BOFIT Viikkokatsaus / BOFIT Weekly 2016/35

The government announced last week that every pensioner will receive a one-time payment of 5,000 rubles (about €70) next January. The sum corresponds to over 3 % of an average annual pension. In addition, the government said it would return (at least for next year) to traditional inflation indexing of pensions as set forth in the law. That indexation means the annual pension increase, which usually occurs in February, is based on the rate of consumer price inflation at the end of the previous year. At the start of this year, however, the government introduced a new rule that pensioners who keep working will no longer be eligible for inflation adjustments. Official figures show that about 35 % of Russia’s over 45 million people receiving different government pensions are still working. The most recent forecasts expect inflation to be running at about 6–6.5 % at the end of this year.

The typical cost-of-living adjustment to cope with inflation was not granted this year. Despite the fact that inflation was running at nearly 13 % at the end of 2015, pensions were only increased by 4 % in February. At that time of the feeble adjustment, the government said a second increase would be possible in the second half if economic conditions allowed.

Russian pensions this year and last year fell in real terms for the first time since 1999 ¬– and the drop has been stunning. At a meeting of cabinet ministers on pensions, prime minister Dmitri Medvedev last week noted that the government’s fresh decision to hike pensions was based on both social and political considerations. Many observers had expected for some while the government to raise pensions with the approach of the national Duma election on September 18.

Low oil prices, economic contraction, and the ensuing drop in budget revenue, have made the government rein in cost-of-living adjustments of pensions. Pension spending has risen to a quarter of total government spending, and about 9 % of GDP.

Russian pensions and inflation, 2006‒2016

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Source: Rosstat.