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The only moment of suspense during last “direct line” with Russian President Vladimir Putin came during his exchange with former Prime Minister and Finance Minister, Alexei Kudrin, who brought an unemployed Putin along with him when he moved to Moscow in the mid-nineties, asked the president about his economic strategy, focusing on the decision not to raise the retirement age (55 years for women and 60 for men; this level was established in 1932). Putin’s response was telling, revealing that he believes the political and economic problems plaguing the country are manageable, and that the current crisis is like a boil that will go away by itself. He doesn’t intend to take any steps towards resolving these problems.
Raising the retirement age, a topic of much discussion recently in Russia, is one of those steps. It is a model of a micro-reform that could have macro-consequences. I call it a model because it might reveal the problems that await the Russian social and economic systems in the coming years, and how the regime might react to such serious challenges.
I need to provide a bit of background information. Since 2012-13, the working age population in Russia has been in decline. The Director of the Institute for Social Analysis and Forecasting at the Russian Presidential Academy of National Economy and Public Administration, Tatyana Maleva, points out that the baby boomer generation is about to retire just as the much smaller 1990s generation enters the workforce.
But that’s only half the problem. To solve Russia’s much-discussed import substitution problem, and to produce something besides services, the country needs people. It needs a large skilled labor force. But we currently have a situation in which millions of ostensibly well-educated young managers, lawyers, and financial analysts are unable to replace the retiring skilled industrial workers.
Stuck between industrial and post-industrial ages, Russia is losing the workforce that has the skill to exploit its industrial potential. At the same time, it is not training a new generation of laborers capable of working in the post-industrial workforce; the millions of high-tech jobs the government once hoped to create can never be filled. The retiring industrial workers are taking their production secrets with them.
Another problem lies in Russia’s wage replacement ratio—the percentage of pre-retirement income paid out upon retirement—which has been declining drastically. It stood at 35.7 percent in 2010, but fell to 33.1 percent in 2014. It’s no wonder retirement-age workers aren’t rushing to turn in their time cards, but rather working well into their golden years to supplement their retirement income.
So why not just raise the retirement age? It doesn’t have to increase to 65 right away, as the president assumed when he effectively called Kudrin heartless: “Would a person have to work until the age of 65 and then end up in a wooden casket,” the president said, using a colorful Russian idiom to describe one’s ultimate resting place (indeed, the president’s wealth of idiomatic expressions is seemingly inexhaustible).
But such a “harsh” step does not necessarily need to take effect with current retirees, raising the retirement age could be done incrementally. Vladimir Nazarov, the Director of Russian Ministry of Finance Scientific Research Institute, believes that if this incremental approach been implemented 10 to 15 years ago, today’s problems with the Pension Fund and wage replacement ratio would not nearly as dire. It also might have decreased the deficit of skilled technical workers in Russia: the older able-bodied workers would have been able to stay at their jobs longer, if only by a few years, possibly resulting in a more optimistic labor market. In essence, Russia could have “[held] onto the last working generation” for a tad bit longer, as economist Tatyana Maleva put it.
This year, incomes fell for the first time since 2000. In the past, pensions were able to help older Russians endure tough times because they were adjusted for inflation. But it appears that pensions can’t compensate for falling incomes any longer: a retired mother can no longer support her underemployed son and unemployed daughter-in-law with her pension.
Russia is heading for a real crunch in 2030 if current economic trends and the leadership’s “do-nothing” attitude remain unchanged, the system of defined pension contribution is abandoned, and the retirement age stays the same, under such conditions, one worker’s contribution to the pension system will support one retiree’s livelihood. Specialists claim that no such systems exist anywhere in the world, and neither do such economies.
The regime’s “heart-felt” attitude toward the country’s citizens will eventually result in “wooden caskets” for future generations; they will have to shoulder incredible social burdens, living in poverty in a tremendously distorted labor market.
The Russian regime doesn’t plan far ahead. It focuses on solving tactical economic problems so it can retain its electoral base in the lead up to the 2018 presidential election. That leaves two more presidential terms for the system meltdown.
But then again, the current Russian leader probably doesn’t intend to stick around for that long.
This publication originally appeared in Russian.
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