Russia’s babushka time-bomb

March 24, 2011

The babushka, that embodiment of Russian grandmotherly goodness that has spawned iconic dolls and inspired a Kate Bush song, poses one of the gravest threat to the Russian economy.

Moscow-based investment bank Renaissance Capital also expects this segment of the demography to spur politically risky pension reforms.

Russia’s pension system is coming under increasing strain thanks to growing life expectancy — particularly among women — and a shrinking labour force due to the collapse in birth rates in the 1990s.

Since the introduction of the current system, the average life span of the Russian man has risen to 63.4 years, up from 58.7. Over the same period of time, the life expectancy for the country’s women has risen to 75.4 years, up from 71.9.

Russian women are thus likely to claim a pension for 20 years after retirement at 55. Compare this to the three to four years that the average Russian man gets.

Little wonder that it’s the babushka segment of the demographic that is giving Russian policymakers cause for pause.

“This is becoming expensive. Russia spends 6 percent of GDP on pensions compared to just 1 percent of GDP in Mexico.” writes Renaissance Capital Chief Economist Charles Robertson in a note.

Unless the retirement age is raised, spending on pensions will expand by a third in real terms over 2011-2030, he adds.

As evident elsewhere in Europe, raising the retirement age is politically fraught. Pensioners make up a substantial chunk of the electorate. But the finance ministry is considering a gradual increase in the retirement age to 62.5 for men and 60 for women to reduce future pension expenses. This will save around 0.5-1.0 percent of GDP per annum, Robertson estimates.

He also expects the government to push through changes to the pension tax scale as well as reduce pension payments and divert money to healthcare.

Don’t expect these changes to take place before 2012.

That’s when the country’s presidential elections take place and none of the candidates will want to risk the ire of the babushka brigade.

One comment

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Without getting too complicated, surely it is possible to look at the issue of ‘Gradfathering’-no pun intended-
the entitlement date an individual will recieve the pension. This would act to ensure individuals who will be entitled to a pension in year 2012 receive the benefit, but all others entitlement is pushed back one year based on the individuals year of birth in 2012.
As an example, an invididual aged 55 in year 2012 will receive the benefit in 2012.
An individual aged 48 in 2012 will now receive the pension in 2026, a deferral of the entitlement from age 55 to age 62.
There is no denying we all want to retire earlier. The reality is financial, neither we as individuals or the Government elect can afford the cost.
As individuals, we and the government we elect need to
speak the brutal truth, and accept the need to both work and save a little longer for our retirement.
It would also help if the goverment took a long term view of retirement savings, and ensure financial fees did not operate as gravy trains for the privelede by charging fees as a percentage of assets under management, and also look at extending tax exempt status to retirement savings. Who knows, this may work to reduce the goverment’s cost of borrowing, depending on how structured.

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