There is No "Reform" in Russia's Recent "Pension Reform" Bill | Interview with Evgeny Gontmakher

PONARS Eurasia
By
Maria Lipman & Evgeny Gontmakher
27 Jul 2018

 

A protester holds a sign that reads, “Pension reform is a robbery of the people.”


► Maria Lipman speaks with Evgeny Gontmacher about the political and socioeconomic implications of raising the retirement age. Gontmacher is the deputy director responsible for social policy projects and recommendations at Aleksei Kudrin’s Committee of Civil Initiatives. Over 1992-2003, he held positions as Head of Department at the Russian Ministry of Labor, Deputy Chair at the Presidential Council for Social Policy, and Head of Department at the Russian Government Administration.


 

Soon after his inauguration for a fourth presidential term, President Vladimir Putin held his annual call-in show (Pryamaya liniya) with the Russian people. He spoke a great deal about his plans to cut poverty, boost economic growth, and improve medical care and demographics trends - saying for instance that life expectancy should reach at least 80 years of age by 2024. When asked whether the retirement age would be raised, Putin didn’t say yes or no. Instead, his response was lengthy and evasive:

As for the retirement age… I've always taken a highly cautious and careful attitude to it. …One of the key goals that I have set to the Cabinet is to increase the pensioners' incomes, and it should be a significant increase… (A)nother important goal is to decrease by half the number of those below the poverty line. We should find out in the nearest future which measures the Cabinet will come up with to solve this key task… I want to emphasize again: the key goal of the whole system of pensions is to significantly increase the level of welfare and incomes of pensioners.” 

One week later, Prime Minister Dmitry Medvedev announced that as of 2019 the retirement age would be gradually raised from 55 to 63 years of age for women and from 60 to 65 for men.

On July 19, after a short, but emotional debate, the Duma voted for the bill implementing the new retirement ages. The next day Putin, who had kept silent on this matter since his Pryamaya liniya, said that he “disliked any variant [of the pension reform] that involves a raise of the retirement age.” This variant “can't appeal to an overwhelming majority of our citizens,” he added. Putin has thus emerged as his people's savior, concerned about their well-being and standing up to protect them against those in the Cabinet who, as he said, may “dupe” them. 

The need to raise the retirement age has been discussed by the government and nongovernment experts, as well as the media, at least as long as Putin has been Russian president. A major reason cited by experts has been that the number of pensioners is growing, while the overall population is not; this means a growing financial burden for those employed to provide – through their taxes and other payments – for those who don’t work (pensioners as well as other non-working categories).

Anatoly Vishnevsky, Russia’s leading demographer, referred to this trend as “unwelcome, but inevitable” and emphasized that the rise of the demographic load would be especially steep in the next 10-15 years. He also stressed the fact that, even though this trend has been long predicted, the government only now begins to deal with it, and even so in a manner that he referred to as “shortsighted and momentary… without a clear vision of the long-term prospects.”

Even if Putin and his various administrations have ever seriously considered circumspect, forward-looking policies, none have been pursued. One thing is certain, however: throughout his time in office, Putin explicitly rejected the idea of raising the retirement age, which he rightly saw as a highly unpopular measure. During his 2005 Pryamaya liniya he was quite straightforward:

“I am against raising the retirement age. And as long as I am president, such a decision will not be made. It is my general belief that we have no need to raise the retirement age… [we should not] infringe on [people]’s pension rights …. And I will repeat once again that I am against an increase of the retirement age for both, men and women.”

In 2005, Putin must have been especially anxious to reassure his citizens. Earlier that year his government launched the so-called “benefits-for-cash” reform – a replacement by cash payments of in-kind entitlements, the legacy of the command economy. The ill-prepared reform came as a shock to unsuspecting retirees and other entitled categories: many did not trust the government and were concerned that they would simply lose their benefits, while the compensation would be inadequate if paid at all. Across Russia, spontaneous protests erupted in large urban centers and smaller towns. What made things worse still was that the mass protests at home almost coincided with the Orange revolution in Ukraine. This, of course, further increased the Kremlin’s alarm; the reform was mostly suspended, and special payments were made in order to quell the protests. As Evgeny Gontmakher says in the interview below, in the end, the no-reform was even costlier than the actual reform would have been. After that, Putin's administrations consistently refrained from large-scale unpopular reforms – and luckily for the Kremlin, the price of oil remained mercifully high so the government could afford to avoid these risky moves.

