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DOI: http://dx.doi.org/10.20534/EJEMS-17-1-47-52
Finogenova Yulia Y., Prof. Plekhanov Russian University of Economics E-mail: [email protected]
Analysis of new financing opportunities for Russian pension insurance system
Abstract: The revision of socio-economic development's forecast of Russia for the year 2016 leads to make the adjustments of the Pension Fund of Russia (PFR)'s budget size. The main reasons associated with a fall in GDP, the reduction of which in 2015 was 3.7%, and the declining of the employees' wage funds on which were charged the pension contributions. Thus, in 2016 the budget of the PFR for compulsory pension insurance benefits payments was formed with a deficit of 810,5 billion RUB. The possible sources of funding this deficit are: state budgetary transfers, encouraging later retirement and, potentially, use the assets of National Welfare Fund.
The purpose of this article is to analyze the possibility of PFR's deficit financing due to: (1) the involvement of employees individual contributions (up to 2% of their income) and (2) by eliminating restrictions on the maximum size of the accruals for pension contributions of relatively highly paid groups of citizens.
The main conclusions will be done regarding the possible size of PFR's deficit reduction and they will based on the results of the additional pension insurance contributions amounts' modelling.
Keywords: the deficit of Pension Fund of Russia, increasing the size of pension accruals, mandatory employees' contributions into public pension system, financial stability of Pension Fund of Russia.
JEL codes: J140, H68, G23, G28 The purpose of this article is to analyze the out-
Introduction comes in the result of the possible decisions, which are
The economic crisis in the Russian Federation debating by the public. These decisions are connected
gave impulse to Russian mandatory pension insurance with introduction of compulsory pension contributions,
system to opt for the further way of development. which have to be done by employees. At the moment, in
There are a number of key socio-economic chal- Russia, employees are exempted from payment of any
lenges of the pension system: (1) necessity of ensur- social taxes on their income and the responsibility for
ing the adequate level of postretirement income; (2) that is the employers' burden.
dynamically changing structure of the labor market; Additional source of PFR's budget deficit indemnifi-
(3) increased labor migration within the country and cation is the taxation of highly income employees. Now
between the states; (4) the permanent ageing of popu- contributions to PFR are taken in the full amount (22%)
lation and (4) the deficit in the budget of the Russian only from the first 796 thousand Rubles of annual payroll
Pension Fund (PFR). [2] fund in the year 2016 and in excess of this amountare
charged only 10%. So, in this research there will be investigated the effect of this "ceiling" elimination.
All proposals under review herein are aimed exclusively at enhancement of PRF's revenues formation with due account of the rights of pensioners.
Table 1. - Main indicators of the forecast of the socio-economic development of the Russian Federation for 2016-2018 [5]
Analysis &Methodology
In the table 1 there is a brief analysis of the socioeconomic development indicators of the Russian Federation forecasted for the period of2016-2018 based on the data of the Federal State Statistics Service.
2011 2012 2013 2014 2015 2016 2017 2018
Reported Estimated Forecasted
Consumer price index as of December of the previous year,% 106,1 106,6 106,5 111,4 112,2 106,4 106,0 105,1
GDP, bln. Rubles. 55 967 62 147 66 194 71 406 73 515 78 673 84 910 91 930
Rate of GDP growth,% 104,3 103,4 101,3 100,6 96,1 100,7 101,9 102,4
Payroll fund, bln. Rubles.. 12 864 14 667 16 379 17 737 18 599 19 903 21 617 23 424
share of Payroll fund in GDP,% 23,0 23,6 24,7 24,8 25,3 25,3 25,5 25,5
The nominal monthly average gross payroll per one employee, Rubles. 23 369 26 629 29 792 32 495 34 352 36 838 40 092 43 601
The pensioner's minimum subsistence level, Rubles per month 5 032 5 123 5 998 6 617 8 182 8 803 9 340 10 367
For the reference: The exchange rate at March 23, 2016
Let's make some comments on the choice ofindicators. Thus, CPI (Consumer price Index) determines the value of indexation of insurance pensions from the 1st of February of the year under planning. The situation faced by the pension system in 2016 was unique as far as such indexation is concerned — indexing was made by incomprehensible 4% instead of 12,2% (it was noted that 4% is a target inflation rate of the Central Bank of the Russian Federation) however it is well known that the issue concerning the additional indexation will be reopened in the second half of the year based on the performance of economy. The pensioner's subsistence minimum determines, respectively, the minimum possible amount of the pension benefits of the retiree. Where the amount of a pension is below a minimum subsistence income for a variety of reasons, a pension supplement shall become established to the pensioner, be funded by the federal or regional budget and paid through the PFR.
