Changes to the pension system and VAT rate increases are negative for long-term growth

RUSSIA ENERGY / FINANCE - In Brief 21 Jun 2018 by Marcel Salikhov

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The Government introduced two bills to the Duma last weekend when the country diverted its attention to the World Cup. The first one proposes gradual increase in the retirement age. From 2019 to 2034 the Government intends to increase the retirement age to 65 years for men and 63 years for women. Currently the retirement age for men and women is 60 and 55 years respectively. Thus, the plan is to increase the retirement age by half year each year. It’s less harsh than the plan that was leaked to the media few weeks ago but still it means significant increase in the retirement age in relatively short period of time. Changes to the state pension system which is 50% funded by the transfer from the federal budget is needed. Due to demographic reasons the number of pensioners will increase and the number of workers whose contributions are paid to the pension system will decrease in coming years. So without changes to the retirement age it will lead either to lower pensions or higher social payment contributions. Increase in the retirement age was discussed for a long time in Russia but previously was furiously dismissed by the Government and V. Putin himself. But the proposed plan is really tough. For example it means that a person who is expecting to retire in 5 years under the current system will have to work 10 years till retirement under the new system. The basic rationale for such toughness is that it will save expenditures for the budget. In 2019 proposed changes will save approximately 200 bln RUB for the federal budget which is not that much. But the effect will be higher in the following years. Russia's long term demographic forecast (base scenario) Source: RosstatT...