Apparently, in today's much less auspicious economic situation, the government felt that procrastination was no longer affordable. It is impossible to believe, however, that Putin did not sanction the decision to finally start raising the retirement age. Yet, the Kremlin tried to persuade the Russian people that Putin was not involved. His spokesperson, Dmitry Peskov, has repeatedly emphasized that the decision was the Cabinet's, not Putin's. "Neither the (Kremlin) Administration nor the president participated in these discussions,” he insisted. 

But the people were not convinced. Putin’s approval and trust ratings have fallen for the first time since the annexation of Crimea. According to Grigory Kertman of the FOM polling agency, which is generally seen as loyal to the Kremlin, "The attempts to distance the president from the pension reform have been lost on the citizens; the (polling) numbers point to significant discontent.”

Polling data confirmed what was obvious all along: an overwhelming majority were against retirement reform, and numerous street protests followed. In many regions, local authorities, reluctant to approve the highly unpopular reform, especially shortly before Election Day in September, lingered and didn’t come up with their assessments until they were strongly pressured from Moscow. (In the end, most regions submitted their approvals).

In Moscow, which will have a mayoral election in September, the city legislature announced that it would not discuss the reform until after the election. The incumbent mayor’s competitors are a joke, and the results of the Moscow election, just as of any federal or regional election in Russia, are fully preordained. And yet, the authorities have sought not to upset Muscovites prior to the vote.

Closer to the day when the Duma was to vote for the controversial bill, the government media consistently avoided words such as “reform” or “raise.” According to research conducted by meduza.io, the media opted instead for wordings such as “changes in the pension legislation,” “changes in the pension system,” “a bill on pension changes” or simply “the pension bill.”

The debates in the Duma lasted just one day. For the three nominal opposition parties, this was an opportunity to vote against “the anti-people government,” but since United Russia, the major pro-Kremlin faction has a solid majority, nearly all amendments were declined, and the bill was easily approved by 328 votes against 104.

The Russian opposition parties have long been reduced to opposition only in name, and Vladimir Zhirinovsky, the leader of one of those parties, the LDPR, has long become an unparalleled master of a political travesty. His contribution to the debate was a fiery speech against the raise of the retirement age in which he blamed “the mess of the past 100 years” on the Duma deputies of the early 20th century who “staged a revolution” and “killed the Tsar.” “Everywhere where there’s a monarchy, people live better,” he declared.

In a heavily monopolized political system, pushing a piece of legislation through the Duma or forcing governors or regional legislatures to approve unpopular policy is hardly a problem. Public sentiments are much harder to control. As Samuel Greene and Graham Robertson wrote in a recent piece, “[T]he one thing that can be relied on to create protest in Russia is policy that makes life palpably harder for any particular group of people.” In the case of retirement age, the “group” amounts to tens of millions of people.

As Gontmakher points out, the protests staged so far have been relatively insignificant. One reason may have been that many in Russia were distracted by the World Cup; besides, Putin had earlier issued a decree introducing strong restrictions, a de-facto ban, on public rallies and other actions in the cities hosting the World Cup. But Putin’s declining ratings are in itself a very serious factor. His amazing levels of approval have endowed him with a unique status: he is unchallenged and unaccountable, way above all institutions, and infinitely superior to anyone in the Russian political establishment. Putin’s approval ratings, which have remained at 80 percent or higher (since the annexation of Crimea), have served as the safeguard of his regime’s stability, despite economic stagnation and declining living standards.

“The rise or decline of discontent depend on the moves of the president who is currently taking a pause,” FOM's Kertman said in late June.

On Friday last week, Putin interrupted his “pause” by saying that he, along his people, disliked the reform and would save the citizens of Russia from the risk of being “duped.” A plurality of Russians had expected him to interfere on their behalf: 35 percent thought back in June that a softer version of the reform would be adopted (only 19 percent expected the cabinet's plan to be enforced. The rest did not have a clear opinion).

It is unclear at this point whether the reform may indeed be softened, or what consequences Putin’s interference may have for the Cabinet and the prime minister. After Putin’s statement, it is them who look “duped” or at least outplayed.

Experts are skeptical that Putin will substantially soften the reform proposal. The stagnant economy leaves him with very limited freedom to maneuver. He is more likely to offer minor changes and benefits for small groups. The key question, however, is whether his ratings will rebound.

People protesting the recent pension reform measures. One sign reads, “Putin, stop Medvedev!!! We are against increasing the retirement age and raising the taxes.”

INTERVIEW WITH EVGENY GONTMACHER

Masha Lipman: What is your general impression of the pension reform proposed by the government?

