ZOiS Spotlight 27/2018 by Katharina Bluhm (18 July 2018)
On 18 July 2018, a protest rally against the planned pension reform was due to be held in Moscow, organised by parliamentary parties and the extraparliamentary opposition – in itself a somewhat unconventional alliance. Although the rally was postponed until after 25 July due to the ban on protests during the World Cup, in the provinces demonstrators – among them opposition activist Alexei Navalny and the largely unknown pro-Kremlin, pro-business Party of Growth – came out in large numbers. Other forms of political protest are being mobilised as well: the Confederation of Labour of Russia (KTR) – a trade union organisation – launched a petition against the reform, which has already attracted more than 2.7 million signatures, while the Communist Party is calling for a nationwide referendum and has orchestrated negative appraisals of the reform in the regional parliaments.
At the meeting of the Cabinet on 5 June, three legislative proposals were discussed: 1) to raise the pension age to 62 for men and 60 for women; 2) to increase it to 65 for men and 60 for women; or 3) to raise it to 65 for men and 63 for women. The first two proposals were put forward by the Ministry of Labour and Social Protection. The third and harshest option, proposed by the Ministry of Finance, was the one selected.
With this reform, the Russian President breaks a promise which he made after the protests in 2005 and has repeated since then. Speaking on “Direct Line”, a TV question and answer session with the President which is screened once a year, Putin made it clear that Russia’s retirement age would not rise. In light of this promise, the well-established symbolic division of labour between the unpopular Prime Minister Dmitry Medvedev and his government (who are shouldering the responsibility for the reform), on the one hand, and President Vladimir Putin at the top, on the other, has taken a knock.
Many critical analyses of the pension reform draw attention to Russia’s low life expectancy, especially among men, its widespread elderly poverty due to inadequate pensions, and the system of pension-related benefits and add-ons. The pension, although minimal, serves as a kind of basic income, which many pensioners top up by continuing to work. According to government statistics, around 30 per cent of pensioners remain in formal employment for three to five years after reaching retirement age. The average pension amounts to roughly one-third of the average salary, but the pay-as-you-go scheme cannot cover even this amount without state subsidies.
In order to understand the conflict, it is worth probing more deeply. Two aspects are particularly interesting: first, the embedding of the reform in the elite’s economic policy debate, and second, the problem of justice and confidence – a key theme for opponents of the reform.
Budget consolidation vs. development
So why did the Russian government initiate such an unpopular reform so soon after taking office? At first glance, the answer is simple: it is all about tactics. A government should always take tough decisions early on in its term. And the situation is critical: for 2018, the Pension (Insurance) Fund deficit is an estimated 257 billion rubles (17.7 billion euros), with 40 per cent of its revenue now coming from the federal budget. However, the pension reform is part of a broader agenda which may be described as budget consolidation against a backdrop of sanctions and falling oil and gas prices. This broad package of budget consolidation includes the following measures:
1) The rate of value added tax (VAT) will be raised from 18 per cent to 20 per cent in 2019, a move which has already been approved by a large majority in the Duma. VAT benefits for socially significant goods and services will be unaffected. The increase is unlikely to have any real effect on the inflation rate, according to experts.
2) The Reserve Fund, which was built up with revenues from oil and gas, formally ceased to exist on 1 January 2018, as its resources have been steadily depleted since 2014 to plug budget deficits following the imposition of Western sanctions. Expenditures from the National Wealth Fund (NWF) – that was separated from the Reserve Fund in order to support investment and social expenditures – are put on hold as a means of replenishing the Funds.
3) Overall, the government is keen to take a step back from budget financing from oil and gas revenues. It is therefore planning a moderate increase in government debt from 14 per cent of GDP in 2018 to 16.6 per cent in 2021, with this new debt to be raised from domestic sources. A new budget development fund will also be set up.
4) In future, the Ministry of Finance is keen to utilise the NWF solely for the purpose of co-financing a new individual pension savings scheme subsidised by the state. The existing “reserve insurance” will be scrapped at the same time. This scheme allowed insurees to build up their individual pension pot by making their own savings provision for 6 per cent of the pension contribution – 22 per cent of their gross salary – paid by their employer. However, with the Pension Fund facing a colossal deficit, capital-funded pension provision was “frozen” from 2014 and these funds are now being used to pay for the current generation of pensioners.
The Communist Party calls the draft legislation “the product of a liberal policy that is hostile to the working people”. For economist Mikhail Khazin from the right-wing pro-Kremlin Rodina party, it perpetuates the government’s discredited “liberal” policies that benefit no one but a “transnational elite”. The standard criticism is that the liberal paradigm of economic development failed in the 1990s and is driving Russia towards dependence on the West, with an increase in retirement age, tax rises, and – as the next step – more privatisation: in other words, less state, more market. Economic development and innovation, which are the basis for sustainable growth and national sovereignty, cannot be achieved in this way, it argues. Indeed, the CP goes one step further and is demanding the complete renationalisation of Russia’s key industries.
Although Khazin – as usual – radically simplifies the “liberal” positions and ignores the downsides of an even stronger role for the state, his criticism does highlight the potential impacts of raising the retirement age in a context of weak economic growth. If the supply of labour and the general health of older employees make it impossible for them to continue in employment – which he assumes to be the case – they will require state support from another source, whether this takes the form of unemployment benefit, disability pension or some kind of municipal provision, enforced through the courts.
The problem of justice and confidence
Most of the arguments put forward by Russian critics of the reform focus on the status quo: current life expectancy or employment structure, for example. The pension reformers’ calculations, by contrast, are predicated on forecasts of improved life expectancy and medium-term labour shortages caused by the demographic crisis, which the incremental raising of the retirement age is intended to address. However, the conflict is also about social justice and the lack of trust in government.
Putin may have brought the oligarchs to heel but he has not narrowed extreme inequality. Redistribution effects via taxation are fairly limited. The flat-rate tax introduced in 2003 has been a focal point of criticism from Communists and right-wing conservatives alike for years. Calls for taxation of income from capital are dying down, not least because this would trigger a capital flight unless Russia were placed under even more of a lockdown – not a situation that would appeal to large sections of the elite.
The trade unions attribute the Pension Fund deficit mainly to the low incomes of wage earners. Another contributory factor here is many businesses’ practice of paying part of their employees’ wages and salaries “in an envelope” with no deduction of contributions.
It’s not just that the President has failed to keep his promise. Lack of transparency and uncertainty over the use of the Pension Fund are also reinforcing the deep mistrust of government bureaucracy. The use of employees’ individual pension pots to make provision for the current generation of pensioners is unlikely to have strengthened public confidence in any form of private retirement provision administered by the state.
And finally, the security and defence apparatus is exempt from the planned rises in the retirement age. Civil servants working in these sectors can continue to retire at 40-45. This has clearly added fuel to the protests.
Navalny has voiced his suspicion that the government has chosen the toughest of the three options for the planned pension reforms simply to offer scope for Putin’s intervention in favour of one of the milder variants. We will soon find out whether such speculation has any substance. The way in which the draft legislation is to be implemented and the criticism voiced reveal yet again the intensity of the controversy within the elite over a viable development model for Russia. Even at best, this conflict will be mitigated by the centre of power – in other words, by Putin – without creating democratically legitimate structures for interest representation and compromise.
Katharina Bluhm is the Head of the Institute for East European Studies at Freie Universität Berlin. Her research focuses on new Russian conservatism. Her forthcoming publications include “Entwicklung mit Tradition? Russlands konservative Gegenbewegung” in the journal Osteuropa, 6/2018, and “New Conservatives in Russia and Central Eastern Europe”, co-authored with Mihai Varga.