GDP and the payroll fund in particular, are the grounds for calculation of the revenues of the budget with regard to collected insurance contributions for mandatory pension insurance system [3].
Having identified the main indicators of the forecast of the socio-economic development from which we
was 75,69 RUB per 1 EUR.
are to make a start while summing up a situation in the mandatory pension insurance we will try to assess the extent of the challenging issue — a size of deficit reduction of the PFR' budget.
For this purpose, we will refer to the data relevant to planning and implementation of the PFR budget (see table 2.). Under the deficit is implied herein an inter-budget transfer from the federal budget to the budget of the Fund ofmandatory pension insurance (hereinafter «Transfer»).
It should be noted its uneven dynamics: a decrease in the share oftransfer in the revenue side to 5,5% in 2014 was caused by the recovery growth of the economy and especially by the growth ofthe payroll fund and its share in GDP. From 2014 onwards the share oftransfer is increasing: it was affected by the transition to the stage of stagnation since 2013 and further deterioration of the economic situation in 2014-2015, as it was most obviously illustrated by the growth of consumer price index.
Thus, it is necessary to determine the most expedient tactical decisions focused on the enhancement of the revenues of the PFR's budget.Increasing of contribution rates — it is a rather widespread measure accepted among international systems of mandatory pension insurance [1].
Table 2. - Dynamics of the Pension Fund of the Russia's budget deficit, covered by the state budget transfer for 2011-2016 [4]
Year Revenues of PFR, total (bln. Rubles) Ofwhich a transfer for mandatory pension insurance (bln. Rubles) Share of transfer to the balance the PFR's budget (%)
2011 5 255,6 924,4 17,6
2012 5 890,4 1 033,1 17,5
2013 6 388,4 942,8 14,8
2014 6 159,1 336,3 5,5
2015 (forecast) 7 146,8 689,9 9,7
2016 (forecast) 7 528,8 810,5 10,8
For the reference: The exchange rate at March 23, 2016 was 75,69 RUB per 1 EUR.
At the same time the measures, which had been already adopted in our country became a frequent practice abroad, for example, extension of the minimum length of pensionable service granting a right to an insurance old-age retirement pension as well as toughening of requirements allowing to receive an early old-age pension.
It should be noted that the Russian Federation — is the only country in the world where only an employer pays insurance contributions, therefore the employee has no relation to the CPI funding system [7].
As of2016 and to the end of2018 the insurance contributions will be paid by the employer at the rate of 22% of the payroll fund; at that ceiling value of the base for assessment of insurance contributions will be subject to review on an annual basis by the Government of the Russian Federation and in the year 2016 it makes 796 thousand Rubles. The insurance contributions at the rate of 10% will be accrued on earnings above the established ceiling value ofthe base [9].
Existence of insurance contributions accrued in excess of the ceiling value of the base are of interest as well, as the contributions in this particular case are depersonalized in its nature, do not affect in any way the pension rights in future and are used exclusively for the redistribution of funds in favor of current pensioners. The structure has much in common with the system of the pension payment funding on account of tax charges. Its application could become an outcome of using of the Uniform Social Tax (UST) practically during ten years, as in the 1990s there were no ceiling value of the base for accrual of the insurance contributions, however at that time it had become an analog of curbing pensions depending on the ratio of the insured person payroll versus an average one in the industry [10].
