Pension benefits in Russia

Life conditions that Russian citizens face after retirement are not enviable all. In nominal terms pension benefits are increasing every year, though in real terms this increase is destroyed almost entirely by inflation. Why elderly people who have been working fairly for many decades to the benefit of the national economy now have to survive, sometimes even denying themselves food or necessary medicaments, thus living almost below the poverty line?

According to Pension Fund there are no poor elderly people in Russia, but let us see if it is true. Though pension benefits below the subsistence level are not observed in the regions, it by no means implies that Russian retired people enjoy high standard of living. There is such a thing as a minimum subsistence level of a pensioner. If calculated pension benefits are below this level the Government compensates the difference. Thus, in 2018 the minimum pension benefit was 7489 rubles (approximately $115). This amount should cover payments for housing and public utilities and groceries, though consumer basket of the retired people is more modest than that of a regular able-bodied man. In addition to that, a lot of retired people have some health problems — at times severe – so they need expensive medicaments and paid health-care services. Some of them even have to leave their homes or apartments and move to smaller ones in order to decrease cost of utilities and get by somehow.

In 2018 the Russian authorities decided to increase pension benefits by 2.9% which is only 0.7% above the official inflation rate. In fact, an actual monthly allowance will constitute just 250 rubles (slightly more than $3). With that amount of money, retired people will be able to buy two loaves of bread and a carton of milk or kefir and then continue to “survive” as before.

Authorities, however, like to present themselves in a positive light and they are quite good at that. Before the increase of the pension benefits, they had been speaking about it on many occasions for several months as if it were some invaluable achievement. But the reality is that annual pensions indexation is established by the law while increase of the social payments to the minimum subsistence level is not an achievement but a direct obligation of the state.

Back in the 2007 Russian officials stated that pension benefits should constitute 40% of wages (lost earnings due to the retirement). According to data from the Federal Statistics Service (Rosstat), in the third quarter of 2018 an average accrued salary payment in Russia was 41830 rubles and an average amount accrued pension benefits made 13352 rubles, subsistence level for the whole country being 10326 rubles per capita. All pension reforms were complemented by eloquent promises, though in fact did not change the situation at all or made it even worse.

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Let me remind you how pension benefits were initially formed and calculated. Employers transferred 22% from wages to the Pension Fund, 16 % of them constituting an insurance pension which is used to make payments to all retired people nowadays, 6% being a funded pension, i.e. a sum of our money on our retirement accounts. But from 2014 they declared a moratorium on a funded pension, which is still into force today. Certainly, it will affect future pension benefits as after this “freeze” and funds transition to the Pension Fund Budget, returns form the funded pension is close to zero and may even become negative, taking inflation rate into account.

Besides, in 2015 a saving scheme was replaced by the point system. That is why today there is no exact answer to the simple human question: “What pension benefits will I get eventually?” as the amount of the pension is allegedly calculated individually. Thus, a lot of citizens feel like they are being fooled as no one fully understands how this system really works. Here is an approximate calculation scheme: basic part of retirement pension which is less than 5,000 rubles is added by some points accumulated throughout the working life (each point equals a certain amount of money).

Low wages are considered to be one of the primary causes for low pension benefits. To dispel this myth let us look at the point system where a person himself has practically no influence. Even a person who earns high wage, cannot accumulate more than a set maximum – that is a bit more than 8 points. Furthermore, there are no explanations on a basis of a value of one point – it just exists and is indexed regularly.

The authorities encouraged citizens to invest money in the pension system, promising to guarantee a comfortable life in the old age by means of high payments. The new reform, though, leaded to a full loss population’s trust. By the way, “the rules of the game” will change again as a lot of authorities have spoken on abolition of the point system; thus, it is not yet known how the pension benefits will be calculated in 2019 and 2020.

As we know, many retired people, due to different circumstances, keep their jobs even after they reach a retirement age. The authorities decided to interfere and imposed a moratorium on the indexation of pension benefits of working citizens. They believe that income of employed elderly people is increasing anyway.

According to The Ministry of Economic Development and Trade, an economic growth will reach world averages only by 2035. However, no one is going to develop efficient management of the State and economic processes, to cut civil servant’s salaries, reduce spending on the armed forces. Instead, they are planning to increase the number of employees, partly by raise the retirement age up to the age of 60 for women and 65 for men. That is why a number of retirement people will decrease by 7 million people by 2035 (i.e. 23%) while without this reform this number will increase by 5.4 million. Furthermore, the rise of the retirement age goes with the precipitous fall of the pension benefits themselves: their correlation to the lost earnings will drop from current 35% to 22%. In this case, approximately one-fifth of the population loses out as their revenues fall dramatically in comparison to the other citizens.

According to this forecast, pension benefits will increase by 2.5% in 20 years (we are talking about a real purchasing power). Thus, these savings ensured by the increase of the retirement age are not used to increase pension benefits or economic growth in Russia.

After this reform, citizens are also concerned that pension benefits may be fully abolished for the working pensioners. However, the Government and some experts try to dissipate these rumours, referring to the fact that a right to a pension is enshrined in the constitution.