V Social Conditions and Social Protection: Issues and Options
Author:
Mr. Sergei V. Alexashenko https://isni.org/isni/0000000404811396 International Monetary Fund

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Mr. Augusto López-Claros https://isni.org/isni/0000000404811396 International Monetary Fund

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Language:
English
Print Publication Date:
08 Apr 1998
Keywords:
OP; government; enterprise; social; tax; market economy; unemployment compensation; retirement age; real value; poverty line; Non-wage benefits; Income; Social assistance spending
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Abstract

The adjustment experience of transition economies attests to the important effects of macroeconomic policies on income distribution and social equity and welfare. An effective adjustment program must therefore take these effects into account, particularly because they impinge on the most vulnerable or disadvantaged groups in society. This is especially important in a country such as Russia, where the process of transition has brought about serious social dislocations associated with the sharp contraction of output, major shifts in the composition of output, and other systemic factors (see below). In the last several years Russia has also witnessed a severe worsening of the distribution of income. The ratio of the income of the top to the bottom decile rose from 5 in 1991 to 13.5 at the end of 1995, while the Gini coefficient of incomes rose from 0.24 in January 1992 to well over 0.5 in late 1994 (World Bank, 1995b). Income distribution in Russia has become more unequal than in most developed industrial countries and has been accompanied by a pronounced deterioration of living conditions for the poor. These trends are particularly disturbing, since a fairly extensive body of empirical research shows that higher income inequality can contribute to political instability, which in turn depresses private investment and adversely affects future economic growth. Higher income inequality has also been linked to inflationary pressures.44

The adjustment experience of transition economies attests to the important effects of macroeconomic policies on income distribution and social equity and welfare. An effective adjustment program must therefore take these effects into account, particularly because they impinge on the most vulnerable or disadvantaged groups in society. This is especially important in a country such as Russia, where the process of transition has brought about serious social dislocations associated with the sharp contraction of output, major shifts in the composition of output, and other systemic factors (see below). In the last several years Russia has also witnessed a severe worsening of the distribution of income. The ratio of the income of the top to the bottom decile rose from 5 in 1991 to 13.5 at the end of 1995, while the Gini coefficient of incomes rose from 0.24 in January 1992 to well over 0.5 in late 1994 (World Bank, 1995b). Income distribution in Russia has become more unequal than in most developed industrial countries and has been accompanied by a pronounced deterioration of living conditions for the poor. These trends are particularly disturbing, since a fairly extensive body of empirical research shows that higher income inequality can contribute to political instability, which in turn depresses private investment and adversely affects future economic growth. Higher income inequality has also been linked to inflationary pressures.44

A critical challenge facing Russian economic policy in the years ahead is how to bring about the necessary adjustment and achieve some of the key macroeconomic objectives of the transition to a market economy. These include the establishment of a stable macroeconomic environment, the transfer of certain social functions from the enterprise sector to the state, the rule of law, and continued integration with the world economy, with the least amount of hardship to the most vulnerable social groups and without an aggravation of the income distribution trends mentioned above.45 Apart from ethical considerations concerning the responsibility of the state in the area of social protection, proper consideration of the impact of economic policy measures on social conditions can produce stronger public support for a particular economic policy and government, making such policies more sustainable.

This section presents an overview of the main policy issues in the area of social protection in Russia. Following a discussion of social conditions, the main elements of the existing social safety net are presented and a number of policy options for improvements are identified.

An Overview of Social Conditions

Income and Consumption Measures

Income and consumption-based welfare indicators try to capture the availability of resources necessary for the satisfaction of human needs.46 Using a hypothetical poverty line equal to 40 percent of the 1989 average wage, the poverty rate in Russia increased from 6.5 percent in 1989 to over 44 percent in December 1993. Over the same period, the number of people living in extreme poverty rose from 2.5 percent to 20.5 percent, somewhat less than the 27 percent estimated by the Ministry of Labor, using a constant poverty line of 60 rubles per capita in 1989 prices.47 A World Bank-Goskomstat survey carried out in the second half of 1992 showed especially high rates of poverty for children under 15 (46 percent) and families with three or more children (72 percent). In the first quarter of 1995, some 30 percent of the population (or about 45 million people) were estimated to have income levels below a rather austere minimum subsistence level of some Rub 200,000 ($45) a month; by the end of the year the figures showed some improvement, with 37 million people estimated to have income levels below the minimum subsistence level (Table 12). Regardless of the measure chosen, the number of people living in poverty has increased substantially, even if some allowance is made for the mitigating effects of intra family transfers, the growing of one’s own food, and other such factors.

Table 12.

Poverty Line and Incidence of Poverty

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Source: Goskomstat.

Annual average.

Consistent with the sharp drops in real household income observed in the early part of the transition period, average food expenditure shares in Russia rose from 36.1 percent in 1990 to 47.1 percent in 1992.48 The economic difficulties associated with the transition have affected both those already living near the poverty line in the pretransition period and consisting mainly of pensioners subsisting on minimum pensions, single-parent families, and families with several children, and others who, while not necessarily near the poverty line at that time, saw their real incomes eroded as a result of the particularly harsh effect of the transition on their individual sectors or industries. An example of the latter might be workers and research scientists living in “closed” cities affiliated with the military-industrial complex in outlying regions of Russia, engineers working in heavy industry, as well as public sector workers employed in education and health centers. The relatively low ratio of the minimum pension to the average wage suggests that pensioners living on the minimum pension have been the most adversely affected group. At the end of 1996, about 7 million pensioners (20 percent of the total) were receiving a minimum pension of $21 a month, well below the minimum subsistence level. Within this group, single pensioners are the most vulnerable subgroup, the majority of whom are women. Also, the ratio of the average pension to the average wage (the so-called replacement rate) was about 37 percent in 1996, low by international standards (Table 13). The real value of pensions has also fallen, reflecting infrequent discretionary adjustments. In the five-year period to 1996, real minimum pensions fell by some 70 percent and real average pensions fell by 35 percent (Figure 8).

