PENSION REFORM IN RUSSIA

	It is known that effective February 1998, the Russian pension system has substantially changed. Will you please give more details. The pension system specified in the Russian Pension Law had required modification long before the recent changes occurred because the amount of state retirement pensions was quite low against the background of growing living expenses. Most frequently, it did not ensure reasonable subsistence for a retired person. For the purpose of pension reform in the Russian Federation, Decree 1 of the RF President "On immediate measures seeking to improve the state retirement pension scheme of the Russian Federation" was adopted on April 15, 1996. By issuing the aforesaid Decree, the President of Russia supported the idea of transition to a new procedure for calculation of pension amount based on consistency between the amount of the pension and length of service. In connection with this, on June 23, 1997, the State Duma adopted the Federal Act "On the procedure for calculation and increase of state retirement pensions in the Russian Federation." The Act has stipulated that effective February 1, 1998, with growing wages in the country, state retirement pensions will be subject to calculation and increase using a pensioner individual rate. It is suggested that a fixed pension based on minimum monthly wages should be rejected with introduction of a pensioner individual rate. This means that a pensioner will be entitled to select the calculation of a state retirement pension based on an individual rate claiming a higher pension value (Clause 3 Article 7 of the Act "On state retirement pensions in the Russian Federation.") In this case, the main point is calculation of a pension subject to the average monthly wage of the retired person in comparison with the average wages in the country which will be announced on a quarterly basis by the State Committee of the Russian Federation for Statistics and approved by the RF Governmental Decree. The new law only applies to retired persons who had received a state retirement pension prior to its adoption, and to those who will retire thereafter and seek state retirement pension for the first time. Retirement, disablement, long-service and survivor benefits will be provided for. The law is not applicable to workers past retirement age who continued working after February 1, 1998 and a received state retirement pension (Clause 6.1).
	What is the current procedure for calculation of pensions? The procedure for calculation of state retirement pensions applicable until February 1, 1998, is stipulated by Act "On state retirement pensions in the Russian Federation" as amended on February 25, 1999. At present, this is the basic legal act specifying a common system for the calculation of pensions with different types of retirement pensions being determined under common scheme. In particular, pursuant to Article 16 of the Act, the retirement (old age) pension is 55% of the average monthly wage selected by the employee over the recent 24 months or any 60 months of continuous work during the entire period of service. Percentage of the pension in respect to the average monthly wage is increased with every extra year over obligatory service. In total, this share will not exceed 75% of the average monthly wage of the employee. It is known that a retirement (old age) pension for men is paid at the age of 60 with a total length of service of min. 25 years, and for women at an age of 55 with a total length of service of min. 20 years. In the event that the employee has worked for 25 years and his/her average monthly wage over the last 2 years was 600 rubles, the amount of his/her pension will be calculated as follows: P = 0,55 x 600 = 330 rubles. The amount of the pension calculated as above may not be lower that the established minimum pension value equal to 1 MW 1( 83 ruble 49 kopecks), nor exceed the maximum equal to 3 minimum wages (250 rubles 47 kopecks). In the above case, the minimum amount of the pension is exceeded, so the employee may only claim the maximum of 250 rubles 47 kopecks. P=0.55 x 600 = 330 rubles = 520 rubles 47 kopecks Pursuant to the Decree of the RF President "On immediate measures seeking to improve the state retirement pension scheme of the Russian Federation" dated April 15, 1996, a compensation benefit in amount of 85 rubles is added to the above sum for employees who are entitled to the maximum amount of the pension (3 minimum wages), and 150 rubles for employees entitled to the minimum amount (1 minimum wage). Compensation benefits to persons receiving fixed pensions in amounts ranging from 83 rubles 49 kopecks to 250 rubles 47 kopecks are paid on a differentiation basis as a difference between 250 rubles 47 kopecks and the actual amount of the pension. In the above case, since an employee with an obligatory length of service of 25 years is entitled to the maximum pension, he/she may claim a compensation benefit in an amount of 85 rubles: P = 250, 47 + 85 = 335 rubles. 47 kopecks. Therefore, the amount of pension according to the previous procedure for calculation of state retirement pensions is 335 rubles 47 kopecks. Different mark-ups and extra payments are added to the pension under Article 21 and 110 of the Act "On state retirement pensions in the RSFSR " for relevant legal reasons. The state retirement pension scheme specified in the new law will change the procedure for calculation thereof. At present, the amount of the pension will be automatically determined by the district social security authorities subject to the pensioner individual rate, the amount of his/her average earnings and the average wages in the country for the appropriate quarter of the year.
