BOFIT Viikkokatsaus / BOFIT Weekly 2018/25

Last week the government finally agreed on a long-discussed move to raise the retirement age. As proposed, the retirement age would be increased annually in six-month increments until the new target ages were reached. Although certain groups would be exempted, the retirement age would generally rise from the current 60 to 65 for men and 55 to 63 for women.

Pension expenses already consume about a quarter of Russian public spending. They have increased due e.g. to higher life expectancy (currently 67 years for men and 77 for women), even if pensions have only increased modestly. Last year, the average monthly old-age pension was about 14,000 rubles (200 euros).

Last year just over 36 million Russians, or about a quarter of the population, received old-age pensions. Rosstat reports 24 % of them were also working. The number of such individuals, however, seems to have fallen dramatically in recent years with the elimination of annual cost-of-living adjustments for pensioners who choose to keep working.

The government also submitted to the Duma a proposal to raise the VAT rate from 18 % to 20 % from the start of 2019. Socially important items, like food and medicine, would continue enjoying reduced tax rates. The government estimates that the VAT increase will annually bring in an additional 620 billion rubles (9 billion euros) to the federal budget.

Most of the funds raised by the changes are set to go to funding expenditures for fulfilling president Putin's May decree. The cabinet discussed also several other measures to fund the May decree and compensate the tax hike, but they have so far not proceeded to the Duma.

While Russian economy experts have taken the proposed increase in the retirement age in general positively, they have criticized the VAT hike on its depressing effects for economic growth. In contrast, raising the retirement age goes down badly with average citizens. A recent survey found that 92 % of respondents were opposed to the government's proposed increase in the retirement age and an online petition by labour unions opposing the change has already gathered over one million signatures. Some political researchers believe the government deliberately came out with a harsh proposal to leave room for softening the conditions later.