Table 13.

Average Monthly Wages and Pensions

(In current rubles)

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Source: Goskomstat.

Including all benefits and allowances, average pension during last month.

Ratio of average pension to average wage.

Figure 8.
Figure 8.

Real Average and Minimum Pension

(I99I:Q4 = 100)

Sources: Gokomstat; Pension Fund; and IMF staff estimates.

Other Welfare Measures

Income measures of welfare in an economy undergoing profound structural transformations need to be interpreted with care, given the large fluctuations in relative prices, and the shifts in the structure of the economy and in the sources (formal or informal) of activity and income. A fuller picture of social conditions is thus obtained by supplementing income-based indicators with other measures that attempt to capture certain aspects of the quality of life, particularly in the areas of family life, reproductive behavior, mortality, and migration (Table 14). Between 1989 and 1994, these indicators in Russia evolved as follows: (1) a 36 percent drop in the crude birth rate; (2) a 46 percent increase in the crude death rate over the same period, by far the highest rise in the region;49 (3) a six-year decline in the life expectancy for men, to 58 years, which is below the age of retirement; (4) sharp increases in the incidence of certain diseases (diphtheria, measles, and tuberculosis), sometimes reaching epidemic proportions; and (5) extremely large increases in violent deaths and the incidence of crime in general, including a 137 percent increase in homicides and a 53 percent increase in suicides.50 A comprehensive set of 29 indicators of welfare, ranging from indicators based on measures of income and consumption to others that attempt to capture the quality of life (mortality, health, and education) show that in Russia, between 1989 and 1994, 27 of these indicators deteriorated, often markedly.

Table 14.

Social Conditions

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Sources: United Nations Children’s Fund, 1993, 1994, 1995, 1997; and Goskomstat.

Number of total births in a year per 1,000 midyear population.

Overall measures of fertility representing the sum of age-specific birth rates over all ages of the child-bearing period.

Annual number of deaths of infants less than age one per 1,000 live births.

Explanatory Factors

The above profile, which demographers and public health experts have characterized as “alarming” and “without precedent in the European peacetime recent history of this century,” reflects a number of interrelated and sometimes mutually reinforcing factors.51

First, the sharp deterioration in most indicators of human welfare reveals the presence of an already precarious and extremely vulnerable social environment at the outset of the transition. Unfavorable starting conditions stemming from poorly designed public health policies during the two decades preceding the onset of market reforms left the populations of these countries ill-prepared to withstand the short-term adverse effects of certain measures, such as price liberalization. Some (possibly large) share of the increase in mortality registered in the late 1980s and early part of the 1990s resulted from prolonged periods of environmental neglect and contamination, and lifestyles and nutritional habits inconsistent with healthy living, all compounded by a marked worsening in the quality of health services available to the population at large.52 Since toxic emissions in the U.S.S.R. were high by international standards, significant parts of the population were exposed to high levels of radiation and, as a result, up to 17 percent of the U.S.S.R. had been declared an ecological crisis area.

Second, the transition itself has brought about fundamental changes in the psychosocial environment, generating what has been called a “social adaptation crisis” (United Nations Children’s Fund, International Child Development Centre (1994, p. vi)). The rapid disappearance of traditional institutions and assumptions has left broad segments of the population especially vulnerable to the economic effects of the transition. Social scientists give several reasons: uncertainties about the ability of parents to provide for their families; loss of self-esteem associated with the sense that work experience accumulated during decades of Communism has, overnight, become largely irrelevant in the emerging market place; deep frustration with the drastic erosion in the real value of pensions and the violation of the implicit social contract (that is, that an old-age pension would guarantee a certain dignified standard of living in the future); and, equally important, mental habits and values, coupled with “negative conflict-solving behaviors which have long prevailed in the region and which include frequent recourse to drinking, violence against family members and, finally, against themselves.” 53

Third, while some increase in poverty rates was inevitable at the outset of price liberalization, the government’s failure to bring inflation down to low and stable levels had the predictable effects on per capita income and hence adverse welfare costs on key segments of the population. The absence of political consensus on the ends and means of the economic reform program, particularly in the initial stages of the transition period, also delayed structural reforms and sharply limited the supply response associated with certain measures. At the same time, social safety net issues received inadequate attention, which greatly intensified the plight of vulnerable groups, as well as of those employed in the industrial sector, particularly the military-industrial complex.

Fourth, on the institutional front, the rapid curtailment in the intermediary role of the public sector in the economy, sometimes associated with the privatization process, sometimes linked to the need to bring the public finances under control, accelerated the breakdown of long-established Soviet institutions that had performed a vital social safety net role (such as cultural, sports, and vacation camps; public libraries; and art centers) but did not result in the emergence of adequate substitutes related to organizations of civil society. A general relaxation of health inspections and traffic and labor safety norms, together with rapidly rising crime, contributed to a worsening of some of these indicators. Indeed, this institutional collapse has entailed significant social costs over and above those linked to purely economic factors.

Fifth, severe deficiencies in governance, arising from certain institutional weaknesses, have characterized the transition period. In Russia, in particular, these deficiencies have at times led to situations in which, faced with the need to strengthen the process of macroeconomic stabilization and thus to implement a tight fiscal policy, on a number of occasions government initiatives resulted in the granting of tax exemptions and/or deferrals to certain enterprises and/or lobby groups, with detrimental implications for budgetary revenues. In the context of nominal budget deficits agreed upon at the outset of the fiscal year, these initiatives necessarily led to the compression of expenditures, including in such areas as education, public health, and human capital investment. A strong case can be made that many of the policies implemented in the context of the transition—price and trade liberalization and privatization—were long overdue and, indeed, essential components of the process of modernization of the Russian economy. Hence, some adverse short-term effects were inevitable, particularly given the enormous distortions in resource allocation inherited from the past. Discretionary tax exemptions and privileges, granted on criteria quite removed from efficiency considerations, have made the adjustment process more painful than otherwise would have been the case. The sharp expenditure cuts have affected health services and other welfare expenditures and have led to greater social instability and an erosion of public support for market reforms in general.