	Can a layman calculate his/her pension in accordance with the new pension law? Yes, he/she can. The new law specifying calculation of the pension amount has introduced a pensioner individual rate. It is determined by a special formula: multiplying the amount of pension (percentage in the obligatory length of service including percentage for every extra year) by percentage of the average monthly wage of the retired person for the last 2 years or any 5 continuous years, and the level of the average monthly wages in the country at the same time. R = P x (AW : AWC) For determination of the individual rate (R) according to the new regulation, the obligatory service length requirement is preserved. Pursuant to the new law, this may be called insurance scheme (Article 2). Depending on the length of service, percentage of the pension amount in respect to the average monthly earnings is 55 % (minimum), including: 1% surcharge per each extra year over the obligatory service period, but not exceeding 75% (P). The ratio between the average monthly earnings of the retired person (Average Wage, AW) and the average monthly wage in the country (average wage in the country, AWC) is determined by division of the average monthly wage of the retired person over 2 years (5 years) by the average monthly wage in the country at the same time. For instance, the employee has an actual service period of 25 years, which complies with the requirement. Hence, in this case, the actual length of service does not exceed the obligatory period required for raising the amount of pension. This means that the employee is entitled to the minimum old age pension of 55%. For further determination of the rate one must know the average monthly wage of the retired person over the last two years or five years, and the level of average monthly wages in the country over the previous quarter of the year. Presumably, the employee's length of service is 25 years, his/her previous average monthly wage is 600 rubles, the level of average monthly wages in the country for the relevant period is 800 rubles. The calculation formula of the rate is as follows: R = 0.55 x (600 : 800) = 0.55 x 0.67 = 0.368 The law stipulates that the ratio between Average Wage (AW) of the Retired Person and Average Wage in the country (AWC) may not exceed the 1.2 growth index of the average monthly wage. In this example, it does not exceed the limit amounting to 0.67. Now, in order to find a particular amount of the pension, one has to multiply the individual rate 0.368 by the amount of the average monthly wage in the country for the relevant accounting quarter. As a result, the proper amount of the pension under the new law will be calculated P = 0,368 x 800 = 294 rubles. In the event that the index above exceeds 1.2., the ratio of the average monthly wage of the retired person and average monthly wage in the country would be multiplied by the maximum amount of the pensioner individual rate (1.2) Comparing the previous and the current procedure for calculation of the pension, it should be noted that the amount in the former and latter case is 335 rubles 47 kopecks and 294 rubles, respectively. Therefore, the retired person will benefit from the former calculation. This will be applicable, because the new pension law in comparison with the previous one may not further deteriorate living standards of the Russian retired people.
	What is the procedure for calculation of the average monthly wage in order to find the individual rate and to calculate the pension on one's own ? In this case, a major part of the calculation is information on the average monthly wage for the relevant period of time in the country (total wage of the retired person shall be confirmed by appropriate documents). Prior to the new pension law, statistical data on the amount of the average monthly wage in the country were not officially published. It was not particularly necessary. The situation has changed with adoption of the new law specifying a quite new procedure for calculation of pensions with respect to the current one. Pursuant to the new law, each retired person, without making an extra effort, may calculate the amount of his/her pension on his/her own by pre-calculation of his/her average monthly wage based on the published indices of the average monthly wages in the country. The amount of the average monthly wage of the retired person is calculated for the last 2 years of service or any 5 years in a row for the entire period of service, by means of simple arithmetic calculations. For this purpose one must know the amount of the recent average monthly wages in Russia. These are published by the RF Committee on Statistics. The average monthly wage of the retired person over the relevant period of time allowed for administration of pension is calculated by division of the total amount of earnings over two or five years, by two or five years, respectively. After that, the total amount of average monthly wage in the country for a selected (optional to the retired person) period of time is also divided by two or five years, respectively. As a result, the first figure is divided by the second and the result obtained is rounded off to three signs following the point in the obtained figure. In this case, if the forth figure of the result obtained is 5 or more, the previous figure is rounded off to one. Presumably, if the index is 0.5287, then the ratio will be as follows: 0.529). The index 0.529 means the amount of the average monthly wage required for calculation of the pensioner individual rate.
