Citizens of Russia, friends,
On June 16, 2018, the Government submitted to the State Duma a draft law on reforming the pension system, and on June 19, the draft passed its first reading in Parliament. The law’s main purpose is to ensure that the pension system remains sustainable and financially sound for years to come. This means not only maintaining incomes and pensions at the same level, but also increasing them for current and future retirees.
It is for achieving these goals that the draft law envisages a gradual increase in the retirement age, along with a number of other measures. I do understand how important and serious these matters are for millions of people, for every person. For this reason, I decided to speak to you directly, in order to explain every aspect of the changes the Government is proposing. I will also share my perspective and proposals that I believe to be essential.
First of all, let me remind you that the debate on the need to increase the retirement age has not come out of nowhere or all of a sudden, and did not start today. This issue was discussed back in the Soviet times, as well as in the 1990s. However, the decisions were not taken, but were delayed for various reasons.
In the early 2000s, Government members, as well as many experts insisted that the pension system needed to be reformed and the retirement age raised.
These changes had objective grounds. It was obvious that by about 2020 we would inevitably face serious demographic challenges. What caused them?
Every 25 to 27 years, a significantly lower number of people in Russia enter adulthood, when they can start families and raise children, than there could and should be. This is due to the grave demographic loss of the Great Patriotic War, which includes not only direct losses but also millions of people who were never born during the war.
The mid-1990s were a period when another small generation entered adulthood. It was at that time that the country also faced the harshest economic and social crisis and its catastrophic consequences. This led to another powerful demographic collapse. Even fewer children were born than we expected. The demographic pit of the late 1990s was comparable to 1943 and 1944.
Now, that low-numbered generation born in the 1990s is entering the active working age. This is putting even more pressure on the pension system, which is primarily based on the pay-as-you-go principle. That is, the pension contributions of the people who work are used for payments to the current pensioners, the generation of our parents. Our parents, when they worked, contributed to the pensions of our grandparents.
The conclusion is clear. The active working age population is decreasing, along with our capability to pay and adjust pensions for inflation. Therefore, changes are necessary.
I opposed them in the 2000s. I spoke about this both in private meetings and in public. For example, during a Direct Line broadcast in 2005 I openly said that no such changes would happen until the end of my presidential term.
In 2008, when I left the presidential post, the basic provisions of the pension system were fully preserved. Now I believe that at the time my view was economically feasible and socially fair and justified. I am certain that raising the retirement age in the early and mid-2000s would have been absolutely wrong.
Let me also remind you how the country lived at the time. Its economy had yet to gain a stable footing with modest GDP figures and extremely low salaries. The unemployment rate was high, and so was the inflation rate. Almost 25 percent of the country’s population lived below the poverty line. Life expectancy was just slightly above 65 years.
What would have happened, if in that socioeconomic environment we started raising the retirement age in order to increase pensions, as we now intend to do? Many families, especially in smaller towns and rural areas, would have lost their main and sometimes only income. Considering the high unemployment rate, neither working nor retiring would have been an option, while any gains in pensions would have been eaten up by high inflation, producing even more poverty than before.
We had to start by overcoming the consequences of the 1990s, generating economic growth and resolving the most urgent social problems.
So what has changed over the past years? We did not waist our time. When I say we, I mean that all of us, citizens, the authorities and the country, were hard at work.
As soon as we were able to accumulate the required financial resources, we channelled them into social development for the benefit of our people. We launched long-term initiatives to improve demographics, including the maternity capital subsidy. They yielded positive results, partially offsetting the demographic setbacks of the preceding decades. We also had to overcome major economic challenges, and succeeded in reviving stable economic growth starting in 2016. The unemployment rate in Russia is currently at its lowest since 1991.
Of course, there are a lot of things that have yet to be undertaken, including in healthcare and in other areas that are essential in terms of the quality of life and life expectancy. That said, there is no question that due to government initiatives, alongside the fact that people started paying more attention to their health, which is also very important, Russia is now one of the leading nations in terms of life expectancy growth rates. Over the past 15 years, life expectancy increased by 8 years (7.8 years).
