Russia’s economic policy makers are in talks to abolish compulsory contributions to employees’ managed pension funds that had been aimed at sustaining the long-term health of the system, three sources close to the government said, Reuters reports.
The finance ministry and the central bank, who for years had resisted the pressure to scrap the mandatory payments because of worries about the future fiscal burden of pensions, have now conceded the point and are crafting ideas instead on how to encourage voluntary retirement savings, the sources said.
Dwindling revenues following sanctions and a slump in oil prices have left little cash to keep on patching an ever-growing hole in the State Pension Fund. The Fund, managed indirectly by the health ministry, covers current needs and has seen its contributions falling short.
“The decision is still pending, but the finance ministry and the central bank are discussing the ‘voluntary’ option,” said a source familiar with the talks, who spoke on condition of anonymity.
Two other sources, one in the finance ministry and another close to the government, confirmed the discussions.
While the move would ease the burden on the state budget, it could potentially reduce funds for long-term investment in capital markets if officials fail to ensure that Russians save for retirement on their own.
Under the current system, the state divides the funds paid by employers for each employee into two parts, with the larger portion going straight to current state pension payments and a smaller part to the employee’s individual pension saving account.
The second part, known as the mandatory accumulative pension, is usually invested in financial instruments by the state or privately-managed funds.
Reuters sources would not elaborate how the voluntary part would work as discussions are still going on. But if there is no voluntary part in the new system, then potentially all future employer contributions to the state would go to pay current pensions obligation.
Faced with a widening federal budget deficit, the finance ministry has for the past three years suspended transfers of money destined for the accumulative part of the system, using it to cover current pension obligations instead.
The decision to change the system, if taken, would in effect cement that practice.
The state has promised to return the suspended funds but no date has been given. This change might free the ministry from returning the cash.