The 1st thesis is demographic, based on the fact that the working-age population is rapidly decreasing and with the current parameters of the pension system (first of all – the retirement age) the weight that pensions puts on the economy and working citizens can become unacceptably heavy.

The 2nd thesis is budgetary: the growing volumes of transfers to the pension system (the so-called budget deficit of the Pension Fund of the Russian Federation, PRF) are an excessive burden for State finances.

The 3rd thesis is structural, affirming that mechanisms of retirement are imperfect and there are too many pensioners/recipients of privileges in the system. The forced increase of the retirement age is often considered as a radical way of solving these problems.

However, the pension system is also an important element of the economy, which has an impact on its development in a number of channels. That’s also why actions aimed at reforming the pension system should be considered from the point of view of its complex impact on economic dynamics. Attempts at solving fiscal tasks on the basis of changing the parameters of the pension system bear long-term risks, the main one of which is undermining society’s trust towards the social policy of the State.

Let’s now consider in more detail each of the groups of arguments in favor of the radical pension reform.

Backbreaking pension burden is a myth

The perspective demographic situation in Russia doesn’t look catastrophic at all. Real demographic loading, in our opinion, is determined not by the dynamics of the working-age population, but by the ratio of the number of dependents and employed persons. And here in the next few decades everything will be not so bad (see the graphic).

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The demographic load

In 2017 this figure was equal to 103%, i.e., for every 100 employed persons there were 103 dependents – which includes also unemployed pensioners, children, the unemployed, and the economically inactive working-age population. Even in the toughest demographic scenarios the level of the demographic load calculated in such a way by 2050 won’t exceed the values that were already recorded in the late 1990’s. And this doesn’t take into account the growth of labor productivity in the last 15 years and its predicted growth during the period up to 2050.

“Attempts at solving fiscal tasks on the basis of changing the parameters of the pension system bear long-term risks, the main one of which is undermining society’s trust towards the social policy of the State.”

If to refer to inter-country comparisons, then it will be possible to draw the conclusion that the current level of the demographic load in the Russian Federation is quite moderate. For example, already now in Poland the ratio of the number of dependents and employed persons exceeds 130%, in France — 150%, and in Finland — 120%. But in Russia, according to our estimates, the level of 120% can be exceeded only closer to 2030, and the current Polish level — only closer to 2040.

The level of the pension load on the Russian economy isn’t excessively high either. Even in the conditions of economic stagnation of 2014-2016 the volume of pension payments in our country didn’t exceed 7.5% of GDP. For comparison: in the most developed EU countries (Germany, France, Italy) this figure totalled 12–17% of GDP, and in the countries of Eastern Europe (Romania, the Czech Republic, Poland) it was in the range of 8-12% of GDP.

The load of insurance payments on the Russian economy (7.1% of GDP in 2017) can’t be considered as ultra-high. For example, in the most economically developed European countries with a mainly solidary pension system it is significantly higher than it is in Russia: in Germany — 17% of GDP, in France — 19%, and in Italy — 13%. In the countries of Eastern Europe its minimum level is noted in Bulgaria (about 8% of GDP), but in Poland, which is comparable to Russia in terms of GDP per capita, it is already 14% of GDP.

Thus, Russia allocates a rather small volume of resources for the provision of pensions. At the same time it is obvious that at the current level of payment for labor in our country (the average salary in 2017 was 39,000 rubles, the median — 30,000) even achieving the level of 40% of salaries being replaced with pensions recommended by the International Labour Organisation isn’t capable of providing an acceptable standard of living for most Russian pensioners.

One more consequence of the low level of labor payment in the Russian economy is the impossibility of forming a somehow significant obligatory accumulative component of the pension system. For the overwhelming part of the population of the Russian Federation attempts to force the population to save up their pension can lead only to a decrease in the level of consumption, which, in its structure, with the prevalence of food and obligatory payments in it, has an archaic character.

In the current conditions accumulative pension programs can have a voluntary or corporate character, providing the possibility to save up for the most well-to-do layers of the population. It is also necessary to note that it is hardly possible to call the existence of pensioners/early retirees a factor that is capable of influencing the economy in a sharply negative way. As of the beginning of 2018, only 6.8% of the recipients of pensions according to age didn’t reach the official border of retirement age. Moreover, in recent years the proportion of pensioners/early retirees has reduced: at the beginning of 2008 it was already 12.2%.

Not a question of accounting

The key question during the discussion of pension reform — changing the retirement age — is connected first of all to ensuring social justice. Moving the borders of retirement isn’t just changing the volume of payments to pensioners. This is an action that involves a whole string of socio-economic consequences connected to the structure of employment, the income of the population, and the system of social support. And it is necessary to evaluate these consequences all together.