Evgeny Gontmakher: As one of the authors of the Russian pension reforms of 2002, I would like to say: forget the word “reform.” Back then we developed our pension reform following the recommendations of the World Bank. We were building a new pension system; and any normal pension system draws on three pillars: the first one is a standard, pay-as-you-go part. In the countries with established pension systems, 50 percent is contributed by the employee, and the other half - by the employer. In Russia, the employer pays 100 percent. This is a minimum that everyone is assured of.

The second element is the accumulated benefits – this is what you accumulate for yourself, and maybe your employer also contributes. When you retire, you get this second half in addition to the pay-as-you-go.

And there's also a third part, which is purely your choice. You may, if you like, open an account in a pension fund, or in a bank offering pension accounts, or in an insurance company, etc.

Back in 2002, we were introducing these new institutions. For the first time in our history, we introduced a mandatory accumulated portion of the retirement pension. This is why what we conducted back then was a pension reform. Discussions of that reform began as far back as 1997. There was a National Council on pension reform under the president. Mikhail Kasyanov, then prime minister, was the head of that Council, and I was its secretary. The council included representatives of all the Duma factions, employers, trade unions, experts, etc. We organized discussions, debates, traveled to other countries and studied their experiences.

"Back in 2002, we were introducing these new institutions. For the first time in our history, we introduced a mandatory accumulated portion of the retirement pension. This is why what we conducted back then was a pension reform."

According to our reform plans, by 2030 at least one-half of the total pension payments were to be transferred to the accumulated part, so people would be given an opportunity to manage a significant portion of their own pension.

One more reason why those measures amounted to an actual reform was that private managing companies were granted the right to invest the accumulated funds.

One issue that remained unsolved was the status of the Pension Fund. The funds accumulated there have remained state property. My colleagues and I are suggesting today that this fund is converted into a nonprofit organization, so the money accumulated there becomes public property.

Other institutional changes are also necessary. For instance, in Russia, one cannot open a pension deposit account for as long as 10 or 20 years, or longer. Such deposits make the depositor eligible to file income tax returns. The banks that offer such accounts are granted tax privileges since they guarantee the safety of the accumulated funds. Yet, in Russia, the banking system does not really participate in the pension system, and neither do insurance companies.

What is proposed today is not a reform, but a mere change of parameters: instead of retirement at the age of 60 for men, and 55 for women, these parameters will be raised to 65 and 63. It is not clear whether the social welfare system will be adjusted to these new parameters. For instance, currently pensioners are assured of subsidized public transportation, they don't have to pay the real estate tax, they are entitled to subsidized utility tariffs… Will they keep or lose these benefits when the current changes are made? If all these factors were taken into account and linked up, this would amount to a large-scale social program, and the rise of the retirement age would then be just one element of it.

"What is proposed today is not a reform, but a mere change of parameters."

I am for raising the retirement age, but it is necessary to get thoroughly prepared for it, to create certain institutions and organize public discussions. Instead, the Cabinet has proposed these measures almost overnight. If the bill is adopted, the new rules will be effective in 6 months, as of January 1, 2019.

In the mind of a Russian individual, retiring at age 60 and 55 is like free healthcare and free secondary education – it's a given, something that has always been in place. Any changes in such core matters, and especially those that have to do with retirement age, interfere with deep-seated public perceptions. This is a very important factor.

Lipman: What would be the right way of introducing these changes in Russia?

Gontmakher: In the system of governance Vladimir Vladimirovich [Putin] created it is universally assumed that he is the ultimate decision-maker. This means that he should have himself announced the raise of the retirement age and explained why this should be done.

Putin wanted to remain impeccable, but, according to the surveys conducted by both FOM and VTsIOM polling agencies, people in Russia are unhappy. FOM reported that 83 percent were against the raising of the retirement age even before it was announced. And more recent data indicates that this perception has not changed, and people don't believe that Putin is not involved in this decision. In theory, he can still backtrack and say, my dear friends, I call it off. But this would mean dealing a blow on [Prime Minister Dmitry] Medvedev and forcing the Cabinet to resign.

"FOM reported that 83 percent were against the raising of the retirement age even before it was announced."

Lipman: Do you think this might happen?

Gontmakher: I don't think so. But then it’s impossible to predict. All the decisions are made by a single person. He is sitting in the Kremlin and reads the reports about public sentiments. The protests that have taken place so far have not been significant, but people in Putin’s administration are always on alert for signs of a “color revolution” - what if Aleksei Navalny brings hundreds of thousands to the streets?