Finally, exogenous factors have also played a role. The collapse of the CMEA and, subsequently, the disturbances to trade and financial relations in the context of the dissolution of the Soviet Union, as well as various ethnic and regional conflicts, at times resulting in violent confrontations with losses of human life, have exacerbated the welfare losses associated with the transition. In addition, in Russia, protectionism among partner countries has likewise impeded a faster reorientation of exports.54

Social Protection

The most important component of the safety net in Russia, accounting for the bulk of expenditures on social protection, are old-age pensions received by 29.2 million pensioners at the end of 1996, equivalent to nearly 20 percent of the population. An additional 4.1 million people received disability pensions and 2.3 million others received survivors’ pensions (also referred to as “loss of breadwinner” pensions). A further 2.0 million people received a variety of other pensions (for example, veterans pensions and “social” pensions to workers with less than five years of employment) bringing the total number of pensioners to 37.6 million, or over one-fourth of the Russian population (Table 15). The retirement age is 60 years for men and 55 for women, although lower ages apply to certain groups. For instance, the retirement age for coal miners and the military is 45 years, and even lower ages may apply in many cases.55 It is estimated that up to one-fourth of all pensioners have retired under some type of early retirement scheme.

Table 15.

Population and Pensioners

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Source: Pension Fund.

Present legislation allows pensioners who are able and wish to continue to work to receive both pension and salary, with the extra years of service adding on to the value of the pension. Pensions other than for old age typically involve a reduced level of benefit; for instance, disability pensions are capped at the minimum pension, and social pensions, which are funded through the federal budget, are also paid at two-thirds of the minimum pension. It is estimated that about 7 million pensioners received the minimum pension at the end of 1996.56

Table 13 shows the recent evolution of the monthly minimum and average pensions, both inclusive of price compensation allowances. At the end of 1996, these stood at Rub 120,000 (about $22) and Rub 321,000 (about $58), respectively. The table also shows the pensioner-specific average subsistence minimum that, at the end of 1996, stood at Rub 267,000, which shows that the minimum pension is less than 50 percent of the already austere average subsistence minimum and that the average pension is equivalent to 85 percent of the average subsistence minimum. By 1996 over 60 percent of all pensioners were receiving pensions that were equivalent to less than three minimum pensions, that is, somewhat below the minimum subsistence level for the general population. Virtually all others received pensions that ranged between 3 and 3.5 minimum pensions. Given the compression of pensions and the level of the average subsistence minimum, the bulk of pensioners have incomes at or below the poverty line. This is also reflected in the consumption patterns of pensioners: 75 percent of pensioners’ income is spent on food, and the diet is heavily slanted toward basic staples (bread, potatoes, vegetable oil, and so on); pensioners have had growing difficulties in meeting other basic expenses, such as for public utilities, and have had to postpone indefinitely others, such as the purchase of some consumer durables. Given this difficult situation and despite the absence of systematic data, it appears that many pensioners have been forced to earn additional income by remaining at their place of employment. Some surveys suggest that, at least in the larger urban centers, up to 20 percent of pensioners have continued to work past the retirement age and, hence, in the case of male workers, past the average life expectancy. The Pension Fund estimates that approximately 8 million pensioners—21.5 percent of the total number of beneficiaries—continue to work beyond the retirement age.

Because of infrequent adjustments to changes in the cost of living, average and minimum pensions in real terms have fallen precipitously during the past several years. By 1996 they stood at 65 percent and 30 percent, respectively, of their 1991 levels.57 The average pension on December 1995 was a full 14 percent lower in real terms than the same pension a year earlier, and the real drop in the minimum pension over the same period was 21 percent. Pensions were increased in February and May 1996, and by the end of 1996, the minimum pension stood at some 80 percent of the minimum subsistence level, although, as of end-1997, there was no formal linkage between the minimum pension and the minimum subsistence level (see below).

Pensions are financed through the Pension Fund, the bulk of its resources generated from payroll contributions. Employer contributions to the Pension Fund are assessed at 28 percent of gross pay, although the rate for agricultural enterprises and the self-employed are lower, at 20.6 and 5 percent, respectively. Employee contributions are set at 1 percent. Because of exemptions and arrears in payments of contributions—which exceeded 2 percent of GDP at the end of 1996—the effective contribution rate for the general scheme is well below the statutory rate of 29 percent (see below).58

In addition to pensions, a number of other benefits are provided through various extrabudgetary funds (Figure 9). The Social Insurance Fund (SIF) provides sick, maternity, and birth allowances and a broad range of other benefits. It finances these benefits from employer contributions assessed at 5.4 percent of gross pay collected on some 61 million workers (Table 16). The bulk of these resources (approximately 85 percent on average) are administered by the enterprises themselves, with the remaining share going to the SIF to cover administrative expenditures and the payment of benefits to other recipients. As presently administered, enterprises collect the contributions and pay the benefits dictated by the law; leftover amounts are remitted to the SIF, which may have to finance “deficit” enterprises and/or regions.59 Sick pay is provided at 100 percent of pay for employees with eight or more years of service, to large families (at least three children) and to certain special groups, such as Chernobyl victims, war veterans, and Northern Territories residents. The benefit is reduced to 80 percent of pay for length of service between five and eight years and to 60 percent for less than five years. Sick pay is, in principle, available “until recovery,” or until the employee is judged to be eligible to receive an invalidity pension.

Table 16.

Social Insurance Fund

(In trillions of rubles)

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Source: Social Insurance Fund.

Before and after childbirth, payable at 100 percent of pay for 140 to 180 days.

Payable at two minimum wages a month for an additional 18 months.

