- THE PENSION SYSTEM: A MODEL FOR RUSSIA AND INTERNATIONAL EXPERIENCE
- Modeling the Pension System of the Russian Federation
- 12. Modeling the Outcomes in Brief
- Modeling the Pension System of the Russian Federation
12. Modeling the Outcomes in Brief
Our calculations demonstrated that under the basic pension system development scenario (the middle demographic forecast of the RF Goskomstat and the macroeconomic forecast of the RF Ministry for Economic Development and Trade for 2002 – 2050):
- the old age dependency ratio will rise 2.15 times;
- the pensioner dependency ratio will rise 1.7 times;
- the PAYGO affordable replacement ratio will go down 1.95 times;
- the funded pension affordable replacement ratio at the date of retirement will, by 2050, approach 9% (funded pension was calculated at a 7% real profitability rate);
- indexation of basic pension to inflation will, to all practical purposes, result in its disappearance;
- indexation of NDC pension under the current legislation will produce a very large PAYGO surplus: the payments will take up less than half of the contributions;
- by 2050, the replacement ratio (equal to the PAYGO affordable replacement ratio plus the funded pension replacement ratio at the date of retirement) will approach 25%. That is, it will go down 20% as compared to 2002.
Our calculations show that, despite the significant disparities in expected general population under different RF Goskomstat’s demographic scenarios (the estimates for 2050 differ by more than 40 million), the pensioner dependency ratio are very similar, as a result of which the affordable replacement ratios are also similar. This made us supplement the basic scenario with two more demographic scenarios defining the extent of the possible change of the old age dependency ratio. By 2050, the variation is:
- 1.5 times for the old age dependency ratio;
- 1.35 times for the pensioner dependency ratio; and
- 1.35 times for the PAYGO affordable replacement ratio. The latter deviates from the figure of the basic scenario by less than 20%.
In demographic terms, the size of funded pension is affected mainly by residual longevity. In each examined longevity scenario (low, middle, high, and extra-high), residual longevity rises by approximately 10%. This growth determines a corresponding decrease of funded pension and, in consequence, the replacement ratio.
Funded pension is strongly affected by the rate of returns on accumulations. Its change by 1% changes the funded pension replacement ratio by 15 – 25% (depending on the age of retirement).
Under the worst (in terms of the pension system) demographic forecast, in 2050 the replacement ratio will go down by 15%, falling to 21%.
As a result of the introduction of funded pensions into the new pension system, part of pension contributions are saved for the future and have to be taken out of the current revenues of the RF Pension Fund used to pay the pensions of present-day pensioners. Although formally, this is not supposed to cause a Pension Fund deficit, it is still possible that in future, additional funding of the country’s pension system will be required to raise the pensioners’ standard of living. Our calculations show that the greatest decrease of the replacement ratio will occur in 2011 (by approximately 14%); subsequently, the difference between the replacement ratios supported by the pre-reform and the new systems will begin to close and, since 2031, the new system will ensure a higher replacement ratio than the pre-reform one.
We also discovered that indexation of basic and NDC pensions envisaged by the current legislation will, in the long term, significantly decrease the replacement ratio: in 2050, it may go down to 16%, while the system is able to support 25%. The greatest fall in relation to wage will be observed for basic pension. This means that the indexation scheme needs to be revised.
Contributions to the basic and NDC elements of labor pension also required adjustment. To strengthen the dependency of pension size upon the volume of contributions and encourage the future pensioners to pay them, the share of the contributions used to fund the NDC element of labor pension should be raised at the expense of the amount going to the basic element. This can be done, since in the future, a large surplus of the money funding the basic element will be formed.
To raise the efficiency of the pension system, retirement age for both men and women will have to be increased. Calculations made for all demographic scenarios show that if retirement age is raised to 65 years for men and women, in 2050:
· the old age dependency ratio will do down 1.8 – 1.9 times;
· the pensioner dependency ratio will go down 1.6 times; and
· the PAYGO affordable replacement ratio will rise 1.6 times.
Raising retirement age by five years would result in the funded pension replacement ratio going up by 40%, and by 10 years, by 100%.
The lower social tax rates enjoyed by the manufacturers of agricultural produce, family communes, and small nations of the North engaged in traditional trades would produce a noticeable decrease of the NDC element of these persons’ labor pensions. To preclude this (and assuming that these tax “benefits” needs to be retained), they should be funded out of the part of the social tax directed to the basic element of labor pension.
As a result of the regressive scale and the equal size of basic pension for most pensioners, the replacement ratios of the persons belonging to the middle class will be â 1.5 – 2 times lower than on average. To enable them to ensure a higher replacement ratio, the development of non-public pension provision/insurance should be encouraged[1].
The assumptions pertaining to migration used in the basic demographic scenario, under which the country’s population will fall to 100 million by 2050, appear understated. Such a large reduction combined with aging would make necessary the arrival of a large number of employable age immigrants. The aspects of the pension system connected with a high immigration rate clearly need to be studied in more detail.
The expected high real wage growth rate gives a sharper edge to the issue of investment of pension accumulations. This issue lies beyond the boundaries of this paper. It should be noted, however, that the debate on this issue does not stress enough matching pension obligations and the assets in which it is proposed to invest pension accumulations. Thus, as regards the latter, fixed-income government securities are not risk-free even if the probability of default is nil. With reference to long-term pension accumulations, the risk of unexpectedly high inflation makes investment in fixed-income securities highly risky.
