These comments were published in Rossiyskaya Gazeta on December 23, 2008

On the eve of the First Russian Pension Forum, which took place a week ago in Moscow, experts believed that it would be largely devoted to significant adjustments to the new policies that concern the material well being of current and future pensioners. There were no sensations. But new questions did come to light. Health and Social Development Minister Tatiana Golikova stressed the need to return to insurance standards in the pension system. This approach is definitely correct. But let’s speculate on what the discussion should cover.

The minister stated that starting in 2015, the size of the basic insurance component of the work pension will depend on the length of employment. It can be reduced by 3% for each year under the standard 30-year employment period or increased by 6% for each year over the “norm.”

The current insurance programs presuppose a direct correlation between the volume of accumulated payroll contributions and the size of subsequent payments. However, they definitely do not involve an algorithm with bonuses for the length of employment, which I think is an conceptual mistake.

Let’s suppose that an employee reports a short employment period (10 years, for example) but a high salary. Let’s say that the salary for the obligatory insurance payments is 415,000 rubles a year. His pension should be the following: 415,000 rubles multiplied by 0.26 (the percent contributed to the Pension Fund from the salary) and for 10 years, and then everything divided by 228 months of the average life expectancy in retirement. And we get 4,700 rubles per month. During a thirty-year employment period, this figure should triple to 14,100 rubles.

But why should someone be rewarded for “overworking” and punished for “underworking?” Anything can happen in life: for example, a person works 10 years, makes 4,700 rubles per month as pension, and he’s fine with this. And how is his situation worse than that of a, let’s say, janitor who made a small salary – 10,000 rubles per month, but worked 34 years, in order to receive the exact same pension? It’s easy to calculate that after the introduction of additional charges and discounts for an employment period the first worker will receive even less than 4,700 rubles per month. Depending on the size of the basic component of pensions at the moment they reach the pension age, the “penalty” could range from several hundred to several thousand rubles per month. Then the janitor with 34 years of employment will receive a good “prize.” Where is the fairness and simplicity that are at the heart of the current insurance ideology?

All these tricks related to the employment period are to serve as a pretext for advancing the retirement age. It is a right goal to pursue, but if the situation in the country improves, the individual will reach the retirement age in totally another status after the years 2015 - 2020. Firstly, he or she will have a relevant salary, which would be a pity to lose, since retirement benefits do not fully compensate a salary. Secondly, people will maintain good health till retirement age and thirdly, professional retraining will give hope and good chances for career development and fulfillment of ambitions. This makes it more logical to offer an employee some future benefits instead of a later retirement, since the individual refuses to take advantage of the occurrence of the insured event.

There is one more issue to mention. I do not know who convinced Ms. Golikova of the fact that if 82% of the population earn below 415,000 rubles annually in 2010, this ratio will remain so in the future. This might be correct if the sectoral structure of the current economy remains intact. Such an economic pattern means that people working in export-related industries, which are quite few in number, and sectors providing services to these industries (banks, consulting companies, private insurance etc.) earn much more, than those working in education, public health, light industry and agriculture. Adjustment of our economy toward innovative patterns will gradually eliminate discrepancies between salaries. The number of people with annual salary exceeding 415,000 rubles (adjusted for inflation) will substantially grow.

By giving this simple example I once again emphasize the need to revise the pension system, even regardless of the crisis. But it is a very important initiative which calls for consideration of the potential external conditions under which the pension system is to function. We also should be aware of seemingly unimportant details capable of generating grave problems in future. However, on top of bonuses and work-length-driven reductions, we basically heard a repetition of suggestions introduced by the Prime Minister Vladimir Putin on October 1, 2008. However, over the past two months the economic and financial situation in the country has dramatically changed.

Would it have been possible to assume on October 1 that the volume of industrial production in November would decrease by 10.8% compared to the previous month? I think that the data on salaries will be no less disappointing. And salaries directly influence (through the collection of the unified social tax) the state of the pension system. Alas, it looks like it is futile to expect a growth in unified social tax receipts in 2009 – even zero growth (as opposed to negative growth) is fairly optimistic.

Of course, it can be said that this time the federal budget will help out the Pension Fund. However, the budget is already under strain. For the first time in several years, the 2009 federal budget will have a deficit (although not a large one) This, by the way, is not yet critical. But what will happen to the economy in 2010? No one knows. According to the optimistic forecasts, the worst is behind us; economic growth will resume and salaries will grow, as will contributions to the Pension Fund. But, as the famous saying goes, don’t forget about the worst while counting on the best. First Deputy Finance Minister Sergei Shatalov recently said that next spring the government might consider the question of extending the deadline to replace the unified social tax with an insurance based system. And this presupposes an increase in the contributions to the Pension Fund and the Compulsory Medical Insurance Fund, as well as a change in the discounts on their payment, presenting a burden to businesses that have just started to recover.

And here it is appropriate to analyze the prospects for the National Welfare Fund and the Reserve Fund. Oddly, Tatiana Golikova said nothing about this. But the 5.8 trillion rubles that the two funds contained as of December 1 will most likely not increase during the coming years because of low oil prices. However, the money will be spent – at least to close the growing budget deficit of the Pension Fund, which next year must pay out 3 trillion rubles to pensioners. And 3.7 trillion in 2010, and 4.3 trillion in 2011. The Pension Fund deficit is relatively small for now – it should be 134 million rubles in 2009. However, in order to allow it to pay out the basic component of pensions, the federal budget should transfer a larger amount (more than 1 trillion rubles) to the Pension Fund. And if there is even a 30% chance of the depression lasting more than one year, then this should provide a serious foundation for preparing a real anti-crisis variant of the pension reform.

The author is a member of the Management Board of the Institute of Contemporary Development