Figure 9.
Figure 9.

Expenditure on Social Programs

(In percent of GDP)

Sources: Extrabudgetary funds; and Ministry of Labor and Social Development.

In 1996, the average number of sick days paid per worker was 8.3; it was 14 for those actually ill. Sick pay is also available when caring for a family member, although certain time limits may apply (for example, 14 days a year for the care of a child over 14 years of age). For younger children (less than 14 years of age) and for single mothers (regardless of the age of the child), however, there is no limit, which may explain the relatively large share in total sick pay outlays of this particular benefit (15 percent). In addition, the SIF subsidizes the expenses of a large number of sanatoriums attached to enterprises; these subsidies typically take the form of payments for utilities, food, and medical personnel. Subsidies are also provided for vacations (implicit subsidy of 90 percent, but limited to a small fraction of beneficiaries60) and children’s summer camps. These expenditures account for nearly 23 percent of total SIF expenditures. As with the Pension Fund, arrears have accumulated in employer contributions to the SIF. On October 1, 1996, these stood at Rub 5 trillion, equivalent to nearly 20 percent of total expenditures. The counterpart of this has been a “squeeze” in the level of some of the benefits and growing delays in their payment, although no figures are available on the extent of this phenomenon.

Until May 1995, the maternity grant consisted of a single payment equivalent to five minimum wages; it was then raised to 10 minimum wages and, on January 1, 1996, it was set at 15 minimum wages; this benefit is made available regardless of whether the mother is employed or not. Mothers also receive a birth allowance set at 100 percent of their wage, irrespective of length of service, payable for a period of 140 to 180 days; subsequently, a benefit equal to two minimum wages is provided for an additional 18 months.61

Children’s allowances are provided to all families, irrespective of the level of income. Children up to the age of 16 receive a benefit equal to 70–140 percent of the minimum wage, although the benefit rises if the mother is single; if either parent serves in the army, the security forces, or a number of other public institutions (such as the Ministry of Foreign Affairs); or if the child is due alimony payments and these are not received. The benefit is also payable to children up to the age of 18 if they are full-time school students.62

In Russia, 34.8 million children are officially eligible to receive the allowance. Although no figures are available on the number of actual recipients, the Ministry of Labor and Social Development estimates that, at the end of 1995, about 80 percent of those eligible actually applied and received the allowance. It is not clear why so many others did not apply although it is presumed that several factors played a role. These include the relatively small size of the allowance (which averaged $9 a month during 1995), arbitrary interpretation of implementing guidelines at the oblast level with officials refusing payment to otherwise eligible recipients (for example, workers in the “informal” sector), and lack of information on eligibility requirements in general. Much of the financing is provided through the regional budgets, although part of the federal transfers allocated to the regions are also intended to finance children’s allowances. In addition, all children’s allowances for defense and security personnel are paid out of federal funds. Approximately one-third of all oblasts—mainly those located in the Northern Territories—receive the allowances adjusted by a “regional coefficient,” which ranges from 1.1 to 2.6 times the regular allowance. Total expenditures on children’s allowances amounted to Rub 4.5 trillion in 1994 (0.7 percent of GDP), Rub 14 trillion in 1995 (0.9 percent of GDP), and are estimated to have reached Rub 31 trillion, or 1.4 percent of GDP in 1996 (Table 17). On June 1, 1996, arrears on the payment of children’s allowances amounted to Rub 3 trillion, Rub 700 billion of which corresponded to 1995 allowances.

Table 17.

Expenditure on Social Programs

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Sources: Extrabudgetary funds; and Ministry of Labor and Social Development.

Administered by the Ministry of Labor and Social Development.

The rate of unemployment in Russia stood at 9.3 percent of the labor force in December 1996, affecting 6.8 million people (Table 18). The number of registered unemployed that month was 2.5 million, an 8 percent increase compared with a year earlier and a nearly fivefold increase compared with the same period in 1992. Unemployment benefits are provided through the Employment Fund, which receives payroll contributions from employers equivalent to 1.5 percent of gross pay.63 These resources are shared on a 20:80 basis between the federal and regional (oblast) employment funds. The regional share in turn is further distributed between regional and local funds although there is no fixed formula for this, with the distribution left to the discretion of the regional authorities. Of the 89 regions in Russia, 47 received in 1996 some form of transfer from the federal share, to compensate for insufficiency of resources after the payment of benefits at the regional level.

Table 18.

Unemployment and Vacancies

(In thousands)

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Source: Goskomstat.

First-time job seekers receive a benefit equal to the minimum wage. Unemployed workers with prior job experience receive, during a 4-month period, 75 percent of their average monthly wage during the preceding 3-month period prior to loss of their jobs; the benefit is reduced to 60 percent during the following 4 months and 45 percent for the next 4 months. Beyond the first year the worker may receive a benefit equivalent to one minimum monthly wage for a 6-month period but needs to reapply for the benefit on a monthly basis. After this initial 18-month period, and following a 6-month period in which he or she is not eligible to receive unemployment compensation, the worker may reapply and receive one minimum monthly wage during an additional 12-month period and may also supplement this income with stipends for participation in public works projects. Unemployment benefits accounted for 29 percent of total Employment Fund expenditure in 1995, up from 18 percent in 1994.

The Employment Fund also allocates resources to training, early pensions,64 and financial support to enterprises “for the protection of existing jobs and the creation of new ones,” the latter under two schemes that make resources available to enterprises either in the form of grants or subsidized loans at one-half of the central bank refinance rate, both mainly aimed at vulnerable groups, such as youth, invalids, women with several children, and the long-term unemployed. As with other social funds, arrears in contributions have emerged recently; at the end of 1996, these stood at Rub 3.2 trillion, equivalent to over 100 percent of total unemployment benefits paid out. Arrears in the payment of unemployment benefits were Rub 1.2 trillion. The ratio of the average unemployment benefit to the average wage in 1995 was 20 percent. The sharp increase in underemployment in the form of unpaid leave and shorter working hours, affecting nearly 6 million people at the end of 1996 (about 8 percent of the total labor force), is another characteristic of the labor environment.