The officials probably expected that the people would begin to get adjusted to a sudden increase in the retirement age, but if they indeed had such expectation, they were wrong. They may have expected that people would get distracted by the World Cup - but this did not happen either.

This is why the government is currently discussing ways of civilized retreat. My advice to those in charge beginning with Vladimir Vladimirovich: OK, pass this legislation effective as of January 1, 2019, and add a provision that the retirement age will begin to rise on January 1, 2025.

"My advice to those in charge beginning with Vladimir Vladimirovich: OK, pass this legislation effective as of January 1, 2019, and add a provision that the retirement age will begin to rise on January 1, 2025."

These six years would be a preparation period when the government would explain why the retirement age has to be raised. This would enable the Cabinet to save face by leaving in place the announced raise, but also soften the negative effect.

In May Putin issued a decree with beautiful promises – to improve health care, to ensure an increase in life expectancy, to accelerate economic growth, to cut poverty in half by 2024. So why doesn't the government start to implement these goals, so people would see that things are indeed getting better – then will be a good time to raise the retirement age.

Lipman: One often hears that raising the retirement age now is an objective necessity because the load on those employed becomes insurmountable...

Gontmakher: I asked those in the government who have insisted that the retirement age must be raised immediately: what is the actual goal you seek to achieve? I haven't got an articulate answer. The first reason is clear: there's no money because life expectancy has become longer, and this has led to an increase in the number of pensioners. In fact, life expectancy has grown in recent years as a result of reduced infant mortality. Meanwhile, for those who reached the retirement age, life expectancy has not changed significantly since the 1960s.

In 1965 a 55-year-old woman could expect to live another 24.3 years, and in 2016 this number is 25.8 years. For 60-year-old men, these numbers are 15.6 and 16.1, respectively. In the next six years, the situation will not change substantially.

It is true that the Russian government already provides the Pension Fund with over three trillion rubles a year from the federal budget to make up for the shortfall in employer-funded contributions. Yet, as soon as it became clear that people were upset by the prospect of the later retirement, the government got frightened and immediately announced that the annual pension increase (a Russian law has it that pensions must be raised every year to adjust for inflation) will be doubled: 1,000 rubles instead of the planned 500.

It appears that the additional expenditures incurred by these extra 500 rubles are equivalent to the total amount that the government expects to save next year, when, according to the proposed measures, there will be no new pensioners. This means that there will be no financial profit for the state. It is like planting potatoes, but then digging them out because one is hungry.

"Already, ideas are circulating that the government is going to raise the average pension up from the current 13 thousand to 20 thousand. Very simple calculations show that the increase of the retirement age is unlikely to enable the government to save any funds."

Already, ideas are circulating that the government is going to raise the average pension up from the current 13 thousand to 20 thousand. Very simple calculations show that the increase of the retirement age is unlikely to enable the government to save any funds.

Another explanation is demographic: the government wants to reduce the load on those employed. Currently, the number of those for whom the employers make payments to the Pension Fund is about 50 million people, while the total number of pensioners is about 40 million. The number of “payers” could be larger, if people did not move to the gray sector of the economy. About 20 million in Russia do not make any payments to the Pension Fund because they work in the shadow economy. If they were given an incentive to contribute to the Pension Fund, Russia's financial problems may not be so grave.

Demographic factors are not insurmountable. If the government policy toward small business or the self-employed were more benevolent, they might consider making payments to the Pension Fund, and the government may get additional revenues.

We have a National Welfare Fund that had been originally designed for balancing the pension system. As of now, almost four trillion rubles have been accumulated there. This Fund continues to grow since the budget rule has it that all additional revenues generated by a rise of the oil price beyond 40 dollars per barrel must be transferred to this Fund.

"There's also a psychological reason why the raising of the retirement age is being pushed through right now."

And by the way [Aleksei] Kudrin, [former Russian Finance Minister; since 2012, he has been head of the Committee of Civic Initiatives, a civil society organization of professionals that seek to influence the government decision-making] suggested that, since the price of oil has recently gone up, the budget rule may be softened a bit by moving the cut-off line up from 40 to 45 dollars per barrel.

There may be other solutions that would make it possible not to raise the retirement age so abruptly.

But there's also a psychological reason why the raising of the retirement age is being pushed through right now. People in the government have used two arguments to scare Putin. One that the price of oil may drop leading to a collapse of the economy, and the other, a demographic one: that it will soon be impossible to provide for the elderly because the number of workers is too low. The oil price forecast indeed came true, and Putin realized that this was a mighty serious matter. This is why he also believed the other forecast: if they had guessed the oil price dynamic correctly, he may be thinking, they might also be right when they point out that, unless we raise the retirement age now, we may face an economic disaster.

