Social insecurity
Being a member of unprivileged social class in Russia is equal to miserable lifestyle and literal death. The system of social benefits in my country is very ill-designed due to its fragmentation, lack of legislative support and poor financing.
After the collapse of the Soviet Union, the abolishment of centrally planned economic system resulted in drastic economic decline and social hardship. Complicated by the effects of wage and price liberalization, the social consequences of market-oriented transition triggered a general decline in the standard and quality of life for the majority of Russian citizens. very important consequence of the Soviet system of social provision and social security was that people had very few social risks because the state took care of their education, job placement, health and child care, accommodation and provision for old-age or disability. Accustomed to state paternalism, people lacked enough initiative and were unprepared to cope with hyperinflation, unemployment or social insecurity in general.
In that mess associated with the rapid system change Russia also lacked visionary leaders who could facilitate the transition. Yeltsin did very little to improve the social benefits system[1]. It all started (and ended) with Putin, who introduced significant reforms in 2002. The most important one was the pension reform. Due to the aging of Russian, there was an urging need for the improvement in pension provisions for elderly. Veterans, people who defended their country or those who spent their life slavishly working for the greater good of the no-longer existing Soviet system were left with nothing. I can barely imagine how these people feel (even though I am a witness to it) given that they believed in and worked hard for something that just disappeared at once and did not leave any means for survival. Literally. Elderly people were standing on the streets begging for money like homeless. If they did not have children who had enough funds to support them they were forced to live in extreme poverty.
Going back to 2002 reforms, Putin started acting as soon as he accepted presidency in 2000. The key players and his assistants in this uneasy task were Mikhail Kasianov (prime minister at that time), Mikhail Dmitriev (Deputy Minister of Economic Development and Trade), and Mikhail Zurabov (representing interests of The Russian Pension Fund [PRF] – a huge bureaucratic structure with more than ten thousand personnel working all over the country). However, there were conflicting interests on the two sides. Dmitriev was a protagonist of radical market-oriented reforms while Zurabov and his colleagues in PRF opposed any radical change for obvious reasons. Kasianov had to leverage those conflicting interests in the limited amount of time given him by Putin as the head of the National Council for pension system reforms.
The scheme of the proposed reforms intended to consolidate all of the PRF funds; in short, the new system consisted of three parts: basic part (fixed by the government), insured part (earning-related pension) and funded part (formed in individual accounts based on returns from savings in the PRF). Three laws that regulated that change were passed in 2001. However, this new system required for additional legislative reforms such as “Law on Investments of the Funded Part of Labor Pension,” “Law on Amendments to Law on Non-state Pension Funds,” and “Mandatory Occupational Pension Law.” Needless to say, the process to finalize and pass those laws was very complicated, in large part due to opposition, and the last reform wasn’t accepted until 2004. Moreover, the administrative and organizational issues hampered the implementation or institutionalization of the new pension system in Russia. One was the selection of pension asset management companies for the funded part. Another one was the eligibility of applicants to select from those companies; and finally, the lack of initiative on citizens’ part. The majority of people barely understood what pension asset management meant and did not trust financial institutions to handle their savings. This goes back to financial literacy issues and the above mentioned repercussions of the Soviet equal benefit system.
As a result, Kasianov was fired, Dmitriev resigned, and Zurabov was appointed as the Minister for Health Care and Social Development. In the spring of 2004, almost at the same time as the reform of Government administrative structure, a new wave of social reforms backed by the President arrived. A bill was proposed to replace the nation’s pervasive social benefits (such as discounts on transportation, medicine, and other necessities) with monetary compensations, so-called monetization of welfare benefits. The bill repealed 41 laws and amended 155 others to end benefits introduced in the Soviet era to millions of retirees, military veterans, the disabled and Chernobyl cleanup workers, etc. This change caused an immense wave of social protest, which resulted in “babushka revolution” in 2005. People demanded an increase in basic (fixed) pension or mitigation of the monetization reform, both of which were eventually satisfied in the subsequent years.
So, did the reforms work in the end? The answer is that we are far from the end yet. Since 2002, only 4-5% of future pensioners have transferred their accrual assets under the management of private investment companies or independent pension funds, which indicates that Russians are simply not ready to use the accrual system effectively. In 2006 the average state pension in Russia rose 15.3%, year-on-year to 2,726 rubles (about $103 in 2006 dollars) per month. This amount still does not seem reasonable. However, it is questionable whether we need another pension reform in Russia. In my opinion, the Minister of Finance Alexei Kudrin had a point in his speech at the Healthcare and Social Development Ministry’s board meeting on April 18th. He said that instead of repeating the scenario of 2002, it is necessary to correct the existing pension system in order to raise pensions and boost the quality of social services.
“We will prepare proposals to stabilize the pension system and increase pensions, for which purpose we will be ready to sacrifice our dearest, the National Wealth Fund,” Kudrin promised.
The Finance Ministry will also draft proposals to reform the single social tax, which are expected to apply starting in 2010, according to Kudrin. Note to the reader: the effects of the unified social tax currently include practice of paying salaries “under the table” and avoidance of tax payments by both businesses and individuals. He stressed that the pension system should be a top priority for the government over the next 20-30 years. Seems like Putin wanted to concentrate on that too, but his reforms went off track. Let’s hope for the best.
[1]There were two occasions in the 1990s when the Yeltsin government tried to institute substantial reforms in the pension system. First, in 1995, the Government worked out the “Concepts of the Pension System Reform in the Russian Federation,” which included the idea of setting up a three-pillar pension system for the first time in Russia. However, this “Concept” was not realized. Second, in 1998, a new “Pension Reform Program” was publicized. It included a plan of introducing a funded mechanism to finance retirement pensions. This program was relatively well designed, but didn’t last long enough to be materialized because of the financial crisis that took place in August of 1988.
