The flexibility of the pensionable age

The pension reform, together with a VAT increase, is the most important intervention of Russian President Vladimir Putin’s fourth term in office since his re-election a few months ago. Signed on Oct. 4th, the reform substantially amends the previous system and will gradually increase the retirement age to 60 for women and 65 for men starting from next year. Pensions in Russia are based on a mandatory insurance system. Employers must deduct funds from employees’ wages for both insurance as well as pensions. Minimum social pensions are guaranteed for everyone, regardless of their line of work.

Until January 2015, Russian pensions were based on a cumulative system in which part of an employee’s income was put into a private or state pension fund. The authorities then froze material funds and introduced a “points system”. The 2013-2015 reform introduced a new formula for calculating pensions that accounted for three different factors: age, earnings and pensionable age. Furthermore, citizens born in or after 1967 have the right to decide whether to continue accumulating pension funds or to repay them as insurance.

The government draft law sent to the Duma (the lower house of Parliament) last Jun. 16 amends the pensionable age. The initial project established a gradual increase in the pensionable age for the majority of citizens from January 2019 to 65 for men (from 2019 to 2028) and to 63 for women (from 2019 to 2034). Following President Putin’s constitutional intervention in which he proposed amendments to the bill that were subsequently approved by the lower house of Parliament, retirement age for women was set at 60 (not 63) and protection measures were introduced for workers in pre-retirement age (5 years prior to the established pensionable age).

The need for a reform to increase the retirement age had been expressed several times over the previous years, albeit on an international level rather than during internal debate. The International Monetary Fund had previously advised reform, but this had been discussed minimally by Russian authorities prior to the presidential elections of last March 18th. The reform was first supported by the presidency and government the day after Putin’s election to his fourth term and is based on an awareness that the system’s previous parameters were established in the 1930s when the life expectancy of the population was decidedly lower.

In an article recently published by the Russian Academy of Sciences magazine, Prime Minister Dmitrij Medvedev reiterated that the pension system regulations previously in force were rather obsolete. In 1939, the percentage of people older that the retirement age was generally established at around 8.6 percent; in 2002 it was 20.5 percent; in 2018 it has reached 25.4 percent. The government now faces three options to correct this imbalance: increasing tariffs for contributions to the pension system, reducing real pension levels or increasing the pensionable age.

Meanwhile, on November 23, the Council of the Russian Federation approved the Budget Act of the Pension Fund for the period 2019-2021. The Fund's income in 2019 is expected to amount to 8,613 billion rubles (114.6 billion euros), while expenditure will amount to 8.636 billion rubles (114.9 billion euros): the estimated deficit is therefore 300 million of euros. In 2020 the revenues will be 8,995 billion rubles (120.25 billion euros), while the expenses will amount to 9,017 billion euros (120.7 billion euros), for a deficit estimated at about 450 million euros. In 2021, revenues will amount to 9,294 billion rubles (123.8 billion euros), while expenses amount to 9.328 billion rubles (124.2 billion euros), leading to a deficit of around 600 million euros.

According to the Head of the Russian Pension Fund Anton Drozdov, the amendments will allow Russia to balance the system by 2030 thanks to the reduction expenditures, taking into account the volatility of oil markets that could have a profound effect on the revenues of the Russian Federation in the event of a situation of low prices, as happened during the 2014-2016 crisis. In this way, by the year 2030, money transferred from the state budget to cover the difference between revenue and expenditure will be practically zero. The government will use these funds to index payments of pensions and to finance further benefits, such as pre-pension for mothers with several children and a longer professional career.

In advanced economies, a third of the workforce could retire within a decade, a figure set to rise to 40-50% in the next 20 years. In this context, the supplementary pension is what private companies like Generali offer their clients who over time want to put small amounts of money aside for a more secure future.

To learn more, watch the video Far away, so close.