As we see, facing the risk of public discontent the government forgets rational reasons and chooses to throw money at the problem - just as they did back in 2005 when they launched the benefits-for-cash reform. That reform was intended to save the government funds, but, in the end, they rolled back the reform and spent several times more money.

Lipman: Back then the substitution of cash payments for the in-kind benefits caught people unawares, and this led to mass protests. Yet you seem to say that the government has not learned the lesson of 13 years ago, has not taken proper measures to mitigate the effect of the unpopular policy before it has been formally introduced…

Gontmakher: They haven't prepared as they should have. I think the successful presidential election in March 2018 played a role here. Putin gained a very strong election result, including in big cities. And the experience of recent years also suggests that it may not be necessary to talk to people. The government made the citizens pay a mandatory fee for capital repairs and improvements to residential buildings. And what was the reaction? No reaction, people stayed calm. A bit later the real estate tax was increased several times - and again, no reaction. The latest episode – the increase in the gasoline price. There are dozens of millions of drivers in Russia, every day they come to gas stations – and suddenly they see that gasoline is one ruble more expensive. And yet – they grumbled, but put up with it. The strategists sitting in the Kremlin were probably telling Putin that he doesn't have to worry about the public’s reaction.

"The strategists sitting in the Kremlin were probably telling Putin that he doesn't have to worry about the public’s reaction."

Lipman: Maybe they were right?

Gontmakher: Maybe they are partly right. But Putin trusts his instincts: he probably said, OK, go ahead and raise the retirement age, but let [Prime Minister] Dmitry Anatolievich [Medvedev] do it, not me. He is guided by his intuition …

Lipman: According to a FOM poll, about 60 percent believe that the retirement age will be raised anyway, so maybe there's no point to resist…

Gontmakher: I don't think one should expect large-scale rallies, hundreds of thousands in the streets… but there is still a problem: our people are not very fond of the government as is, except for Vladimir Vladimirovich [Putin], who is an embodiment of Russia proper. His approval and trust ratings have remained steady in recent years whatever was going on. However, the announced pension reform has taken a toll even on his ratings.

"Our people do not want to cooperate with the state. People proceed from the assumption that the government is there to rob them and pocket what's theirs."

Our people do not want to cooperate with the state. People proceed from the assumption that the government is there to rob them and pocket what's theirs; they believe that government officials are thieves, that they are corrupt. And these negative emotions are accumulating.

In his State of the Nation address to the Federal Assembly this year, Putin said that the main threat to Russia is that it is lagging behind (and he was right!) and declared that Russia needs a breakthrough. But then the question arises: what breakthrough can be achieved when people are grumbling, when they are filled with negative emotions? The Russian people may not be eager to take to the streets, most of them don't go beyond grumbling – but how can you build a 21st-century economy with such public sentiments? How can you expect innovations or creativity? The government may pour streams of propaganda on the people, but they simply don't believe it. They feel in their guts that the government is lying to them. And even if they don't have the energy or desire to resist and protest, they take a very skeptical attitude toward the government's message. With such mindset, Russia may go on living for decades, but it is leading to degradation. Russia will lag farther behind.

"The government may pour streams of propaganda on the people, but they simply don't believe it. They feel in their guts that the government is lying to them."

I think Putin is highly concerned that Russia's share in the global economy is declining, that Russia's economic growth is below the world average. He talks about large-scale rearmament, but there will be no brains, or resources, or people on whom to draw. According to a survey, done recently by [the polling agency] VTsIOM, about one-third of the Russian young would like to leave the country. Of course, they will not leave, but such answers give an idea about their mood, and this is a crucial factor that holds back the national development. This is a threat to Russia as a modern country.


Dr. Evgeny Gontmakher graduated from Moscow State University in 1975. Since 2012, he is the Deputy Director responsible for social policy projects and recommendations at Aleksei Kudrin’s Committee of Civil Initiatives. He has been a Member of the Coordinating Board of the European Dialogue group since 2012 and a Member of the Executive Board of the Institute of Contemporary Development since 2008. From 2009-2016, he was Deputy Director and Chief Researcher at IMEMO, Russian Academy of Sciences. Over 1992-2003, he held positions as Head of Department at the Russian Ministry of Labor, Deputy Chair at the Presidential Council for Social Policy, and Head of Department at the Russian Government Administration.