Let's analyze the impact on PFR's funding the scenario, when contributions would be made by the insured person at the rate of 2% of his earnings.
For assessment of the value of such increase we will calculate at first the prospective value of one percent of insurance contributions to be paid by an employee.
For this purpose, it will be necessary to admit some assumptions. As we assess the value based on the payroll fund, it will be necessary to exclude earnings ofhighly-paid employees as well as to apply a adjustment factor for payers of insurance contributions with established reduced rates.
In order to make a model more realistic it seems reasonable to use data concerning the collectability of insurance contributions by the PFR (for the purposes of these calculations we proceed on the assumption that in future PFR will be engaged in the administration of contributions for Mandatory Pension Insurance).
Therefore, the calculations will be made based on the formula:
C = PF * GCR * (1 - HPE) * (1-TS)*CC [1]
VIC = C *GCR [2]
Where C — an expected amount of insurance contributions for mandatory pension insurance;
VIC — value of one per cent of insurance contributions for mandatory pension insurance;
PF — Payroll Fund (the actual value of the indicator will be calculated by Rosstat (Federal State Statistics Service), and a projected one- by the Ministry of Economic Development of Russia);
HPE — a share of employees having earnings above the established ceiling value of the base for accrual of the insurance contributions for mandatory pension system (an estimate indicator);
TS — a share of a transfer from the federal budget for compensation of shortfall in income of the Fund budget in connection with establishing of reduced rates for payment of insurance contributions for mandatory pension system (to be indicated in the explanatory note to the draft of the federal law on budget (forecast) or on the implementation of the PFR budget (actual);
CC — a ratio of insurance contribution collectability;
GCR generally established insurance contribution rate for assessment of the total amount of insurance contribution inpayments, and for the second time — for assessment of a value of one percent.
For assessing a share of HPE we will take the data for tributions are paid in full. In 2015 the ceiling value of the
April 2015 available at present about the number of em- base for accrual ofthe insurance contributions was equal to
ployees broken down by payroll rate. We will assess as well 711 000 Rubles, so we will analyze the share of employees
the rate of the gross payroll up to which the insurance con- whose average monthly payroll was above 59 250 Rubles.
Table 3. - Breakdown of number of employees by the gross payroll rate for April 2015 [8]
Gross Payroll, Rubles per month Share in the total number of employees,%
At the level of minimum wage (5965 Rubles) 1,4
from 5965,1 to 10600,0 10,5
from 10600,1 to 15400,0 13,0
from 15400,1 to 21800,0 17,4
from 21800,1 to 35000,0 26,6
from 35000,1 to 50000,0 15,2
from 50000,1 to 75000,0 9,4
including
from 50000,1 to 59250,0 3,5
from 59250,1 to 75000,0 5,9
from 75000,1 to 100000,0 3,3
from 100000,1 to 250000,0 2,8
above 250000,0 0,4
For the reference: The exchange rate at March 23,2016 was 75,69 RUB per 1 EUR.
The cap of average payroll falls within the range from 5 000,1 to 75 000,0 Rubles per month. Let us assume that the distribution of the gross payroll rates within the range is described as even. Then the share of employees, whose average monthly payroll does not exceed
Table 4. - Value of insurance contributions' collection ratio for mandatory pension insurance in 2012-2014 [3]
59 250 Rubles, makes 87,6% (see table 3.).
The dynamics ofcollection of insurance contributions' ratio for mandatory pension insurance over the last three years are characterized by the values presented in table 4.
2012 2013 2014
Collection Ratio,% 98,7 98,7 98,7
In view of preserving the value of ratio at the level of 98,7 during three years we will use that particular value in our present calculations.
We will determine a share of a transfer from the federal budget for compensation of shortfall in income of the PFR's budget.