I am aware that we all tend to take statistics with a pinch of salt, preferring to draw conclusions from our surroundings and what we can see ourselves. Some people live long lives, while some of our family members and friends unfortunately leave this world very early. I am referring to an impartial assessment of life expectancy growth in Russia, as confirmed by United Nations experts.
We have set ourselves the goal of reaching a life expectancy of more than 80 years by the end of the next decade. And we will make every effort to ensure that people in our country live longer and remain in good health.
Everything I have just said is an objective but rather dry analysis of the situation. It is certainly important. Still, it is equally important to feel and take into account that the proposed changes will affect the vital interests and plans of hundreds of thousands, of millions of people. Some are already thinking about retiring, devoting more time to their family, children, and grandchildren. Others plan to continue working and count on their retirement benefits as additional support. They are certainly entitled to all this. And suddenly, their plans are postponed.
Naturally, many people do not take this well. I understand and share their concerns. But let us see what options we have here.
Should we put up with pensioners’ low incomes and just wait until the pension system starts creaking at the seams and finally falls apart? Should we shift unpopular, but necessary decisions off our shoulders and onto the next generation or act, realising what the country will face 15â€“20 years from now, given the existing situation?
I repeat, changes in the pension system, especially those related to raising the retirement age, raise concerns and disturb many people. And it is natural that all political forces, mainly the opposition, of course, will use this situation for self-promotion and strengthening their positions. This is the inevitable cost of the political process in any democratic society. Nevertheless, I asked the Government to thoroughly study and use all the constructive proposals made, including by the opposition, in the most serious way.
As for the current, incumbent Government, the easiest and simplest thing for it today is to just leave things as they are. The Russian economy feels confident enough, despite the difficulties we know about. The state budget has enough resources to fill the Pension Fund. At least for the next 7â€“10 years, we will be able to continue indexing pensions on time.
But we also know that gradually, there will come a time when the Government will not have enough money to continue doing so. And then even the regular payment of pensions can become a problem, as it happened in the 1990s.
Back in 2005, the ratio of working people contributing to the Pension Fund on a regular basis to the people receiving insurance old-age pensions was almost 1.7 to 1. In 2019, it will be 1.2 to 1. That is, almost one to one. If we do not take any measures, we will not be able to maintain the revenue of the pension system. That is, the incomes of the current and future pensioners. On the contrary, this income will inevitably devalue and decrease as relative to the wages.
Can it be any lower? Even now, pensions are very modest, incommensurate to the contribution made by older generations to the development of our country. We owe them a huge debt.
The proposed changes to the pension system will not only allow maintaining the level of pensioners’ incomes but also, most importantly, will ensure their stable growth ahead of inflation.
As early as in 2019, pensions will be adjusted for inflation by 7 percent, which is twice the forecast inflation rate as of the end of 2018. Overall, in the next six years, we will be able to annually increase the old-age pensions for non-working pensioners by an average 1,000 rubles. As a result, in 2024, the average pension for non-working pensioners will reach 20,000 rubles per month. (Now, I will remind you, it is 14,144 rubles.) In the future, after 2024, the changes to the pension system will make it possible to build a strong foundation for a steady annual rise of insurance pensions above the inflation rate.
I want to stress that the mechanism for the annual pension rise must be formalised in the draft law amending the pension system. This needs to be done in the second reading of the bill in the State Duma.
The obvious question is whether the Government considered any other options and other reserves for ensuring a stable pension system besides raising the retirement age. Of course, it did.
On my instructions, the Government has been working on it up until now. All possible alternative scenarios were carefully studied and recalculated. It turned out that they do not provide any radical solutions. At best, they amount to just patching holes. Worse, they would have devastating consequences for the country’s economy.
A progressive income tax scale seems to be an effective, seemingly fair measure. According to Finance Ministry estimates, the administration of increased tax rates, for example, 20 percent on higher incomes, can fetch about 75â€“120 billion rubles a year, and that is not even for certain. This amount will last us six days at best. Because paying pensions in Russia requires 20 billion rubles daily. I would like to emphasise that this is our daily requirement.
