''It’s a matter of priorities: you care about either Russian Guard or regional polyclinics''

Russian Ex-Economy Minister Andrey Nechayev about the pension reform

''It’s a matter of priorities: you care about either Russian Guard or regional polyclinics'' Photo: RFE/RL (lrt.lt)

In an interview with Realnoe Vremya, Russian ex-Economy Minister Andrey Nechayev explained why this reform still could be adopted painlessly despite the necessity to raise the retirement age. In addition, the scientist and economist examined its pros and cons for the average Russian and forecasted what a decision about the pension reform Vladimir Putin would make.

Main motive is budgetary

Mr Nechayev, let's start the talk with the No. 1 topic in the country if we omit football – with the pension reform. Do you clearly understand the reasons for increasing the retirement age, which is offered by the government to solve the social problem?

Whatever arguments motivated this decision in the public propaganda, from my point of view, the government's main motive for increasing the retirement age is a budgetary motive. The case is that the Pension Fund of Russia is oriented not only to the payment of pensions – it also pays benefits to same Heroes of Russia, deals with maternity capital, while it's a big clause, and several other functions, and the country's grants to the Pension Fund are equal to some 2 trillion rubles. The load of 2 trillion rubles is quite serious for the federal budget, as its total load of expenditures is about 18 trillion rubles. And, in my opinion, the aspiration to reduce transfers to the Pension Fund is the main motive of the reform the government designed.

How correct is the retirement age increase as the best solution to the situation the federal budget is in?

I will remind the retirement age increase is complemented with no less painful measure for businesses – a rise in VAT. Fiscal problems of the budget could be solved alternatively, in fact. But the government hasn't dealt with the pension sphere for long – it started to be reformed in the early 2000s. But further reformation was put off. In addition, the 'gold rain' of oil dollars began, which means there was enough money for everything, including for some rise in pensions, and the reform was frozen.

As a result, now the current system of the country is in a very complicated situation. We almost inherited the Soviet pension system when currently working people pay the pension to those who worked one generation ago. But this system worked well when labour resources increased, now the demographic situation in the country is completely different. According to demographic forecasts, one unemployed person will account for one working person by 2030. This is why this Soviet united system won't be able to provide decent pensions.

''Now the current system of the country is in a very complicated situation. We almost inherited the Soviet pension system when currently working people pay the pension to those who worked one generation ago.'' Photo: Maksim Platonov

From my point of view, we should have developed the funded pension of the system by all means. It was introduced on paper. But there weren't taken any serious measures to develop it: there wasn't introduced tax stimulation of pension savings, there weren't designed wide investment possibilities for the NGPF (Non-Government Pension Funds), like their profitability not always compensates inflation, there weren't created full-fledged guarantee systems for non-government pension funds. They were created several years ago, but they all were poor. In general, they should have developed alternative types of pension insurance. But nothing was done. And this is why the current pension system is a heavy burden for the federal budget. Was it possible it solve the problem without increasing the retirement age? It was.

Is the financial support of the pension system an alternative to the same investments in human capital, development of infrastructure, other spheres where a lot can be done? Of course, it's. This is why it seems to be impossible to avoid the retirement age increase without a dramatic change of the whole budget process any more – only because the state of the current pension system is very bad. Another thing is that previously it could have been done in a more flexible, smoother way and with greater respect for our own citizens, if you like.

''It's been chopped with an axe, as it often happens''

The final version of the retirement age offered by the government will remain the final version – men retire at 65, women – at 63. Or is it possible the president will soften, if you like, because of the discontent in society?

I think it's not accidental that the country's president, according to his Press Secretary Peskov, is nominally remains at a distance from the pension reform. And here is why. Actually, he's aware of the bill, of course, which started to be discussed after his approval, of course, because the president must sign the adopted law anyway. It's seen the ruling party keeps at a distance from the reform – it was seen at a meeting of Premier Medvedev with this party's officials. The situation is becoming funny. The president allegedly isn't aware, and United Russia doesn't support the bill. And it turns out the pension reform became Dmitry Medvedev and a couple of ministers' idea.

But it's nonsense. And I suppose now the Russian president's administration will carefully monitor the situation with the pension reform – the FIFA WC will end, all the euphoria linked with it will disappear, people will find out their retirement age, utility bills will increase, petrol prices will rise, inflation will accelerate and VAT will go up. They will see they are bothered for every little thing – international passport or driving licence duty. And then there is a question – will this all lead to mass protests like it was with the monetisation of benefits in 2005 or after the Duma elections in the 2011-2012? Depending on the protest's acuteness, Putin will react anyway. And it's likely that at one point he will go out and say as a necessary kind tsar like ''we've gone too far a bit, we've overreacted, and might women retire at 60, not 63, or the reform will be extended in time, like it would be correct do it.''

''Depending on the protest's acuteness, Putin will react anyway. And it's likely at one point he will go out and say as a necessary kind tsar like ''we've gone too far a bit, we've overreacted.'' Photo: kremlin.ru

Why was it more correct to extend the reform?