Like the other social funds, the Medical Fund, founded in 1993, is financed through employer contributions assessed at 3.6 percent of gross pay, 3.4 percent of which is retained at the regional level and administered by the local offices of the Medical Fund; the remaining share of 0.2 percent is allocated to the center. Contributions accounted for slightly more than 60 percent of total revenues in 1995, with the rest mainly from budgetary transfers at the regional level, to finance services to the unemployed. The Medical Fund provides medical assistance in the form of hospitalizations, emergency assistance, and medicines for in-patient treatment. During 1995, it handled 16.5 million individual hospitalizations, for an average of 14 days each. The payment of salaries for medical personnel and medicines accounted for 52 percent of the Rub 13.4 trillion spent in 1995 (0.8 percent of GDP). The creation of the Medical Fund is thought to have protected a minimum level of resources for medical assistance from the rigors of expenditure sequestration at the federal level.

Consumer subsidies were an important (and inefficient) source of social protection in Russia during the early part of the transition, particularly in 1992 and 1993, and consisted of commodity subsidies provided through a variety of mechanisms, including the noncollection of counterpart funds associated with the use of tied external credits. While the extent of this form of subsidization through the federal budget has been sharply reduced in recent years, consumer subsidies continue to be provided through local budgets on an ad hoc basis; no reliable figures are available, however. In addition, housing subsidies, mainly subsidies for communal services, may account for as much as 3–4 percentage points of GDP, mostly at the local level.

Policy Issues and Options

Although the creation of the Pension Fund, the Social Insurance Fund, the Employment Fund, and the Medical Fund during 1991–93 was an important step in the establishment of a contribution-based social insurance system, no major changes, other than the introduction of the unemployment benefit, have taken place in the main principles underlying the administration of social protection in Russia. In particular, many benefits continue to be granted universally (that is, not means-tested) and the eligibility criteria for many of these have not been revised to take account of radical changes in the structure of the economy and the needs of various groups within the population. It is important in any discussion of the options available over the medium term to policymakers in the area of social protection to distinguish between the level and the coverage of existing benefits. A key goal of any reform effort should undoubtedly be to protect the most vulnerable groups in society—the old, the unemployed, large or single-parent families, and the disabled. The aim should be to ameliorate the difficult conditions that have emerged in recent years, as evidenced by the income-based and social and demographic indicators discussed earlier. The inevitable resource constraints that the country faces implies that available resources have to be used more effectively; it does not imply that existing levels of social protection are adequate or desirable. To the detriment of the people the system is intended to help, the demands of financial stabilization have often been used in the past as an excuse not to introduce reforms in the existing system of benefits, thus perpetuating a number of rigidities and inefficiencies. As part of any reform effort the possibility has to be admitted that the “right” level of social protection in Russia could involve more spending in specified areas and the curtailment or withdrawal of other benefits to certain groups. Some priorities and possible reforms are discussed below.

(1) Subject to the constraints imposed by the need for fiscal sustainability, the highest priority should be given to moving to a pension system that links in a predictable and reliable way the value of pensions received by Russia’s 37 million pensioners to increases in the cost of living. The improvisations of the past several years have not only worked to the detriment of pensioners but have greatly undermined support for the economic reform process. There appear to be no underlying principles in this area. In 1993–96 the authorities increased the minimum pension a number of times; introduced a system of indexation of pensions in 1993; abandoned the system shortly thereafter and replaced it with one that provides a separate flat “price compensation” allowance, itself adjusted in an ad hoc manner not fully reflecting changes in the price level; and raised the overall level of pensions upward through presidential decree (for example, by 51 percent on October 1, 1994). The net result has been, as noted earlier, a drop in the average real value of pensions, growing delays in their payment (equivalent to close to 1 percent of GDP at end-1996), the narrowing of the distribution of pensions, and the concomitant weakening of the link between individual contributions paid and the level of pension received, which has had the effect of moving the pension system closer to a flat pension rather than an earnings-based scheme, with most pensions being pushed to the minimum subsistence level or below.65 Short of full price indexation, an intermediate step might be to adjust nominal pensions so as to achieve a given replacement ratio; that is, to establish the average pension at a fraction of the average wage.

(2) One component of the above reform would be an upward adjustment in the level of the minimum pension to the minimum subsistence level and the maintenance of this level through indexation. It is inconsistent and socially costly for a social security system to exist, in which several million pensioners receive a pension that is significantly below a figure that the government itself regards as being the minimum essential for survival.66 Even the minimum subsistence level, when it was introduced in 1992, was a temporary concept to protect recipients at times of severe crisis. As such it was designed in a way that allocated an overwhelmingly large share to food products and made little (if any) allowance for many other items in the consumption basket. To the extent that there have been substantial increases in the relative prices of items previously assigned a small share in the minimum basket (such as public utilities, which were significantly underpriced in 1992), even the minimum subsistence amount may no longer be adequate to meet basic needs. The perception that the true social conditions of some of these groups may not be as harsh as suggested by the official statistics because a growing share of the population derives income from the “cash economy” does not undermine the desirability of this measure. The fact that because of need many elderly receiving the minimum pension have been driven to find alternative sources of income in order to survive should not be an excuse for not providing them with at least the minimum subsistence income. At the same time, efforts should be made to bring into the tax base alternative sources of income, including for pensioners. It is estimated that the cost of raising the minimum pension to the minimum subsistence level in 1995 would have amounted to some 0.4–0.5 percent of GDP. This measure can also be seen as an effective way to reduce the incidence of poverty among the elderly. A step in this direction was taken in 1997 with the issuance of a presidential decree which calls for the setting of the minimum old-age pension (inclusive of compensations) at 80 percent of the minimum subsistence level, beginning in January 1998.67

(3) The Pension Fund’s revenue base could be enhanced through a number of measures.

