Putin Backs Russian Pension Revamp Opposed by Finance Ministry

(Bloomberg – bloomberg.com – Ilya Arkhipov and Olga Tanas – November 14, 2012)

Russian President Vladimir Putin backed a planned pension overhaul opposed by the Finance Ministry, Economy Ministry and asset managers, who warn it would curb economic growth.

The Labor Ministry plan would divert taxes from future retirement plans to meet current pension payments and narrow the state system’s deficit. That would reduce the future cash pool and deplete a source of long-term investment capital, according to Finance Minister Anton Siluanov.

The law should be ready by mid-2013 so it may come into force Jan. 1 2014, Dmitry Peskov, Putin’s spokesman, said today by phone.

The retirement overhaul comes as this year’s State Pension Fund deficit is set to exceed 1 trillion rubles ($31.6 billion), equivalent to 1.8 percent of gross domestic product. The Labor Ministry’s plan would cut the share of payrolls that’s invested for future retirees, the so-called funded part of the system, to 2 percent from 6 percent, increasing the share that pays current retirees to 20 percent from 16 percent.

The National League of Management Companies wrote to Putin Nov. 2 asking him to block the legislation as it would deprive the economy of “its strongest investment resource.” Pension cash should be invested to help promote the government’s goal of transforming Moscow into an international financial center and support financial-market liquidity, it said.

GDP will advance 3.5 percent in 2012, according to the government, slowing from last year’s 4.3 percent expansion and 8.5 percent growth in 2007.

Putin’s decision to back the plan is “wrong,” according to Evsey Gurvich, head of the Economic Expert Group, which advises It’s an advisory group of independent experts that works with the Economy Ministry, the Finance Ministry and the central bank.

“It would mean we ease today’s pension problem but weaken the pension system in the future,” he said today by phone. “We’d have to implement serious measures in the future to keep the system alive, such as raising the retirement age and limiting payments for retirees that still work.”

Article ©2012 BLOOMBERG L.P. ALL RIGHTS RESERVED. Article also appeared at http://www.bloomberg.com/news/2012-11-14/putin-backs-russian-pension-revamp-opposed-by-finance-ministry.html.