Reports & Papers
from
Lawrence Livermore National Laboratory
Planning Pension Reform in Russia
Mitchell A. Orenstein, Fellow, Strengthening Democratic Institutions Project
David Woodruff, Associate Professor, MIT Department of Political Science
May 9, 2000
The presentation provided an overview of the current debate on the pension reform in Russia and outlined the positions of major players involved in policy negotiations.
Mitchell Orenstein''s remarks:
The "new pension orthodoxy," a new way of thinking about pension reform in Russia, according to Orenstein, is a reflection of global changes. Systems that were set up in the early 1900s are now being partially replaced by fully funded, privately managed, individual savings accounts. The policy of private accounts was first developed in Chile in the early 1970s, at first generating considerable pessimism, but in the decade that followed, inducing a number of other Latin American countries and some Western European nations to begin full or partial privatization of their pension systems.
Endorsed by the World Bank, the system of private accounts is considered advantageous because 1) it allows pensioners to take advantage of equity returns; 2) it is supposed to provide better management of pension funds; 3) it works better with an aging population; and 4) it encourages capital market development.
The private accounts model has recently gained prominence in Central and Eastern Europe. With increasing population levels and continuing problems with unemployment, Central and Eastern European leaders seeking to pre-empt potential crisis are considering modernization of pension systems as a possible solution. All countries in Central and Eastern Europe, except for Kazakhstan, have either adopted or will adopt some form of partial privatization of pension accounts.
What about Russia?
Throughout most of the last decade, systemic legislative reform, especially in the pension area, was blocked because of persisting disagreements between the Duma and former President Yeltsin''s government. The Duma, heavily dominated by the Left, were able to block most reform efforts by the government. In 1997, the government proposed a new pension system, but the proposal was abandoned after Russia''s1998 financial crisis.
What are the obstacles?
The chief obstacles to pension reform in Russia are political and economic. Political obstacles involve opposition in the Duma. Economic obstacles include the weakness of Russia''s financial markets, which limits the amount of money Russian pension funds might reasonably invest.
Despite the lack of legislation on the issue there have been reforms, mostly through manipulation of existing institutions. These include:
1) collapse of benefit levels;
2) administration of the pension system taken over from trade unions and the Supreme Soviet;
3) intentional flattening of the benefit structure (the difference between minimum and maximum pension is less than it was under the Soviet system);
4) rather than passing laws, the government was manipulating indexation and arrears to create ad hoc cuts in pension spending.
Now there is a move away from ad hoc policy making to an attempt to impose law-based policy changes. What does the reform process consist of?
There are three basic stages:
1) Commitment Building (measured in length of how much time it takes to plan and make a firm commitment to a specific reform measure);
2) Coalition Building (getting approval from other social actors, the parliament, and unions);
3) Implementation (important because implementation does not necessarily follow the new law).
Russia is still in a commitment building stage.
Furthermore, there are two types of actors in the reform process: veto actors and proposal actors. Veto actors are parties and politicians who have the power to veto a proposal. Proposal actors are those who have ideas about different ways to reform. These actors debate in a set of deliberatory forums, which include the parliament, the media, and other various bodies. Debate is now centered in the cabinet. The nation''s pension council has also served as a forum for active debate.
Who are the veto and policy actors? The key veto actor is the president. It is unclear whether Putin will throw his political weight behind any specific proposal. The second key veto actor is the Duma''s Left. A third veto actor is Mikhail Zurabov, Chairman of the Pension Fund (he is also a key proposal actor).
Proposal actors include the Ministry of Economic Development and Trade centered on deputy minister Mikhail Dmitriev, who has been a forceful proponent of privatized accounts. Dmitriev''s proposes long-term partial privatization. As noted above, the Zurabov is another proposal actor. Zurabov advocates a dual system based on insurance and a traditional ''pay-as-you go'' minimal system.
David Woodruff''s Remarks:
Russia is moving away from discretionary use of executive power to a politics of policymaking based on law. Part of this trend can be explained by the reduced presence of barter in the Russian economy. Since all firms had tax debts in the mid-1990s, regional pension funds faced a chronic shortage of funds. Money for pension payments was often collected on a case-by-case basis through a process of mutually offsetting payment transfers among regional companies and regional pension funds. For example, in 1998 Prime Minister Kirienko arranged for a Siberian oil refinery to sell its oil through Nizhnii refineries, which then transferred cash payments to Nizhnii Novgorod pension fund. Nizhnii Novgorod residents received their pensions, but only through a complex scheme that bypassed the Russian Pension Fund based in Moscow. Today such a scheme would not work.
The pension reform debate centers on the issue of division of contributions. The existing proposal involves:
1) A "base pension" comprising 14 %, and 2) a defined (nakopitelnaia) contribution consists of 14 %, of which a notional (iskhodnaia) contribution comprises 12 % and the "actual" contribution (2%), which is money paid into the pension system that is invested.
Also at issue is the unit in which notional contributions will be made. Two possibilities are in rubles or in points. If notional contributions are counted as points, there will be a need for a constant exchange rate. Individuals under point system will have little sense of how much money their investments are earning. Ruble denomination is significantly more transparent.
A further point of debate is whether the two percent "actual" contribution will be invested by the insurance fund or by companies themselves. Finally, there is an issue of inheritance of pension contributions. The Left thinks that some form of inheritance should be allowed. Dmitriev, on the other hand, opposes inheritance.
Returning to the issue of actors, one major actor worth adding to the above mentioned list of players is the Union of Industrialists and Entrepreneurs. Recently, the Union has been maneuvering for a position to be included in the negotiation process. At this point it is unclear what role, if any, the Union will play, since the ''oligarchs'' who have recently filled its ranks want an elimination of a Pension Fund as a whole.
Questions and Comments:
Q: Is there talk of investing some of the funds into the foreign financial markets?
A: Dmitriev would like to see some part being invested. Jose Piñera, an architect of Chile''s system, has also been advising the Russian government to invest abroad. The Duma has resisted such a move.
Comment (Linda Cook): Not all pension legislation has been blocked. The provision on individual pension incomes has been passed but the problem was with the government''s administrative capacity to implement it. The same is the same with non-state pension tax. So don''t look at implementation, but consider administrative capacity.
Q: Are the unions playing a part in the negotiations with the union of industrialists?
A: (Woodruff) One meeting of the old tri-partite commission has been held.
Q: What is the relationship between the pension reform and the development of capital markets?
A: (Orenstein) I do not have very much confidence in Russian policy makers'' deciding to invest abroad and having responsible foreign managers. "We can''t let the foreigners take the money out of the country" seems to be a prevailing attitude in the Duma. Capital markets could develop in Russia, but they would develop on the back of pensioners in Russia. There is also a problem of the Pension Fund of investing itself and having to own "everything."