If to consider the question of the retirement age from the point of view of demography, then now a certain imbalance developed that is connected, firstly, to distinctions in the expected life expectancy between men and women, and secondly, with the very high death rate in Russia. The expected life expectancy of women after reaching retirement age is equal to 26 years, whereas for men the same indicator is 16 years of age. The probability of a 20-year-old woman living up to pension age is 0.92, and for a man — 0.70. If for Russian women the demographic indicators characterising retirement age are at the level of the most economically developed European countries, then for men they are still unacceptably low.

Thus, there are no reasonable demographic arguments in favour of immediately increasing the retirement age for men. Taking into account demographic characteristics, increasing the borders of retirement for women can be discussed, however it’s unlikely that raising this level just for the weaker sex will be unambiguously apprehended in society. In addition, there can be undesirable indirect effects — in particular, a decrease in the birth rate: it’s not a secret that many women today make the decision to have a child counting on the help of young-looking retired grandmothers.

If indeed the process of changing the age of retirement will nevertheless be started, then it has to be gradual so that the level increases for several months per year. Long-term demographically justified reference points for a possible increase of the retirement age, according to our calculations, are as follows: 62 years for men and 60 years for women. This level of new retirement ages must be gradually reached by 2035. By this period the acceptable level of the expected life expectancy can be achieved in the condition of reaching the new borders of retirement age and the probability of living up to them. With the faster change of these borders there will be an essential deterioration of the demographic characteristics for the retirement age population (a decrease in the expected life expectancy during retirement and the probability of living up to it).

Increasing the retirement age is closely connected to the condition of the labor market. Will people of older ages be able, in the conditions of raised retirement age borders, to have work and thus provide an acceptable level of income? If the rate of employment and wages in these groups of the population won’t considerably change, then an increased retirement age will simply lead to a decrease in the real level of their income.

The elderly population probably has no essential potential in terms of growth of employment. This is demonstrated both by the dynamics of levels of the economic activity of elderly people for the past 20 years and the inter-country comparisons of these levels. Among other things, such a situation testifies to the not very high demand of elderly workers in the labor market.

Scenario forecast

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We will try to evaluate the direct and indirect consequences of changing the parameters of the pension system in the medium and long term. For this purpose we will consider four options of its development within the framework of two macro-economic scenarios. The first scenario is inertial, assuming average annual rates of GDP growth in 2018-2035 at a level no higher than 1.5%. The second is a basic one, proceeding from the possibility of achieving average annual rates of GDP growth during this period at the level of 2.7-3.0%. For both scenarios four options are considered for the parameters of the pension system:

A — maintaining the current retirement age brackets of 60/55 years for men/women; the preservation of the current pension expenditure levels in relation to GDP;

B — the modification of option A in the conditions of removing the budget deficit of the PRF;

C — the gradual increase by 2035 of the retirement age up to 62/60 years for men/women; the preservation of the current pension expenditure levels in relation to GDP;

D — the modification of option C, whereby an increase of the retirement age will be followed by a growth of expenses on the payment of pensions up to the level of 11% of GDP by 2035.

Our calculations show that in the long term (by 2035) the scenarios for increasing the borders of the retirement age assume a decrease in the number of pensioners by approximately 6 million people. Thus, within the framework of the inertial macro-economic scenario, the elimination of the budget deficit of the PPF will mean a decrease in the expenses on the payment of pensions to 6.3% of GDP in the conditions of negative dynamics of the average annual level of real pensions. A decrease in pensions in real terms will also lead to an additional deduction from GDP dynamics owing to the squeezing of household consumption. The calculations show that in the medium and long term a 1% increase in pension payments in relation to GDP provides an approximate 0.1% acceleration of rates of economic growth.

In general, in the conditions of the inertial development of the economy, the only way of preserving the level of growth of real pensions is not just increasing the level of the retirement age, but also increasing the expenses on pension payments in relation to GDP to levels characteristic for the countries of Eastern Europe.

The elimination of the budget deficit of the PRF, all other conditions being equal, leads to a considerable decrease in the standard of living of pensioners, and also negatively influences the growth rates of the economy.

Considering an increase of the retirement age as a panacea in dealing with problems that accumulated in the pension system is delusional. Even from a fiscal point of view, the benefits of increasing the retirement age aren’t obvious

It is noteworthy that within the framework of the basic macro-economic scenario, the positive dynamics of the real size of pensions is provided in all considered options of the configuration of the pension system. Thus, the rates of economic growth have a key impact on the condition of the pension system.

However, even within the framework of rather high macro-economic dynamics, it is almost impossible to ensure that the growth in the real level of salaries and pensions is consistent without increasing expenses on pension payments in relation to GDP. Such an increase can be made, for example, due to a growth of transfers in the budget of the PRF from the federal budget or at the expense of increasing the volume of insurance premiums (the growth of insurance premium rates and an increase of the base for their collection). The definition of proportions between these sources is a question of economic policy priorities.

