Russian parliament backs cut in pension savings

November 24, 2012 - 4:19:02 am

MOSCOW: Russia’s lower house of parliament, the Duma, has approved a pension reform law that will cut savings without raising retirement ages, ducking a tough decision on how to finance the budget burden of an ageing population.

The parliament made one concession to Russia’s nascent asset management industry, retaining a higher levy for workers who opt to keep their retirement account with a private asset manager.

But critics including business leaders, economists and pension fund managers say the new rules will store up trouble for future budgets and slash future funds available for investment in financial markets. Russia’s population has declined sharply since the collapse of the Soviet Union and pensioners have formed an important part of the voting base of President Vladimir Putin. 

The law approved on Friday will reduce the contributions that employers pay into mandatory retirement saving accounts on behalf of employees, from the present 6 percent of salary to 2 percent, beginning in 2014. 

Putin has backed the change, under pressure to plug a huge hole in the budget of the State Pension Fund. He has ruled out raising the retirement age from its present 60 for men and 55 for women, a step that many economists have advocated as the most effective solution to the rising burden of pensions. “Bottom line is that the Kremlin backed a shortsighted, politically painless solution, because it is unwilling and or unable to deal with the popular blowback over raising the retirement age,” Jenia Ustinova, an analyst at Eurasia Group consultancy in Washington, wrote in a recent report on the reform.

Employers presently pay a 22 percent payroll levy for pensions, which is split between a 16 percent levy paid to the State Pension Fund to pay present pensions - the ‘pay-as-you-go’ system - and a 6 percent levy that is accumulated in an individual retirement account. 

For most workers, the split would be changed to 20 percent for pay-as-you-go and 2 percent for the individual account, increasing the immediate funds available to pay present pensions, but a d ding to the burden on the government budget in future decades.Reuters