How pension reform will affect the real incomes of citizens :: Economy :: RBC

Raiffeisenbank described scenarios of the effects of pension reform on the income of the population. Optimistic promises to keep the work stable and growing income. In a negative inherent reduction

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The risks of reform

Raising the retirement age to 65 years for men and 63 years for women can have a positive effect on state finances, but the effect of reform on economic growth may be zero or negative, write economists of Raiffeisenbank in the review “the Pension reform will slow the economic recovery” (*.pdf).

The Bank’s economists calculated two scenarios (optimistic and pessimistic), according to which the real income of population will decrease by 0.3–3% by 2034, while GDP in 2034 will be less than 0.2 and 1.9%.

Raiffeisenbank evaluated only the direct effect of pension reforms regardless of other changes in the economy, therefore, calculated by the Bank figures are not a forecast on the dynamics of real incomes and GDP in General, and the assessment of the contribution of pension reform in the momentum indicators.

The optimistic scenario

In the optimistic scenario, men and women who will continue to work after 60 and 55 years, will receive the same salary as working pensioners now (31-32 thousand). In this case, all retirees (working and non-working) pensions will be indexed above inflation. Now pensions to working pensioners will not be indexed; announcing pension reform, the government has indicated it has no plans to return the indexation of pensions to working pensioners, and unemployed promised to annually increase the pension above inflation.

“In the optimistic scenario, the direct effect of the reform on GDP and incomes will be generally close to zero, but the redistribution of income between different groups of the population”, — stated in the overview of Raiffeisenbank. The income of those who will be able to find a job after raising the retirement age to at least remain stable (or even increase), but those who cannot find work will lose their income.

According to economists, the cumulative effect of raising the retirement age will be minus 0.2 per cent of GDP by 2034 compared to the base year of 2018, and the effect on real incomes of the population will be minus 0.3 percent (see graph). But such a scenario is rather truereality and “upper boundary” estimates, noted in the review.

The government believes that pension reform will not only allow to structurally balance the budget of the Pension Fund and to increase material support of pensioners at a faster pace, but will make a positive contribution to economic growth. Ministry of economic development has estimated that raising the retirement age will increase the number of economically active population of 1.8 million people by 2024, and due to this, the GDP growth will increase by 1.3 p. p. for six years.

Pessimistic scenario

In the pessimistic scenario Raiffeisenbank remaining in the labour market, the reform of senior citizens can expect a salary close to retirement (20 thousand rubles. for men and 14 thousand RUB for women), and the pension is indexed above inflation just broken. In this scenario, the effect of pension reform on GDP will reach a minus of 1.9% to 2034, cumulative numbers, and for real incomes or minus 3%.

The average salaries of working pensioners is unlikely to remain at current levels, says Raiffeisenbank, because, in particular, will increase competition in this age category.

Due to increasing periods of retirement in the first three years additional supply in the labor market will be 660 thousand people annually. 200 thousand of them can stay without a job, economists predict. This is 5% of the total number of unemployed at the end of 2017 (about 3.9 million people), according to Raiffeisenbank.

The rating of Raiffeisenbank, stated in the survey do not take into account the effect of pension reform on public expenditures and on the wider situation in the labour market (for example, employment among the older segments of the population may have a negative impact on the employment of young workers). Economists also noted that with the possible mitigation options of reform (e.g., raising the retirement age for women not eight, and five years) negative effect on the economy may decline.

According to Finance Ministry estimates, the pension reform in 2019, will allow to increase own revenues of the budget of the Pension Fund at 287 billion rubles in comparison with 2018. Growth will continue and in 2020 (+4,8%), and 2021-m (+6.8 percent). Own revenues of the Fund will grow faster than costs, allowing starting in 2020 to reduce the transfers from the Federal budget.

According to the calculations of economists of Alfa-Bank, the net financial effect of the pension reform for the budget of the FIU may be about RUB 100 billion by 2024. Annual savings in pension costs will amount to 800 billion rubles by 2024, but about 700 billion rubles from potentially the savings will go into the promised government pensions.

Prime Minister Dmitry Medvedev announced an increase in the retirement age in mid-June. For men the age of retirement will increase to 65 years for women to 63. The transition period of the reform will start in 2019 and will last until 2028 for men (ten years) and up to 2034-for women (16 years old). The rate of increase planned, plus one year each year.

The authorities claim that the increase in the retirement age will lead to a significant increase in the level of pensions of citizens. According to Medvedev, the pensions of pensioners will increase by 1 thousand roubles a year. A bill to raise the retirement age introduced in the state Duma, its first reading will take place before the end of the spring session.

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