It is much more important to determine what proportion of the produced benefits society is ready to redistribute in favor of pensioners without serious damage to economic growth. Our estimates show that increasing pension payments in the long term by 2-3% of GDP is unlikely to cause such damage. In any case, the experience of a number of countries that have a level of economic development similar to Russia’s testifies to this.

Mikhail Khazin:

This is not just a good report. This, in fact, is the first report in which reasonable figures are specified. I, by the way, wrote that such reform in the current version would not bring any benefits to the economy. Actually, once I knew all the figures (because sometimes I wrote negative reviews of this outrage), but a lot of time has passed since then. But what is surprising is that these figures (not the final ones, which were taken from places unknown, but analytical ones) are also not cited by the supporters of reform. There is the suspicion that this is connected to the fact that they themselves know very well that this reform won’t give anything good. There won’t be either an increase in the income of the budget, nor an improvement in the lives of pensioners (should they live so long), nor the appearance of new jobs.

In other words, all of this reform is frank poppycock, a political joke aimed at destroying relations between the People (society) and the Authorities. The specific aim of this is to overthrow Putin, as our liberals are commanded to do by their senior partners from the “Western” global project. And it is precisely like this that we should treat this reform. It has no relation to economic reforms – neither good, nor bad. It not an economic reform, but a political plot! And it is from here that we have to proceed.

Oh, it is very interesting! Turchak, in reality, said that representatives of United Russia must keep quiet concerning any question until the party clearly expresses itself in relation to this question. So far the party has such a position: in general it is “for” reform, and the details are being discussed. Therefore, no party member should have the right to express their opinion on the details of the reform. From the point of view of politics, the decision is disputable (although Merkel, for example, had even worse things), from the point of view of corporate ethics; the decision is the only correct one. So there are no complaints about Turchak. He in general isn’t a fool (I have spoken with him several times) and he is quite adequate, but he has a problem – he still hasn’t gotten used to the television camera. However, this is acquirable.

Now concerning the media. It should be understood that at the end of the 90’s-beginning of the 2000’s practically all non-liberal media died. Completely. And of course, practically all non-liberal journalists definitely died (only a few dozen mastodons from the times of socialism remain). And the youth that grew from the faculty of journalism are in general totally liberal. They were a little bit suppressed in the middle of the 2000’s, but after Medvedev’s arrival to the president’s post they again blossomed. But then the attack of the State on everything that doesn’t reflect “the policies of the party and the government” began.

And then it so happened that now there are many “patriotic” publications in Russia that employ mainly liberal journalists. An enchanting sight. These journalists (in full accordance with the ideas of Lenin that they didn’t read) see their main task as supporting “theirs” – i.e., liberal-financiers, Nemtsov, Navalny and, so on, and to sully the “bloody KayGeeBee”! And it is this that they are involved in, meaning that, propagandising as much as possible the policies of the government, they optimally irritate the population by using Putin personally. There is just a need every time to act out some disgusting story (how an elderly man died on the way to the polyclinic or hospital, how children were taken away from a large family, how an official or a priest hit a pregnant woman and/or juvenile children with their chic car), to explain that this isn’t just the result of the policies of the liberal power, but the concrete fault of the President, who put on their posts the very ministers and law enforcement officers who encourage all of this.

Of course, the President is guilty, first of all, because he understands that if he starts to cleanse this “Augean stable”, then he will be obliged to shed blood, because they won’t voluntarily give back their privileges. But the most important thing, and this is the essence: the liberal Russian elite today set for itself the political task of removing Putin. Why it decided to do this is an interesting question: if Putin himself and a liberal are flesh from flesh, then this task is stupid and senseless. Not to mention suicidal. But if he isn’t a liberal (it is probably correct to say not a political liberal) then, of course, this activity makes sense. But at the same time, for purely propaganda reasons – because people hate liberals, there is a need to hang the label of political liberal on him.

It is precisely because of this, by the way, that the basic reason for complaints about my articles, devoted to the analysis of the Russian elite and the place of Putin in them. Everyone wants a “left-wing” turn “here and now”, immediately, with the bloody massacre of liberals and gallows at intersections where officials and their grown up children hang. This, by the way, is a measure of the irritation of society, while not very long ago people were ready to be satisfied with only their removal from power. I, as a person who understands a bit about how relations are established at the “top”, see a change in those global tendencies that determine the beginning of this turn. And readers see only a mad increase of liberal bacchanalia. And they for some reason don’t ask the question why is there such an increase in suicidal activity? But it is exactly because the “real” liberals see these same tendencies that I also see – and fear fills their hearts.

There is only one subtlety: it is precisely via this activity that they move society from a condition of irritation in relation to them to a condition of hatred. So defeat can cost them very dearly. However, destroying your own path of retreat – isn’t this the most universal method of increasing animosity in battle?

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