In spite of the fact, that the amount of transfer was increasing, in absolute terms, practically during all the past five years, its share in 2012-2014 was declining. However in the last two years the dynamics turned round and its share in the planned PFR budget for the year 2016 has practically reached the value of the year 2012.
Results and discussion
Having received all necessary values of indicators required for one percent's value assessment of insurance contributions, we will calculate it using formulas [1] and
[2]. The estimated data are presented in the table 5.
Proceeding from the calculations, the implementation of liability to pay insurance contributions for mandatory pension insurance by the insured person at the rate of 2% of employment earnings is likely to attract about 295,8 billion Rubles into the budget of the Russian Federation Pension Fund according to the data for the year 2015. Initially, in the year 2015, it was planned a PFR's budget deficit amounted to 431,3 billion Rubles. After that, as a result of the decrease in the amount of the actually collected insurance contributions and increasing adjustments of insurance pensions amounts by 11,4% the size of deficit has grown by 258,6 billion Rubles and became 689,9 billion Rubles. Implementation of liability to pay 2% by employees themselves potentially could be effective in terms of the year 2015.
Table 5. - The assessed value of one percent of insurance contributions for mandatory pension insurance in 2015 [8; 5]
Share of employees with earnings not exceeding the ceiling value of the base for CPI insurance contributions,% Payroll Fund bln. Rubles. Collectability of insurance contributions,% Share of a transfer for compensation of shortfall in income of the PFR's budget,% Value of one per cent of insurance contributions, bln. Rubles.
87,6 18 599,0 98,7 8,0 147,9
Background information: Value of two per cent of insurance contributions for CPI, bln. Rubles. 295,8
CPI - mandatory pension insurance
For the reference: The exchange rate at March 23, 2016
If we assume, that in 2016 the potential revenue increase gained through implementation of liability to pay extra 2% will remain at the level of the year 2015 it will help to reduce an expected deficit of PFR budget from 810,5 billion Rubles (10,8% of the total budget revenues) to 514,7 billion Rubles (6,8%).
The increase of the aggregate rate of insurance contributions for mandatory pension insurance up to 24% (22% - on the part of employers + 2% - on the part of employees) will make it possible in the long run to come nearer to the financial stability of PFR system however the chances to succeed are slim.
It is important also to define in advance for what purpose the incoming insurance contributions will be used: (1) for the financing insurance pensions or (2) to finance the funded pensions or (3) it will be allowed for employees to make a choice between (1) and (2).
If these 295,8 billion Rubles will be used for the financing of the funded pension, this case should be clarified additionally. For example, if an employee accumulates a part of the mandatory funded pension using his own contributions, it seems advisable to reduce contributions for the funded component of the pension to be paid by his employer and increase contributions for insurance pension by a prescribed value. Otherwise, the increase of contributions will not be efficient.
Growing the aggregate rate of insurance contributions for mandatory pension insurance should result in the long-run increase of the retirement benefits' level for population.
However, the implementation of liability to pay insurance contributions on the part of employees, on the one hand enables to attract additional resources through legalization of labor activity, on the other hand — additional problems with irresponsible part of working population, who may not be ready for payment of additional insurance contributions due to low level of salaries.
Another way to avoid a deficit of PFR is to eliminate of ceiling value of the base for accrual of the insurance contributions [1], [6].
is 75,69 RUB per 1 EUR.
For example, the elimination of ceiling value of the base for accrual of the insurance contributions for mandatory pension insurance will make it possible to attract additional funds amounted 403,47 billion Rubles. The calculations were made according to the formula:
C1 = PF * GCR * (1 - TS) * CC * GCR [3]
Where C1 — an expected amount of insurance contribution inpayments for mandatory pension insurance;
PF — Payroll Fund (the actual value of the indicator will be calculated by Rosstat (Federal State Statistics Service), and a projected one- by the Ministry of Economic Development of Russia)
TS — a share of a transfer from the federal budget for compensation of shortfall in income of the Fund budget in connection with establishing of reduced rates for payment of insurance contributions for CPI (to be indicated in the explanatory note to the draft of the federal law on budget (forecast) or on the implementation of the PFR budget (actual);
CC - ratio of insurance contribution collectability);
GCR — generally established insurance contribution rate for mandatory pension insurance.