The efficiency of the funded element of pension provision depends very strongly on the projected wage growth rate. This poses the need for further and more detailed study of the trends of average wage changes and their effect on the changes in the funded element of labor pension.
About the authors
Baskakov, Valerii Nikolaevich, Dr. Sci. (Phys. And Math.), professor, Director of the ANO “Independent Actuarial Information Analytical Center”, professor of the higher mathematics department at the N.E. Bauman Moscow State Technical University, and the department of mathematical methods in economics at the G.V. Plekhanov Russian Academy of Economics. Has been doing research work for 25 years, and teaching, for nine years. His scientific interests are actuarial mathematics, mathematical statistics, insurance, economics, demography, and sociology. Author of over 70 published works, including four monographs and three manuals. Since 1997, has been a member of expert councils and work groups on pension insurance at the Deputy Chairman of the RF Government, the RF Ministry for Labor and Social Development, the RF Ministry for Economic Development and Trade, and the RF State Duma. Member of the Board of the Russian Actuaries’ Society, editor of the journal Pensionnye fondy i investitsii (Pension Funds and Investments).
e-mail: chief@actuaries.ru, http://www.actuaries.ru
Lelchuk, Alexander Lvovich, Cand. Sci. (Techn.), Deputy Director of ANO “Independent Actuarial Information Analytical Center”. Has 17 years’ experience of research and 10 years’ experience of work as head actuary of an insurance company. His scientific interests include actuarial mathematics, insurance, economics, demography, and investments. Has more than 30 printed works, is a member of the Expert Councils on Pension Insurance at the RF Ministry for Economic Development and Trade. Member of the Board of the Russian Actuaries’ Society.
e-mail: Lelchuck@actuaries.ru, http://www.actuaries.ru ,
Pomazkin, Dmitry Vladimirovich, Cand. Sci. (Econ.), department head at ANO “Independent Actuarial Information Analytical Center”, head actuary of the Non-public Pension Fund “Regionfond”. Has 16 years’ experience of research work. Scientific interests: actuarial mathematics, informatics, insurance, economics, and investments. Has over 20 printed works. Since 1997, member of the expert councils and work groups on pension insurance at the RF Ministry for Economic Development and Trade and the RF Ministry for Labor and Social Development.
e-mail: Pomazkin@actuaries.ru, http://www.actuaries.ru.
Independent Actuarial
Information Analytical Center
The autonomous nonprofit organization “IndependentActuarialInformationAnalyticalCenter was set up in 2000 with the support of the Moscow Public Research Fund with the money provided by the US Agency for International Development (USAID) on the basis of the Actuarial Information Analytical Center established in 1996 at the N.E. Bauman Moscow State Technical University.
The Center is headed by Professor V.N. Baskakov, Dr. Sci. (Phys. and Math.).
In 2002, the Center was accredited as a scientific research organization by the RF Ministry for Industry, Science, and Technology (research organization state accreditation certificate # 3935, April 10, 2002).
The Center is a member of the Association of Independent Economic Analytical Centers.
The purpose o the Center is to conduct independent analytical studies of the social and economic situation in Russia and develop, on the basis of their findings, suggestions on government economic policy at Federal, regional, and local level and the formation of civil society in Russia. It is the country’s only nongovernmental organization dealing in actuarial examination of the more important draft laws regulating the sphere of social and economic relations and insurance.
The most significant projects implemented by the ANO “IAIAC” in the past years deal with pension reform in Russia and include Independent Financial and Actuarial Examination of the RF Pension Fund Budget up to 2050, Pension Reform Prospects in the Russian Federation, Independent Actuarial Examination of Government Economic and Social Policy in Occupational Pension Insurance (MPSF grants with the support of USAID), and Modeling Long-term Development of the Mandatory Pension System under different scenarios of the formation of the PAYGO and funded elements, including analysis of the consequences of the introduction of notional accumulation accounts (contract with the RF Ministry for Economic Development and Trade). Within the framework of the implemented projects, the Center designed an analytical model of the pension system intended to evaluate its long-term financial stability using different demographic and macroeconomic development scenarios and different organizational structures of the pension system itself, the replacement ratio, the pension system balance in time, and the needs for outside funding.
The Center’s employees are members of expert groups at the RF Council of the Federation, the State Duma, and the RF Ministry for Economic Development and Trade. Most of them also act as individual consultants for the project to promote the restructuring of the system of social security at the Russian Social Reform Fund “Modeling Pension System Development and Prospective Calculation of its Parameters” (SPIL project).
Over the time of its existence, the Independent Actuarial Information Analytical Center published dozens of papers, three manuals, and several monographs. The Center has an information bulletin, Aktuarii (The Actuary), which offers information on the outcomes of the Center’s studies, news of the Russian and foreign actuarial markets, analytical materials on macroeconomics, demography, social insurance, and pension provision, as well as some other economic and social aspects of the country’s development.
Information on the work of ANO “IAAC” can be found in: http://www.actuaries.ru
[1] Pension Reform in Russia: Causes, Substance, and Prospects / S.N. Vasin, E.Sh. Gontmakher, M.E. Dmitriev, et al, Ed. by M.E. Dmitriev and D.Ya. Travin, St. Petersburg: Norma, 1998, 256 pp.