First, there is a need to include in the wage base various in-kind benefits that are provided by enterprises to their employees and that are tax exempt and thus reduce the definition of gross pay on which contributions are assessed. Some progress began to be made in this area in 1996, but the scope for further progress is ample.

Second, measures need to be taken to narrow the large gap between the statutory contribution rate of 29 percent and an effective rate closer to 20 percent. This can be done by eliminating a number of exemptions, such as the one that allows enterprises in which more than 50 percent of the labor force is classified as “disabled” not to contribute to the Pension Fund, even for the nondisabled workers employed by the enterprise. More generally, it is necessary to phase out many of the preferential early retirement schemes for selected groups of workers that have come to account for a large share of the total pensioner population, have introduced a degree of inequity in Russia’s social security system, and have significantly undermined the Pension Fund’s revenue base. The urgency of these measures is underscored by estimates made by the Ministry of Labor and Social Development that show fiscal sustainability in the present pension system over the medium term only through a gradual rise in the retirement age (to as much as 65–70 years in the long term) and the elimination of all existing exemptions.68 The existence of separate regimes for which different contribution rates apply is likewise thought to have led to abuse; for instance, through attempts on the part of enterprises to register or reclassify as “agricultural” and thus benefit from the lower rate. More important, the effective contribution rate has fallen because arrears in employer contributions have been allowed to grow. From some Rub 7 trillion on January 1, 1995, these had reached Rub 83 trillion by the end of 1997 (equivalent to over 3 percentage points of GDP)—a several-fold increase in real terms and spread over virtually every sector of the economy (including the oil and gas sector).

Third, while there is no scope for a further rise in the employers’ statutory rate of contribution, which in the case of the Pension, Social Insurance, Medical, and Employment Funds amount to a combined 38.5 percent, the same is not the case with the employees’ contribution rate, which stands at 1 percent of gross pay. The disincentive effects associated with a high rate of employers’ contribution are well known and have led to evasion and the rapid growth of the underground economy, with the concomitant adverse effects on the collection of other taxes. It should be possible to move to a system that more equitably distributes the burden of financing between employer and employee without adversely affecting the Pension Fund’s revenue base; indeed, this shift could be obtained through an increase in the employee’s contribution rate. It is estimated that a 1 percent rise in the contribution rate in 1996 could have resulted in a Rub 4–5 trillion increase in social security revenues.69

Fourth, there is also scope to reduce pension benefits to full-time workers who cannot be regarded as being “vulnerable” as a group. Given the wide gap between the average pension and the average wage, it should be possible to limit somewhat the pension benefit to those workers drawing full pay.70

(4) Because of sharp regional differences in the extent of price liberalization, with many local governments still providing important subsidies for housing, public transport, utilities, and some essential commodities, there are sharp differences in the cost of living faced by pensioners across the country. These differences are not adequately reflected, however, in the level of pensions across regions. The minimum pension is the same everywhere in Russia. The calculation of other pensions does incorporate certain regional coefficients, but these are largely based on “structural” characteristics (for example, pensioners living in areas affected by the Chernobyl disaster and pensioners unjustly sent to labor camps or who are victims of “repression” would receive a higher pension) rather than differences in the cost of living. In any event, even with these adjustments, the differentiation in the level of pensions (other things being equal) seldom exceeds 10 percent. But differences in the cost of living are much larger. In the interests of equity, the level of pensions should be harmonized to the regional cost of living.

(5) The present division of responsibilities between the Pension Fund and the Ministry of Labor and Social Development leads to severe inefficiencies in administration. The Pension Fund is responsible for the collection of contributions, the setting of fines, and all relations with the federal authorities as regards possible financial transfers from the budget. The Ministry of Labor and Social Development, on the other hand, is in charge of assessing entitlements, calculating benefit levels in light of existing legislation (such as when an adjustment in the minimum wage triggers changes in the level of several benefits), as well as the actual paying of pensions. This creates a situation in which the Pension Fund is effectively “presented with bills” by an agency that has no responsibility for collecting the necessary revenue. This division of functions makes effective management of resources virtually impossible and has already resulted in a number of problems, such as delays in the determination of benefits and the payment of pensions. Delays in the payment of pensions in early 1996 averaged two months, although there were many for whom the delay was much greater. Also reflecting this, there have been large expenditures on overhead (for example, Rub 2.2 trillion for postal charges during 1995, equivalent to some 25 million minimum monthly pensions).

The lack of clarity concerning jurisdiction over their operations also undermines effective management of the various funds. Formally, the funds report to parliament but a 1993 presidential decree assigned some responsibilities to the government. As a result, the funds are not fully accountable to either body, which helps explain the underlying lack of guiding principles.

(6) The fact that the four main social security funds independently collect their own contributions is a burden on the authorities and greatly limits their flexibility. Not only are the collection functions duplicated, with the concomitant increase in administrative costs, but more important, to the extent that the resources generated cannot be transferred from one fund to another (say, from the Social Insurance Fund to the Pension Fund to pay for higher minimum pensions), it introduces a rigidity in the system that sharply limits the authorities’ ability to respond to the most urgent needs. It also creates a situation in which some benefits are inadequate in magnitude (such as the minimum pension), while others are not only potentially large but misdirected (such as children’s allowances to high-income families with several children; see below). The interests of social protection in Russia would be served well by consolidating these funds into one fund and by giving that fund (for example, the Pension Fund) sole responsibility for collecting and distributing pensions, as well as for administering other benefits. The costs associated with this segmented approach to the administration of social benefits in Russia cannot be overestimated. For instance, until 1995, the bulk of Employment Fund expenditures were administrative, with less than 20 percent of resources in 1994 actually allocated to unemployment compensation. The apparent reason was the need to develop infrastructure at the Employment Fund for the administration of benefits (computer centers, office space, and so on). Such infrastructure was also being developed at the same time at the other funds, thus creating considerable overlap. This was unfortunate, given the significant needs in the social area in Russia during this period.

