Russia goes Socialist on Pension Plans

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Apr. 6 – Russia will spend a record amount of money for pensioners this year, with almost 10 percent of gross national product going into pension funds as the Russian Federation joins the ranks of countries with the highest mandatory pension payments.

After increased pension payout deductions planned for 2011 (from 20 to 26 percent from the payment fund), Russia will overtake almost all Organization for Economic Cooperation and Development (OECD) members, including the United States, Germany, France, Switzerland, Sweden, Japan, Canada on the amount of “pension load” on businesses.

“It’s obviously bad for everyone except the government,” says Russian paper Vedomosti. Sharp growth of loading on businesses will risk rise of illegal labor relations. Not only pension payouts but also incomes taxes will be affected by it. The state finally will win little as a third of the able-bodied population of Russia works in the state sector, and increase of pension payouts will demand more from the state in terms of budget funds.

There’s a crippling demographic crisis facing Russia, as the pension population grows and the workforce shrinks. According to the World Bank, pension systems of a majority of the developed countries now suffer hard times as deficiency will reach from 6 to 10 percent of GNP this year. The situation in developing countries is not better; this year Russia’s pension deficiency will grow to 5.2 percent of GNP.

According to research data from The Institute of Transitional Economy, if nothing changes, Russian pension system deficiency will grow to 7 percent of GNP by 2020. If the government will cover it only at the expense of insurance payments, the tariff for pension insurance should be increased by 54 percent.

From April 1, the Russian Pension Fund has started to index labor pensions in connection with inflation to 6.3 percent (on the average to 8180 rubles), and social pensions to 8.8 percent (to 4600 rubles).