The authorities have raised the retirement age, presenting it as a radical and long-term solution to the problems of the pension system, but this is more likely just a reduction and postponement. The lag of the pension level behind the salary level will increase, and therefore lead to a decline in the quality of life of people retiring, follows from the report by Yuri Gorlin and Viktor Lyashko "Raising the retirement age: the landscape after ...", presented at the XX April conference at the Higher School of Economics. After 2028, the authorities may have to return to discussing a new increase in the retirement age, and although this is still a long way off, it is better to start discussing unresolved problems now.

When Prime Minister Dmitry Medvedev and the government suddenly announced an increase in the retirement age in the spring of 2018, Russians reacted with hostility to the idea. To sweeten the pill, the authorities decided to index pensions at an accelerated rate. It was promised that by 2024, the average pension for non-working pensioners would increase by an average of 1,000 rubles. From the point of view of the interests of today's pensioners and society, this is a good decision, Gorlin notes, otherwise, perhaps, this thousand, no matter how modest this amount may seem, pensioners would never have lived to see. However, this decision has consequences that carry additional risks for the pension system as a whole.

Other countries, raising the retirement age, did so to prevent a decrease in the level of pensions in the future. But the main guideline here is not indexation by the inflation rate, but the ratio of the average old-age insurance pension to the average salary - the so-called replacement rate, which characterizes the performance of the pension of its main function, i.e. compensation for lost earnings of people. In August 2018, the head of the Accounts Chamber Alexei Kudrin, defending the increase in the retirement age in the State Duma, said that it is necessary not only to bring the replacement rate to the 40% of salary recommended by the International Labor Organization, but to take it higher, to be equal to the average for developed countries of 60-70% of earnings. This is an ambitious goal, but hardly achievable: pensioners will not see even 40% in the foreseeable future, Gorlin notes.

Why is GDP growing and incomes of the population not growing?

Opinions / Analytics

The increase in the retirement age as approved has produced results. Without it, the replacement rate would have decreased from 32.8% in 2018 to 27.9% by 2030 and to 22.9% by 2050, based on a more or less realistic forecast of GDP growth of 1.5% per year, RANEPA experts calculated. And raising the retirement age with the same GDP growth slows down the dynamics of the decline - 32.8% in 2018, 32.1% in 2030 and 26.5% in 2050. But the gap between pensions and wages will increase even with accelerating economic growth. On the contrary, the higher the GDP growth rate, the more pensions will lag behind wages, Gorlin notes. The fact is that GDP growth, of course, in some proportion leads to wage growth, but if pensions grow, then only to the extent of the growth of the Pension Fund (PFR) revenues, and they will, among other things, be restrained by the growth of the demographic burden, etc. (and the government would like to avoid mitigating problems by increasing transfers). This has already happened recently: in the 2000s, with rapid economic growth, average monthly wages increased faster than pensions, as a result of which the replacement rate decreased - by 2007 to 22.9% from 34.7% in 1997, according to RANEPA experts. In total, the state had to increase pensions by 2.4 times (by 76% in real terms) over three years, primarily due to an increase in budget transfers to the PFR by 3.6 percentage points of GDP.

If we assume that the pension system will remain unchanged (i.e. based on the principle of solidarity, whereby pensions for today's pensioners are paid out of pension contributions from the salaries of workers), then in the not-so-distant future the problems that have been mitigated for now will return. The state's pension obligations will grow, a risk to the sustainability of the pension system will arise, and after 2024 and especially after 2028, when the transition period of the pension reform ends, the possibilities of maintaining the pension growth declared by the state (to which the population will already be "accustomed") will be limited, the report notes. Until 2028, the situation is more or less predetermined, unless there are cataclysms, Gorlin notes, more distant years are more difficult to predict. It is not clear whether something needs to be done today, tomorrow and before 2024, but, given the inertia of the pension system, discussing problems in the still distant future cannot be postponed for long, Gorlin is sure. At the very least, we need to move away from the idea that with the current increase in the retirement age, all the problems of the pension system have been solved: even such a painful decision as another increase in the retirement age may have to be resorted to again. Obviously, the government should also think about the risks – if only because its plans are based on the Ministry of Economic Development’s forecast of GDP growth of more than 3% after 2020.

How long will the increase in the retirement age last?