Russian Social Sector Reform

By: Scott Wesseler

by Scott Wesseler

Break down of the Russian Social Sector

• Russia, by its constitution, is a social welfare state

• There are many divisions within the Russian social sector:– Divisions based upon government level– Divisions based around type of service

provided

Rough Breakdown of Russian Social Welfare System

1997 Russian Expenditures:

1%

2%23%

3%

9%

5%

37%20%

Rest of Federal

Federal Health

Fed. SocialPolicy

Rest of Regional

Regional Health

RegionalHousing

Regional SocialSecurity

Extrabudgetary

2003 Russian Expenditures

35%

25%

5%

5%

4%

22%

1%

3%

Rest of Federal

Federal Health

Fed. Social Policy

Rest of Regional

Regional Health

Regional Housing

Reg. Social Security

Extrabudgetary

Extrabudgetary Fund Operations: 1997-2003

0

100

200

300

400

500

600

700

800

900

1997 1998 1999 2000 2001 2002 2003

Employment Fund

Pension Fund

Social InsuranceFund

Medical InsuranceFund

Pensions: an Overview

• Old-age Pensions– Old-age labor pensions– State service pensions– State social pensions– Early old age pensions

• Disability Pensions:– Disability Labor Pensions– State Disability Pensions

• Survivor Pensions– Survivor Labor Pensions– Social Survivor Pensions

• The Russian Pension system operates on the PAYGO principle.

Disability Pensions: Qualifying Conditions

• Disability Labor Pensions:– For those who were previously employed– Three groups

• 1: 100% incapable of work and requiring constant attendance

• 2: 100% incapable of work but not requiring constant attendance

• 3: 50% incapable of work but not in need of constant attendance

• State disability pension:– Previously employed– Persons under age 20 disabled due to a general

illness or a severe work injury, occupational disease or military service

Survivor Pensions: Qualifying Conditions

• Survivor Labor Pensions:– Length of service and insurance coverage not

considered– Widows over 55 and widowers over 60, or those who

are unemployed and caring for children less than 14; children up to 18 (23 for students), brothers and sisters up to 18, and grandfathers over 60 and grandmothers over 55

• Social survivor pension:– Provided if the deceased did not have insurance

coverage

Pensions: Old-age Qualifying Conditions:

• Old-age Labor Pensions– Available to men at age 60 and

women at age 55• State Service Pension

– A supplement to the old-age labor pension to state employees, military personnel, and policemen and women with 15 years of service

• State social pension– Disabled citizens, or those

meeting age requirement (men - 65, women – 60)

• Early old-age pension:– Age 50 with 10yrs of work for

men and age 45 with 7.5 years of work for women in an unhealthy working environment or a physically demanding natural environment

Social Welfare Indicators after the Collapse

• Wide spread poverty exists, this was especially true in the years directly after collapse

• This poverty was exasperated by inflation

• Hit certain groups harder than others

% of Russians Living Below the

Poverty Level

0

20

40

60

80

100

1991 1992 1994 2003

Social Structure of Poverty in Russia in 2000 (%)

29%

12%

5%14%

12%

21%

7%

Pensioners

Doctors and hospitalpersonnel

Teachers

Students

Children

Other StateEmployees

Other

Social Welfare Indicators after the Collapse

• Unemployment rose consistently until the year 2000 where it reached its pinnacle at around 13%, it has since fell

• The reproduction rate has steadily fallen

% Unemployment

0

2

4

6

8

10

12

14

1990

1992

1994

1996

1998

2000

2002

Reduction of Base:Wage Arrears

• Were fairly common

• Have an effect on the social welfare system because they take resources that otherwise would be used by the government to implement its policy priorities

Reduction of Base: Decline in Industrial Output and GDP

• Enterprises found it increasingly hard to pay the 29% payroll tax

• A way around this was tax evasion, they just paid workers informally

• Another way around this was to stall on the payments, – Occurred to the extent that by 1997 about ¾ of

enterprises did not pay on time. – Together they owed over R87 trillion, which was

about half of the total amount that was supposed to be in the fund.

Result of Reduction in Base: • Available funds were not able to meet the

growing needs for welfare aid.– Arrears in the Pension Fund became

widespread and severe starting in 1994 and grew in % of budget from 10% of annual expenditures in 1994 to 17% in 1998.

– Pensions also underwent a severe decline in real value

• By 1999 the real value of pensions stood at about 60% of their 1991 level.

Regional Disparities• Regional disparities are

still a major problem.– Over 70% of regional budgets are

subsidized.

– More than half of regional budgets are bankrupt without any hope for remedying their situations in the

foreseeable future. – The extent and quality of social

welfare services each region is capable of providing varies greatly.

Reforms to the system:• In 2003 the Russians changed their

Pension system to no longer operate solely off of the PAYGO principle.– Now it is a mixed system with 3 parts: the

basic pension (which is minimal but guaranteed), the insurance pension and the funded pensions.

• The insurance pension will be paid by the PAYGO principle.

• The funded pensions are basically personal accounts to which an increasing percentage of an individual’s pension savings would be contributed.

Reforms to system:

• Other reforms were attempted outside of the Extrabudgetary realm to attempt to approve social welfare– Many of these reforms tried to tackle

inefficient allocation of aid and also public cynicism about social welfare in general.

– These have not yet been successful

Projections for the Future:

• Those about to reach retirement age will lose from this system

• Those who have awhile before their retirement will gain.

• Women will not gain as much as men because:-they have lower social

security contributions-less employment length

and longer periods of retirement.