Russia’s Pension System Turns into Pyramid Scheme


translated by ria novosti, srouce from  http://www.vedomosti.ru/finance/news/1533815/lovushka_starosti

Vedomosti
Russia’s Pension System Turns into Pyramid Scheme
Russia’s pension system may soon turn into a classic pyramid scheme, say an ex-finance minister and a government economic expert.
Growing life expectancy coupled with the shrinking economically active population promises Russia an economic collapse, former Finance Minister Alexei Kudrin and Yevsei Gurvich, head of the Economic Expert Group, write in an article in the Voprosy Ekonomiki journal. The growth of life expectancy is compensated by higher taxes levied on the younger generation, so that ultimately each generation pays more than its predecessor while receiving more than it paid. This is a classical pyramid scheme.
Higher taxes or increased budget allocations are the easiest way to resolve the pension crisis. Russia used it in 2010. Money transfers to the Pension Fund grew from 1.5 percent of GDP in 2007 to 5.5 percent in 2010, and contribution rates went up from 20 percent to 26 percent. According to this scheme, by 2050 the contribution rate should either grow to 70 percent, or budget transfers to the pension system should be increased by 10 percent of GDP (the total budget spending amounts to some 20 percent of GDP).
Increased taxes and transfers lead to an economic crisis because growing taxes discourage economic activity, but without increases pensions will become smaller, which pensioners will not tolerate. Pensioners are the most active voters and by 2050 their share will grow from one-third to a half of the electorate.
Coordinating the interests of several generations is both a political and economic challenge, Kudrin and Gurvich write. These issues can be resolved by adjusting the retirement age to the growing life expectancy, but it is an unpopular measure.
According to the WTO, the median age of population in the 55 surveyed countries is growing commensurately with the chances of spending these later years in good health. By 2030, the health, working capacity and life expectancy of Russian citizens aged 65 will be the same as those of 60-year-olds now. The retirement age is regularly raised in Denmark, for example, to adjust it to the growing life expectancy.
The pension policy should correspond to human behavior throughout the life span, Kudrin and Gurvich write. The government’s optimal response to the ageing of population would be to increase the retirement age without increasing the contribution rate.
The authors write that by 2025-2030 the retirement age should be 60-62 for women and 62-63 for men. Such an increase in the EU countries, together with other measures, would increase the pension burden by 2.3 percent of GDP by 2060, instead of 8.7 percent projected if no measures are taken.
The Health and Social Development Ministry plans to adjust the size of pensions to the length of service, said Minister Tatyana Golikova. Under this formula, pensions will be raised 8 percent every five years, said Tatyana Omelchuk, an expert at the Academy of the National Economy: “It would be more honest to raise the retirement age. It is the only option provided we want to decrease the pension system’s deficit while raising pensions.”


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