Another aspect of the decentralization of benefits administration detracts from more efficient management of scarce resources. At present, the range of benefits offered by each fund are determined by the relative magnitude of the employers’ contributions allocated to that particular fund, which in turn have been established at levels necessary to maintain many of the same benefits that existed in Russia in the pretransition period. This has resulted in a distribution of resources across different benefits that no longer reflects the rapidly changing needs of the population several years into the transition and that often involves considerable overlap. By way of illustration, Table 19 shows resources spent in 1995 in unemployment compensation, sick pay, treatment at sanatoriums, in-patient medical care, children’s allowances, and minimum pensions. Several observations are warranted: (i) although the unemployment rate has increased sharply in recent years, less than 2 percent of total social expenditure in 1995 went to the payment of unemployment compensation, which remains quite low in relation to the level of wages; (ii) benefits for treatments at sanatoriums through the SIF may duplicate those made available through the Medical Fund and exceed by a factor of 2 those made for unemployment compensation; (iii) children’s allowances remain, except for old-age pensions, the single most costly benefit, exceeding by several orders of magnitude outlays on minimum pensions and unemployment compensation.

Table 19.

Selected Benefits

(In trillions of rubles)

article image
Sources: Extrabudgetary funds; and IMF staff estimates.

As defined by Pension Fund.

Including administrative expenditures.

A key priority of social protection in Russia over the medium term should be to reassess the relative weight that should be attached to each of these benefits within the overall budget for social protection in a way that emphasizes the quality and quantity of services received by the most vulnerable groups in the population rather than maintaining a broad constellation of benefits, often of a universal nature, that reflects pretransition social priorities and conditions. The aim should be to increase the flexibility of the authorities in the administration of scarce resources in a way that gives the highest priority to the interests of the most needy groups.

(7) As with pensions, the administration of children’s allowances could be improved. First, it is desirable to change its universal nature whereby cash benefits are given to recipients independent of the level of income, a characteristic that introduces inequity in the administration of the allowance, reduces the potential benefits to truly needy families, and significantly adds to total costs. The Ministry of Labor and Social Development estimates that, for instance, if the allowance was made available only to families with two or more children, the yearly savings would amount to some ½ of 1 percent of GDP, funds that could be used to increase the value of the benefit to families, with lower incomes or, in the context of an integrated system of social benefits as discussed above, allocated to other worthy social goals. Second, efforts should be made to reach those needy families, which, for reasons that are not completely clear, are presently not receiving the allowance, particularly in light of some evidence of apparent arbitrariness (or mismanagement) in the administration of the benefit at the oblast level. Third, as with other social benefits in Russia, it is necessary to introduce more regional differentiation in the value of the benefit, given sharp differences in the local cost of living. The present regional coefficients are not an adequate substitute and only partly (and sometimes arbitrarily) compensate families for such differences.

Finally, and perhaps most important, the value of the benefit should be delinked from the level of the minimum wage. Whatever the initial motivations may have been to establish such a linkage, the system has quickly given rise to a situation where decisions to increase the minimum wage are determined by the likely financial implications of the corresponding automatic adjustments to social benefits. A more efficient way to proceed might be to link the value of the benefit to some fixed percentage of the minimum subsistence level and to adjust the latter fully to changes in the cost of living. While officials at the Ministry of Labor and Social Development recognize that there is significant scope for improving the efficiency of resources allocated to the payment of children’s allowances, there is also a sense that at present the administrative capacity is not yet in place that would allow the linking of this benefit to some measure of family income.

(8) Much has been written on the need to harden the enterprise budget constraint to address the grievous inefficiencies of the past and because the behavioral patterns implied by the assumptions underlying the existence of a soft budget constraint are inconsistent with the development of a market economy. While the condition of enterprises varies greatly across sectors and regions in Russia, with some having been privatized and thus no longer posing a direct burden on the budget, others have gone or are going through a process of disinvestment and retrenchment. Clearly the ongoing process of restructuring of production by sectors will continue to involve retrenchment in the activities of previously unprofitable enterprises. In addition, it will continue to be necessary to better adapt the size of firms to the needs of a competitive market and to improve productivity. All of these processes have led and will continue to lead to the elimination of jobs and the corresponding rise in unemployment. In such a context, the effective operation of an adequate system of unemployment insurance and compensation assumes a prominent place among macroeconomic policy objectives.

(9) While a strong case can be made for the consolidation of the various social funds into a single one, there is concern that consolidation of these funds into the budget might make their resources vulnerable to the uncertainties of expenditure sequestration. Social spending in general and spending on key elements of the social safety net in particular would then become part of the general expenditure priorities of the government and thus subject to some of the inefficiencies and arbitrariness mentioned earlier. It might therefore be best to move to a system with a single institution in charge of the provision of social benefits, but its resources should be protected from the demands made on the government budget.71

44

See Alesina (1998) for a detailed overview of these issues. The higher measured inequality observed during the last several years needs to be seen against the background of considerable “hidden” inequality under the Soviet regime and the underlying data limitations.

45

In discussing the role of the state in the postsocialist transition, Kornai highlights the sharp worsening in the distribution of income as one of the most serious problems facing economic policymakers.

46

The sources for the statistics quoted in the text and shown in Tables 12—14 are the comprehensive reports on social conditions in Central and Eastern Europe published by the United Nations Children’s Fund (UNICEF) as well as various socioeconomic indicators compiled by the Goskomstat. See United Nations Children’s Fund, International Child Development Centre (1993, 1994, 1995, and 1997).

47

Extreme poverty is associated with incomes below one-half of the official poverty line.

48

The evolution of the food share over time, however, could also be affected by other factors besides income and relative prices, such as the move to a market-based system for the allocation of goods and the associated elimination of food subsidies, the elimination of quantitative restrictions on imports, and, in general, the improved availability of goods.

