About Proposals of the Ministry of Health and Social Development as Regards the Pension System

At present, the Ministry of Health and Social Development is preparing proposals as regards changing of the formula of calculation of the pension capital and indexation of pensions.

The proposals come down to the following:
1) the insurance pension will depend not only on the amount of the paid insurance contributions, but also on the work record;
2) toughening of the requirements to the work record needed for the labor pension to be granted: 20 years for women and 25 years for men;
3) further equalization of pensions: pensions of people with the same work record  will differ much less than the amounts of  paid contributions;
4) actual closing down of the mandatory funded pension insurance. Workers who are born after 1967 are granted the right to allocate 6% of their wages and salaries either to the insurance pension or the funded pension. It is not excluded that by default the funds will be transferred to the insurance pension. As a result, the volume of contributions to pension savings will decrease by 70-90%;
5) if necessary, expenses on pension insurance may be reduced (increased) promptly  at the expense of reduction (increase) of pensions. It is expected to introduce “a complex index which would reflect demographic and macroeconomic indices and the government may change it on an annual basis”.

The above proposals has the following two important advantages:
- People with a high work record and low wages and salaries are becoming the main beneficiaries of the system.;
- If necessary, the system may be balanced “in a manual mode” without violation of  the requirements of the Law.

At the same time the above proposals involve the following risks:
- The amount of the pension is actually determined “in a manual mode” , which factor increases the magnitude of the political and business cycle;
- Within the frameworks of that system, optimization of the expenses is possible, primarily, at the expense of reduction of pensions  with  preserving an excessively wide range of  pension recipients unchanged (the only measure aimed at narrowing of that range, that is, a modest raising of requirements to work record  will not contribute to dramatic decrease in the number of pension recipients ).

V.S. Nazarov – PhD, economics, Head of the Laboratory of Budget Federalism