	What amount of the average monthly wage in the country will be applied in the calculation of pensions? Pursuant to the new pension law, due to growing wages in the country pensions will be raised four time a year: from February 1, May 1, August 1 and November 1. The law specifies that if the pension is increased on February 1 of the current year ongoing, the pension individual rate for raising the amount of his/her pension is applicable to the average monthly wage in the country for the period from October 1 to December 31 1999, that is for Quarter IV of the previous year. This means that from February 1 to May 2000, for calculation of the pension will apply the amount of the average monthly wage in the country determined in the IV Quarter of the previous year. Pursuant to the law, the average monthly wage in the country must be approved by the Government of the Russian Federation on or before January 15 for calculation of the amount of the pension in Quarter I of the new year, because the amount of the retirement pension is increased effective February 1. Period for administration or recalculation of pension Period determining the average monthly wage in the country from 01.05 to 31.07 I Quarter (from 01.01 to 31.03) from 01.08 to 31.10 II Quarter (from 01.04 to 30.06) from 01.11 to 31.01 III Quarter (from 01.07 to 30.09) from 01.02 to 30.04 IV Quarter (from 01.10 to 31.12) In connection with this, the Government of the Russian Federation by arrangement with the State Committee on Statistics of the Russian Federation, Ministry of Labor of the Russian Federation and Pension Fund of the Russian Federation approved on January 11, 2000 the average monthly wage in the country for Quarter IV of 1999 in amount 1,175 rubles. ( Decree of the Government of the Russian Federation as of January 11, 2000 N 29 "On approval of the average monthly wage in the country for Quarter IV 1999 in order to calculate state retirement pension benefits effective February 1, 2000.") Therefore, in administration of the pension under the new pension law, before May 2000, it is 1, 175 rubles (the amount of the average monthly wage in the country for the relevant period) that will be multiplied by the pensioner individual rate.
	What records will constitute service history referred to in calculation of the amount of pensions under the new law in April 2000 ? The procedure for calculation of pension benefits under the new law suggests that the social security authorities seeking to calculate the amount thereof will only allow the net (under insurance scheme) length service. The following is not covered by the insurance scheme: studies in secondary professional and higher education establishments including post graduate studies; doctoral studies and residency; care over disabled person I, disabled child younger than 16 years, aged person requiring permanent care administered by a medical institution; 3 year and 70 days maternal leave; residence in areas providing no employment opportunities to spouses of military officers; temporal residence abroad (over ten years) by spouses of executives with Russian and international organizations. The service covered by the insurance scheme includes: length of direct service as a worker, employee, military officer or related service, temporal occupational disablement, disablement I and II because of injury received while at work or occupational disease, serving the sentence over the period adjudicated upon appeal; unemployment benefit period, public services and moving to the point of destination offered by the Employment Agency for employment purposes; staying in custody for political reasons without criminal offense. Therefore, according to the new procedure for calculation of pensions, the service, required for calculation of the amount thereof, includes employment and related activity resulting in contribution to the Pension Fund. Various types of public services included in the general service under former Act "On state retirement pensions" now are not included in the service covered by the insurance scheme under the new law. However, this does not mean that the enforcement of the new pension law annuls the actual service accumulated by recording periods of public service. Calculation of pensions will be effected in two versions: pursuant both the previous and the current law administering the most beneficial pension.