Thus, taking into account the insurance contribution inpayments on the part of employees the PFR revenues are expected to increase by 735,96 bln. Rubles in aggregate. But, it is always necessary to take into account the previously described growth of liabilities to current and future pensioners.
Conclusions
As we can see from the results of the analysis, PFR could get from 295 to 400 thousands Rubles if the proposed steps will be performed. These amounts could cover at least a half of the current PFR's deficit. For instance, the introduction of an additional contribution amounted 2% of the employee's income would reduce the expected budget deficit of PFR from 810,5 billion Rubles (10.8% of the total budget revenues in the year 2016) to 514,7 billion Rubles (6.8%).
Table 8. - Forecast of receipts from payment of insurance contributions for mandatory pension insurance in case of elimination of ceiling value of the base for accrual of the insurance contributions [8], [5]
Payroll Fund bln. Rubles Rate of insurance contributions to CPI,% Collectability of insurance contributions,% Share of a transfer,% Expected amount of insurance contribution inpayments for mandatory pension insurance, bln. Rubles
2 18 599,0 22,0 98,7 8,0 403,47
3 18 599,0 24,0 98,7 8,0 440,16
For the reference: The exchange rate at March 23, 2016 was 75,69 RUB per 1 EUR.
Moreover, introduction of updated legislation, imposing obligations on employees to pay an additional 2% of their wage will contribute legalization of salary payments, because in case of non-payment of pension contributions, the employee will bear the administrative responsibility. Along with this, there is still a risk of the opposite effect.
Another important effect of the proposed steps is strengthen the insurance character of the pension system and confirmation of thesis about the nature of pensions as deferred earnings.
Finally, all the proposed might reduce, but not to avoid completely the deficit of the PFR.
There are some tools, that may be used in future by the Russian Government to increase the financial stability of Pension Fund of Russia:
- increase in the retirement age, which at the moment is the lowest in the world (in Russia retirement age is 55 years old for females and 60 years old - for males);
- "freezing" of pensions' payments to working pensioners;
- financing the funded pension by the employees themselves (in the size, for instance, form 2-6% of their individual payroll fund), while maintaining the size of the mandatory contributions by employers to the Pension Fund in the existing level of 22% of employees payroll fund;
- cancellation of second tier funded pension and its incorporation into the public insurance pension (this option can be used in case of further deterioration of the economic situation in Russia and the occurrence of Pension Funds' insolvency scenario);
- reforming of early pension insurance system and determination of those categories of citizens who will not be subject to mandatory state pension insurance provision, for example, individual entrepreneurs (for these categories may be created the special retirement schemes on sectoral/industrial or occupational basis).
Only a complex of measures having an effect on the revenue and expenditure sides of the Russian mandatory pension insurance system will make it possible to avoid deficit in the future by Pension Fund of Russia.
References:
1. Ageeva E. V. On pension schemes used in the state pension system//Izvestiya of Irkutsk State Economics Academy, - 2014, - No 3 (available at http://eizvestia.isea.ru/reader/article.aspx?id=19109)
2. Direction ofthe Russian Government from the 25th ofDecember, - 2012. - N 2524-r "On the long-term development strategy of the pension system of the Russian Federation" (available in Russian at: URL: http://base.garant.ru/)
3. Explanatory notes to drafts of the federal law on the implementation of the PFR budgets for - 2012-2014 (available at: URL: http://base.consultant.ru/)
4. Federal laws on the implementation of the Russian Federation Pension Fund budgets for respective periods (2011-2014 and 2015-2016) (available at URL: http://www.pfrf.ru/info/order/budzhet_pfr/)
5. Forecast of the socio-economic development of the Russian Federation for 2016-2018 of the Ministry of Economic Development of the Russian Federation (available at URL: http://economy.gov.ru/minec/about/struc-ture/depmacro/20151026)
6. Odinokova T. D. Actual problems of the implementation of the pension reform in Russia: Proceedings of the Irkutsk State Academy of Economics, - 2015. - T. 25, - No 3. - P. 485-494.