Our propaganda likes to allude to foreign experience in increasing the retirement age. But we should pay attention that it happened in a smoother and more flexible way. Studying the experience of Germany, I saw their citizens who are at a pre-retirement age were offered to work extra three or six months (depending on how much they had to work to a new retirement age, one or two years). While in Russia, it's been chopped with an axe, as it often happens. The women's rise from 55 to 63 years is a gigantic leap for just several years. Perhaps this is why authorities will extend this affair in time anyway.

Your colleague Evgeny Gontmakher thinks it would be better to prepare people for the reform and launch it in 10 some years. What do you think of such a way?

I don't see any sense in postponing the retirement age increase for long. It can be extended: if demographers threaten us with a demographic pit by 2030, let's expand this reform to 2030, so that it would look smoother. Or an alternative version like in Germany could be adopted: if you want to retire not at an old age, you will receive a pension completely but with a 'discount'. And if you want to retire not at 60, 65 but 62, you will receive more than if you retired at 60 but less than at 65. In other words, if a person feels he won't be able to work, for instance, due to poor health or he can't find a full-time job, it means he can retire earlier than the new term but receive a much less pension. This example provides people with an alternative.

What would a gradual transition to the new pension system look like in the Russian case?

To increase the age not by a year every year but eight months.

''We have a budget of the country that is preparing for either a war or revolution''

And what do you think of putting tax collection in order and reducing the number of functionaries together with a gradual transition to the new retirement age? In one expert's opinion, the reform's pain would be barely noticeable.

Of course, this all is true. But tax collection in Russia is high enough, for instance, same VAT (it was decided to raise it only because it's collected well). But the redistribution of costs of the federal budget to fill the budget of the Pension Fund would be an important clause anyway. It refers not only to state management costs but also defence costs (it's rapidly grown in recent time), costs on law enforcement activities. As I often joke, it turned out we have a budget of the country that is preparing for either a war or revolution or both. But nobody said the army and policy must be a priority, but pensions, investments in health, culture, education and so on.

The army rearmament programme seems to be coming to an end…

Nobody is going to reduce costs on the army any way – they are talking about a relative reduction, not absolute.

What per cent of costs on the power block do you think needs to be reduced?

It's a matter of priorities, not per cent. If education, health and the same pensions are a priority for you, it means you need to reduce more. If having a technological possibility to threaten the whole world and inventing new types of missiles with nuclear engines and so on are your priority, it means you need to invest in it. But the first option seems to be sensible.

''We have a budget of the country that is preparing for either a war or revolution or both. But nobody said the army and policy must be a priority, but pensions, investments in health, culture, education and so on.'' Photo: Oleg Tikhonov

Many people see the government's promise to raise the pension by 1,000 rubles every year as an advantage. Is it real? Generally speaking, have you seen more pros in the pension reform or cons?

It's another issue we haven't received a reply to yet – what this saved money will be spent on. To increase pensions? If so, it's one thing, and then it will be a normal compensation to citizens for increasing the retirement age. Yes, now a person will live less on retirement but at least he will have much money. If this money is spent on other needs, even very good needs, then pensioners' state will be very sad: they will retire with poorer health a priori, they will have to spend more on doctors and so on, while they won't have a higher pension in the short run. Of course, the reform has much fewer pros than cons. Yes, it's important now a person can't be dismissed by forcedly making retire, that's to say, it will be possible to do it later.

The rest is the cons. Look, if a person had a job and felt he was in good health, he could work at a retirement age but he loses too much financially due to the pension reform – previously, he could get both a pension and salary, now he will get only a salary. People lose much more than get, I think. For instance, in many regions, people can use public transport free. And if you aren't a pensioner, you lose this benefit. The same thing affects pensioners' benefit to pay utility bills. If you aren't a pensioner, you lose the benefit, etc. A lot will be lost by precisely working pensioners.

Now the lowest pension in Russia is less than 8,000 rubles – the number is very shameful. Is there any possibility to raise it to, for instance, 12,000 rubles in the next two years?

Russian oil price is much higher than the price designed in the federal budget. The lowest price in the budget is $40 per barrel, while the current price for Russian oil is about $73 per barrel. And nothing impedes from increasing this lowest price by $5-7 and send these additional incomes to the budget of the Pension Fund, not to the budget of the National Wealth Fund like now. The Ministry of Finance has recently published its estimates of additional oil and gas incomes. And it turned out 2,7 trillion rubles of them will go to the National Wealth Fund in 2018, which is comparable with the money the federal budget gives to the pension fund!

I'm not saying we must spend all this money. But it's easy to augment costs, but it becomes more complicated to support them later if oil price falls, God forbid. But I don't understand why precisely 3 trillion rubles must be saved, not to send at least a part to the country's budget. This is why there is a source to increase pensions. There is another source too. Our budget will be in surplus next year (+0,3%). And even if money is sent to increase pensions and make the budget unprofitable like before (-0,5%), nothing terrible will happen. I will repeat priorities are the most important things, you care about either Russian Guard or regional polyclinics. Or a rise in pensions, as you're offering.

To be continued

By Sergey Kochnev