Another option is to sell part of state property, for example, as some suggest, all the Pension Fund buildings, including its regional offices. Of course, I agree, they are too generous with their premises. People are annoyed. I also support this. It is estimated that the total value of these facilities is 120 billion rubles. But even if we sell all of them and channel the money into pensions, we will be able to pay them for just another six days. So this is not an option either.
Another proposal is to impose additional taxes on oil and gas companies, the fuel and energy industry. I can tell you, all that we can collect in this way is enough to pay pensions for a maximum of a couple of months. Moreover, that would put the pension system in a very vulnerable position and dependent on price fluctuations in the world hydrocarbon markets.
Perhaps, we should use more of our reserve funds, which are replenished by the income from oil and gas? Yes, it is possible to do so for a while. However, if tomorrow, as I said, oil prices fall, which is quite possible and has already happened more than once, what then? Our reserves will be exhausted quickly, in just a few months. People’s lives, their pensions and incomes for years ahead cannot and must not depend on the price of oil, which changes every day.
Maybe we could just keep channelling more funds into the Pension Fund? Could covering its deficit from the federal budget be a solution? I have already said that we have the resources to do it, at least for now. Yes, these resources are actually available. But let us consider the overall situation.
In 2018, we have allocated 3.3 trillion rubles to this effect from the federal budget, including 1.8 trillion rubles for paying insurance pensions. Assuming that we want average pensions to reach 20,000 rubles without changing anything, the Pension Fund’s deficit would surge 1.5-fold to 5 trillion rubles. To put this in perspective, this is more than we spend on national defence and security.
By opting for this solution, we would destroy our finances sooner or later, which would force us to accumulate debt or print money that would not be backed by anything, which would lead to hyperinflation and growing poverty. Without resources, we would be unable to guarantee national security, or deliver on the most pressing needs, such as improving education and healthcare, supporting families and children, building roads and infrastructure, and improving the quality of life. We would be doomed to stay behind other countries in economic and technological terms.
For this reason, failing to act now or choosing temporary superficial fixes would be irresponsible and unfair to the country and our children.
Let me reiterate that for many years I met all proposals to change the pension system with caution, if not distrust. It was not uncommon for me to respond harshly to these ideas. However, the current demographic trends and developments on the labour market, as well as an impartial analysis of the situation show that the time has come to take action. That being said, the decisions we take must be fair, balanced, and take into consideration the interests of the people.
Therefore, I propose a number of measures that will help to soften the impact of the new decisions as much as possible.
First, the draft law proposes to increase the retirement age for women by eight years to 63, while for men it will be increased by five years. This will not do, of course. It is not right. In our country, we have a special, caring attitude towards women. We understand that they not only work hard in their jobs but are also responsible for the household, taking care of the family, raising children and looking after the grandchildren. The retirement age for women must not be raised by more years than for men. I think it is necessary to reduce the proposed retirement age increase for women from eight to five years.
We must also consider the right for mothers of many children to retire early. That is, if a woman has three children she can retire three years before the official retirement age. If she has four children then four years earlier. For women who have five or more children, the retirement age will remain the same, 50 years.
Second. As I have said before, the retirement age will be raised gradually, so that people can adapt to the new life situation and make plans accordingly. But I understand that it will be most difficult for those who will be the first to face the retirement age increase. For some people it will happen very soon. We must take this into consideration.
Therefore, I propose that those people who were supposed to retire in the next two years under the old law, have the right to apply for retirement six months before they reach the new retirement age. For example, a person who will now be supposed to retire in January 2020 will be able to retire in July 2019, or six months earlier.
Thirdly, what are the main concerns and, I would say, fears of the people who are to retire soon? They are concerned that they may lose both their job and pension, because it is very difficult to find a job after 50.
Considering this, we should envisage additional guarantees that would protect the interests of the older individuals on the labour market. This is why I propose that the final five years before retirement are to be considered pre-retirement age during the transition period. I believe it is necessary to introduce administrative and even criminal liability for employers for firing employees in the pre-retirement age category as well as for refusing to hire people because of their age. The corresponding amendments must be introduced at the same time as the adoption of the law on the pension age increase.