7. Pensions at a Glance - 2015: OECD and G20 indicators, OECD, Publishing, Paris 2015 (available at URL: http://dx.doi.org/10.1787/pension_glance-2015-73-en)
8. Rosstat Statistical Bulletin, published on 17.07.2015 (available at http://www.gks.ru/wps/wcm/connect/ros-stat_main/rosstat/ru/statistics/)
9. The Federal Law from 28 December 2013 N 400-FZ "On Insurance Pensions" (ed. by 29 December, 2015) (available in Russian at: URL: http://base.garant.ru/)
10. Vladimir Nazarov, Sergei Sinelnikov-Murylev. A Strategy for Reforming the Russian Pension System//Economic policy, - No 3, - 2009 (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2111085)
11. Yuldashev R.T., Odinokova T.D. Risky life insurance: products of mass consumption // Strakhovoe delo. 2015. № 12 (273). P. 48-60.
DOI: http://dx.doi.org/10.20534/EJEMS-17-1-53-55
Sharku Gentiana, University of Tirana, Faculty of Economics, Albania E-mail: [email protected]
Investment Alternatives for Individual Investor in Albania
Abstract: During the communism period, characterized by centralized economy, the sole investing alternative for population has been depositing the money in the sole financial saving institution — Institute of Savings and Insurance. After twenty seven years of free market economy, financial system in Albania is a bank based system. Therefore, bank products are the primary and the classic investment alternative for the major part of population. Are any other opportunities for investment by Albanian investors? This article aims to point the alternatives used by individual investors in Albania and the reasons for which using such alternatives.
Keywords: bank deposit, treasure bill, investment fund.
Introduction have been established. In the end of 2015, the financial
After the transformation of the economy from the system of Albania is composed of the following institu-centralized to open free market economy (in 1991), dur- tions, with respective share of the actives to total financial
system actives:
• Banking sector - 90.13 percent;
• Investments funds - 4.64 percent;
• Insurance companies - 1.88 percent;
• Other financial institutions (loan and credit institutions, union credits, leasing and factoring companies, private pension funds) — 3.35 percent.
The financial system in Albania is supervised by two authorities: Bank ofAlbania and Albanian Financial Supervisory Authority. The legislation regarding the financial sectors has been radically changed and improved over years. There is no stock exchange in Albania. It has been opened in 1996 and it has been closed down in 2014. The absence of the stock exchange explains the few investment alternatives. Despite the various financial institutions operating in Albania, the most used investment alternatives from Albanian citizens are: banking deposits, government securities and investments funds. The aim of the article is to describe the investment alternatives used by the Albanian citizens, in order to point out the characteristics of Albanian individuals' investment. The article is organized in five sections. After the introduction, the next section describes the banking deposits.
ing the last two decades the financial system has been radically changed. Until 1990, the financial system has been composed of the Central Bank (functioning as a state bank and as a commercial bank as well), one depositary institution (Institute of Savings and Insurance), and one bank (Agriculture Bank, which had the monopoly of crediting the agriculture enterprises and cooperatives). All have been state owned institutions. No other financial institutes existed. Only after 1991, the foreign capital entered in the banking sector. During the first decade of transformation process (1991-1999), other commercial banks have been established and several credit unions have been opened. Therefore the formal investing alternatives have been very few. During this period, the pyramidal schemes have been designed, which provided extremely high interest rates. The most part of the Albanian citizen's savings was invested in these informal institutions. After their closure in 1998, many of Albanian investors have lost their money. It was a very disappointed investment experience for Albanian investors. Only after 2000 the real transformation of the financial system began: the existing state owned financial institutions have been privatized, and new financial institutions