	What is the procedure for calculation of pension in lack of service? The general procedure for calculation is similar for all types of pensions. E.g., how to calculate retirement (old age) pensions under lack of service. Initially the amount of pension will be calculated in full as if the requirement on the length of service is met. For instance, if a person's length of service is 15 years covered by the insurance scheme, his/her average monthly wage over the relevant period is 600 rubles with average wage in the country for the accounting period being 800 rubles, the formula of the individual rate is as follows: R = 0.55 x { 600 : 800 } = 0.55 x 0.75 = 0.412 The individual rate is 0.412. In the above case, the employee with his/her 15 year record lacks the necessary length of service, so an additional calculation must be made to find out the amount of his/her pension: P = { 412 rubles : 25 years} x 15 years = 247 rubles. Hence, as of April 1, 2000, old age pension of the retired person with actual length of service of 15 years will be 247 rubles.
	What problems may arise in the implementation of the new law and what are its advantages, if any, in comparison with the previous pension law? The basic feature of Russian legal acts is that the adopted documents are just declarative. They are not always financially secure, therefore, the main problem of the new pension law is in its feasibility. According to specialists, the Pension Fund of the Russian Federation will require approximately 10 to 12 billion rubles for the purposes of implementation of the Act: "On the procedure for calculation and increase of state retirement pensions." Senior Assistant Minister of Finance Alexei Kudrin has stated that if the bill "On the minimum wage (MW)" passed by the State Duma in early April 2000, enters into force, 59 billion rubles will be required in this year alone, while in 2001, the required sum will amount to 185 billion rubles. Under the current tough economic conditions, the Government will be most likely forced to print more money to ensure the aforesaid amount. The State may not spend for social security needs more that specified in the budget. And of course, this will not protect the Russian retired persons from price climbing and growing living expenses. A disadvantage of the law is also the fact that the mechanism of decrease of state retirement pensions stipulated by the law is artificial. So, seeking to establish a direct function of the amount of the pension against the length of service under Subclause "d" Article 3, the amount of pension calculated in accordance with the new law, by establishing the limited ratio between the average monthly wage of the retired person and average monthly wage in the country 1.2, actually sets up the limit of the pension. In this case, it may not exceed 1,200 rubles (until recently, 700 rubles)4 . In theory, it is an advantage of the law. Yet, upon simple calculations, it is evident that quarterly growth of average monthly wage in the country is frequently far from compliance with indices of growing living expenses. For instance, the formula for calculation of a pension for a retired person with insured length of service of 25 years and 600 rubles and 1,175 rubles of average monthly wage in the country over Quarter IV 1999, is as follows: R = 0,55 x { 600 : 1175 } = 0,55 x 0,510 = 0,280 P = 0, 280 x 1175 = 329 rubles. As a result, the pension in the above example under the new law as of April 1, 2000 will be in fact 329 rubles, while under the previous pension law, the pension would have been 335 rubles 47 kopecks based on the average monthly wage and length of service. In addition, it should be noted that pursuant to Article 7 of the Act "On procedure for calculation and increase of state retirement pensions" no presidential compensation is paid over the pension calculated in accordance with the new law. Obviously, the Act "On procedure for calculation and increase of state retirement pensions" will bring no particular benefits to most Russian retired people : the amount of pension for people with fairly low average monthly wage will be lower than the pension determined under the effective pension law. Yet, a relative increase of the maximum pension determined from both the previous and the new law, can be traced. So, if total length of service covered by insurance scheme is 45 years, the maximum percentage of excessive length of service is 20% ( that is 75%), the amount of monthly wage of the retired person is 600 rubles, the amount of the average monthly wage in the country over Quarter IV, 1999 was 1175 rubles, the formula for calculation of the individual rate is as follows: R = 0.75 x { 600 : 1175} = 0.75 x 0.510 = 0.382 P = 0.382 x 1175 rubles = 448 rubles As a result, the maximum pension prior to May 2000 is 448 rubles, while if calculated under the previous law, the top amount of pension including the RF President compensation benefit is at present 385 rubles. For instance, a person's length of service is 45 years, maximum excess in the length of service is 20%; the amount of the average monthly wage of the retired person is 600 rubles. Pensions will be calculated from the following formula: P = 0.55 x 600 = 330 = 250 + 20% = 300 + 85 rubles = 385 rubles. Therefore, in early year 2000, the amount of pension for the retired person with medium and high wage will only increase by 3 to 5%. We look forward to the future when the new pension law will provide more benefits to Russian elderly people, delivering them from pondering whether or not to terminate service and enjoy deserved retirement