Of course, it would be wrong and unjust to introduce administrative measures only. This is why I instruct the Government to propose real business stimuli to make employers more interested in employing individuals of pre-retirement age.
I would like to add another point. As a rule, older people have a lot of professional experience. They tend to be reliable and disciplined workers. They can be very useful for their enterprises and companies. At the same time, it is very important that, like their younger colleagues, they have a chance to retrain and improve their skills or acquire new ones.
Therefore, I instruct the Government to adopt a special advanced training programme for people of pre-retirement age. It must be launched as soon as possible and financed from the federal budget.
And if a person of pre-retirement age decides to quit and cannot find a new job yet, we must improve his or her social guarantees. In this case, I propose increasing the maximum level of unemployment compensation for individuals of pre-retirement age more than two-fold, from 4,900 rubles now to 11,280 rubles starting from January 1, 2019, and paying it for one year.
Finally, it is also necessary to set a requirement for employers to provide employees of pre-retirement age with two paid days a year for free medical examinations.
Fourth, when making changes, it is wrong to act indiscriminately. There are no one-size-fits-all solutions. We must take into account the special conditions in which people live and work.
We have already agreed to preserve the benefits for miners, hot shops workers, chemical industries personnel, Chernobyl victims, and several other groups.
I think we need to secure the current pension rules for indigenous minorities of the North.
We must also support rural residents. It has already been repeatedly discussed and even decided that we need to add a 25 percent premium to the fixed payment of an insurance pension for non-working pensioners living in the countryside if they have at least a 30-year record of working in agriculture. But the coming of this decision into force was postponed. I propose to begin these payments as early as January 1, 2019.
Fifth. I think those who started working early should have the opportunity to retire before they reach the required age, taking into account their length of service.
The draft law says that the length of service that gives the right to early retirement is 40 years for women and 45 years for men. I propose reducing the length of service by three years, giving the right to early retirement after 37 years for women and 42 for men.
Sixth. I consider it essential to preserve all the federal benefits that exist as of December 31, 2018, for the transition period, until the pension system reform is completed. I mean the tax benefits on property and land.
Yes, these privileges were traditionally granted only after retirement. But in this case, when changes are to be made to the pension system, and people are counting on these benefits, we must make an exception for them, and grant the benefits separately from retirement, upon reaching the corresponding age. That is, as before, benefits can be used by women from the age of 55 and by men from 60. Thus, even before retirement, they will no longer pay taxes on their houses, apartments, or garden plots.
I know that representatives of the United Russia party at regional legislative assemblies and heads of constituent entities of the Russian Federation came up with the initiative to also maintain all the existing regional benefits. These things are very important to people. They include free travel on public transport, lower utility bills, lower payments for major repairs of buildings and the installation of gas supply, buying medicines at a reduced price and other things. I certainly support this approach. I believe all the necessary decisions will be taken in the regions before the new pension law goes into effect.
You know that many experts are saying that we have dragged our feet for too long regarding the issues that are being discussed today. I do not agree. We were not ready for this earlier. But we really cannot delay the decision any longer. This would be irresponsible and may badly affect the economy and the social sector and have a negative impact on the lives of millions of people because â€“ it is quite obvious now â€“ the Government will have to do this sooner or later. But the later we do this the tougher the decisions will be, that is, without any transition period and without retaining a number of benefits and the alleviating mechanisms that we can take advantage of today.
In the long term, if we act indecisively now, this may threaten the stability of our society and, consequently, our country’s security.
We need to develop. We need to overcome poverty and ensure that senior citizens â€“ the current and future old-age pensioners â€“ have a decent life.
The proposals I was talking about today will be formulated as amendments and submitted to the State Duma as soon as possible.
I have given you a very detailed account of the current situation and my proposals for the sustainable development of our country’s pension system as objectively and honestly as possible. I would like to emphasise again that we have to take a difficult but necessary decision.
I ask for your understanding in this.