October 3, 2018

THERE IS NO BEAR IN THE WOODS:

Putin's Botched Pension Reform (ANDREI MOVCHAN, 10/03/18, Project Syndicate)

Raising the retirement age - to 60 for women and 65 for men - seems like a simple way to help close the financing shortfall. But it has proven to be spectacularly unpopular, with Putin's approval rating plummeting at least a dozen percentage points since the spring, to a level not seen since before the 2014 annexation of Crimea.

Popular opposition to the move reflects neither discomfort with change nor an unwillingness to work. With Russian male life expectancy averaging just 67 years, increasing the pension age to 65 is akin to issuing men an actuarial death sentence. (Russian women live much longer - not least because they drink far less alcohol - and will do reasonably well, by global standards, in the new system.)

But, leaving aside popular opposition, raising the retirement age addresses the wrong issue in the wrong way. The reform is meant to ease strain on the public budget, by enabling the government to reduce subsidies to the pension fund. But, while Russia's pension fund does have a massive shortfall, state subsidies to it amount to less than 10% of the total consolidated budget - less than the fluctuation caused by changes in oil prices each year. For a country with negligible sovereign debt, a stable budget surplus, and foreign-currency reserves that grow by $30 billion each year, spending an extra $30 billion to subsidize pensions should not be a major problem.

What will be a major problem is the effect of the higher retirement age on the labor market. If older workers keep their jobs for longer, younger workers will have a harder time finding employment in many fields. For companies that prefer younger employees - say, because they operate in a cutting-edge or fast-changing industry - there may even be incentive to bribe labor inspectors, in order to avoid penalties for discriminating against older workers.

Instead, Russia's leaders should recognize that the real challenge their country faces is an aging population, and that raising the retirement age is thus little more than a Band-Aid. After all, if the pension fund were to remain sustainable using this approach alone, the retirement age would have to increase by another five years in 2028. If the Russian economy remains stagnant, as expected, the pension tax (already 22% of income) will also have to rise in five years, to keep the fund's financing levels stable.

Posted by at October 3, 2018 4:56 PM

  

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