The article was published in Vedomosti on August 21, 2008.
 
The current problems with the state pension system boil down to three key social issues: unacceptably low retirement benefits for current pensioners; threat of poverty expanding among retired people and those to retire in the next 10-15 years; poor efficiency of the mandatory accumulative portion of the retirement system, which might result in low pension coverage for people born after 1966.
 
1. Social security services, instead of pension insurance funds, currently handle the payment of retirement benefits. This gives them the right to transfer full financial responsibility for the payment of retirement benefits to the federal budget. At the same time, the federal budget will also receive the social tax and insurance payments made by employers (as part of the mandatory retirement payment program) for employees born in 1966 or earlier (i.e., for those who do not have mandatory accumulation accounts).
 
The following measures will also be taken in order to enhance pensioners’ quality of life (these measures are in line with suggestions made by the Ministry of Public Health and Social Development, which are worth supporting):
 
* Basic retirement benefits will be increased in the next 1-2 years to match minimum wage in the pensioner’s region of residence. If necessary, the missing funds may be allocated from regional budgets;
* The retirement capital of current pensioners for the average work pension will be recalculated to exceed pensioners’ current average cost of living by 2-2.5 times (this is to be achieved in 2-3 years).
 
2. A separate range of measures is needed to provide people born before 1967 (who do not have mandatory accumulation accounts) with relevant retirement benefits. It is clear that even the recently introduced program of voluntary co-financing will not help boost the accumulative element of their future retirement benefits in the less than 13 years remaining till their retirement, i.e. these payments will be quite insignificant. According to some estimates, the joint efforts of the state, employers and future pensioners will only increase monthly pensions by 2,000 rubles. Thus, the range of measures intended to provide relevant retirement benefits to people born before 1967 will be the same as those applied for current pensioners.
 
3. As for employees born after 1966, it is necessary to continue increasing the volume of mandatory contributions made to accumulative accounts in upcoming years. Therefore, the current 6% of individuals’ salary will grow to 8%, 10% and possibly to 12%. At the same time, it is necessary to increase mandatory contributions to the insurance portion of future retirement benefits. On top of this, the recently introduced program of state co-financing of voluntary pension savings should be expanded. The state’s annual input should be raised from 12,000 rubles to at least 40,000-50,000 rubles. Such a measure will provide relevant financial support to those set to retire after 2022. A considerable portion of this amount (and preferably the bulk of it) should be derived from mandatory and voluntary savings. 4. As for those set to begin working in upcoming years, the introduction of an insurance premium has been suggested. An amount equal to 12-15% of the individual’s salary will be accumulated on a mandatory accumulative account along with the single social tax (5-7%). The money in question will form the distributive component and the basic part of the retirement benefit. At the same time, it is necessary to toughen regulations on the length of service required to receive basic retirement benefits: no less than 20-25 years of single social tax payment, instead of the current five years required. Consequently, this group’s retirement benefits will consist of two mandatory parts: the basic and the accumulative. The majority of such pensioners will also receive insurance payments (from a voluntary retirement insurance program, a program co-financed by the state and businesses, private programs run in cooperation with the private pension fund (PPF), or from all of these sources).
 
5. It is necessary to introduce a range of measures in regard to PPF in order to ensure optimal conditions for private investors, to enhance the quality of cooperation between the fund and its clients, and to enhance its reliability:
 
* Free pension contributions made by employers to PPF from the single social tax;
* Free pension contributions made by individuals to private pension systems from income tax;
* Free pension contributions made by PPF from individual income tax;
* Unify the tax liabilities of PPF and other private entities handling the pension funding plan;
* Strengthen the requirements of PPF and private management companies, including requirements regarding the volume of owners’ capital and standards of operating activities.
 
6. Another vital strategic measure depends on the introduction of the law “On professional retirement systems” and the settlement of the status of the RF Pension Fund.
 
Currently about 20% of employees retire prematurely (these are mainly jobs from lists #1 and #2 – workers in the Far North and similar locations). This trend puts extra pressure on the Pension Fund, which is forced to pay for an extra 5-10 years of retirement. On the other hand, employers are reluctant to bear the burden of extra retirement payments, which prevents lawmakers from finally approving the law “On professional pension systems.” This law was approved by the State Duma after the first reading in 2002. We believe that the introduction of a system of incentives for employers (tax incentives, etc.) might help solve this problem. First, it could lead to the liquidation of jobs that involve harmful labor conditions. If such a solution proves to be impossible due to technological or climate reasons, employees could be motivated to make payments to professional pension systems. It is crucial to at least revive the dialogue – which stopped several years ago – between the state and employees on the subject.
 
Status of the Pension Fund of the Russian Federation
 
The status of the Pension Fund of the Russian Federation (PFR) was defined by the Supreme Soviet of the RSFSR in 1991 and reads as “the financial and lending entity,” which runs counter to the Civil Code (it was approved later). One of the solutions we suggest is to transform PFR, akin to a private pension fund, into a “special legal organizational form of a non-state social welfare organization.” As opposed to the private pension fund, the PFR should be established by the state, employer representatives and employees (e.g. those appointed by the Russian tripartite commission overseeing social and labor issues). This would make it possible to free the PFR from many irrelevant responsibilities, like providing current pensioners with retirement benefits, maintaining the registry of federal benefit recipients, paying monthly cash benefits, and registering people eligible for maternity capital, etc. Such a measure would enable the PRF to concentrate on the issues of mandatory and voluntary pension insurance.