49

For those countries for which the data are available in Eastern and Central Europe, the Baltic countries, and several states of the former Soviet Union (a combined total of 18 states), UNICEF calculates a measure of “excess mortality” equal to the absolute number of people who have died in a given period as a result of increases in death rates, netting out the effect of changes in the size and age structure of the population. Excess mortality in Russia during 1990–93 amounted to about 600,000 people, two-thirds of which corresponded to 1993.

50

These two rates are for the period 1989–93.

51

United Nations Children’s Fund, International Child Development Centre (1994, p. v).

52

For an eloquent account of the deterioration of health ser-vices as it affected the Soviet female population, see Plessix Gray (1989). According to UNICEF, in 1988 one-third of pediatric hospitals had no hot water, 70 percent lacked essential equipment for common medical emergencies and basic drugs, and laboratory materials were generally in short supply. The consumption of animal fat and other cholesterol-rich products in the U.S.S.R. was three times higher than the level recommended by the World Health Organization.

53

United Nations Children’s Fund, International Child Development Centre (1994, p. 53).

54

The process of integration of the Russian economy with the rest of the world has at times taken place against a backdrop of significant trade restrictions in foreign markets and the threat of the imposition of new ones. These restrictions have taken the form of antidumping procedures and quantitative restrictions of exports of steel, aluminum, and other commodities. Some of these problems are expected to be ameliorated by membership in the World Trade Organization (WTO), especially in the area of antidumping, where established, reasonably transparent procedures exist and are applied. WTO principles also exist for quantitative restrictions that would mitigate present discriminatory practices.

55

Other groups that are entitled to early retirement include civil aviation personnel and workers in health and educational institutions, artistic and entertainment establishments, and “jobs characterized by adverse labor conditions”.

56

Official data issued by the Pension Fund show that 3.7 million pensioners receive the minimum pension. However, there are other groups, such as the 2.3 million pensioners on survivors’ pensions, for which the benefit does not exceed the minimum level.

57

For instance, between November 1, 1994 and May 1, 1995, prices, as measured by the consumer price index, grew by a cumulative 106 percent; the minimum pension (including price compensation allowances) was increased by 54 percent. The average pension rose by 72 percent over the same period.

58

Approximately 93 percent of all revenue collected by the Pension Fund is derived from the general scheme, for which the employer contribution rate is 28 percent. Agricultural workers account for some 5 percent and the remaining 2 percent of revenue corresponds to the self-employed.

59

In the textile sector, for instance, payment of benefits significantly exceeds revenues from contributions. The SIF then is required to step in and provide the difference.

60

About 630,000 vouchers were issued in 1995.

61

This benefit was equal to one minimum wage until the end of 1995.

62

Until May 1995 the benefit was payable at 70 percent of the minimum wage only if the child was less than 6 years old; the benefit was reduced to 60 percent for ages between 6 and 16 years.

63

The contribution rate was reduced from 2 percent to 1.5 percent on January 1, 1996. The Employment Fund estimates the ad-verse impact on revenues in 1996 to be some Rub 2.5–3 trillion.

64

Some 130,000 workers have used this option, retiring a full two years before the age of retirement. The Employment Fund transfers to the Pension Fund the resources needed to finance this.

65

With the aim of establishing, over the medium term, a closer linkage between the magnitude of pensions and the level of individual contributions, the government adopted a resolution in 1997 to establish an Individual Data Center under the jurisdiction of the Pension Fund. (Government Resolution No. 318, dated March 15, 1997, “On Measures to Organize the Registration of Individual State Pensions.”)

66

In 1996 the minimum pension was equivalent to 33 percent of the average minimum subsistence level, well below the corresponding ratio for 1993 (55 percent).

67

As noted in Decree No. 573, dated June 14, 1997, “On Measures to Maintain the Financial Condition of Pensioners.”

68

There appears to be little support in Russia for increasing the retirement age—which is low by international standards—above 60 years for males. The precipitous decline in the average life expectancy (which has fallen below the retirement age) creates a difficult “perception” problem for those who argue that this mea-sure is necessary to strengthen the revenue base of the Pension Fund. Since the average life expectancy of females is, however, considerably higher, there would appear to be some scope for savings by increasing the retirement age for women, which at present is five years lower than that for males.

69

The case of Spain is illustrative. At 29.15 percent, employers’ contributions in Spain were among the highest in member countries of the Organization for Economic Cooperation and Development in 1980. These were reduced to 24 percent by 1985 while only marginally reducing employees’ contribution rates from 5.15 percent to 4.80 percent. A new law on pensions introduced in 1985 significantly tightened eligibility requirements by increasing the length of period required to qualify for a pension and by broadening the coverage of the income on which contributions were paid. Tighter control also contributed to reducing the rate of growth of disability pensions. These measures more than offset the adverse impact of the reduction in contribution rates.

70

In late 1997 the government adopted a medium-term framework for pension reform that envisages, beginning in 2000, that pensions would be funded through a combination of the present pay-as-you-go system and a capitalized system of individual accounts.

71

The potential risks associated with this “confiscation” of resources meant for social expenditure cannot be overestimated. In 1996 the Employment Fund was instructed to transfer Rub 350 billion to the Pension Fund (not necessarily a harmful thing) and Rub 700 billion to the Ministry of Defense for military conversion purposes. Some limited transfers between funds, notably from the SIF to the Pension Fund, in the form of loans were made in 1996.

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Cover Fiscal Policy
Fiscal Policy
Issues During the Transition in Russia
ISBN:
9781557757036
ISSN:
0251-6365
Publication Date:
08 Apr 1998
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557757036.084
Pages:
63
Figure 8.

Real Average and Minimum Pension

(I99I:Q4 = 100)
Figure 9.

Expenditure on Social Programs

(In percent of GDP)

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