To remind, in looking for funds to cover the PAYG deficit, the government ruled last year to i) abolish the funded part of the system for future pensioners whose savings were managed by the state management company (VEB) and ii) freeze it for one year for the rest whose savings were managed by the private pension fund industry. This helped to ‘save’ more than RUB 550bn last year; the federal budget reduced the transfer to the PAYG system and redistributed the released spending capacity to priority sectors (mostly the military).
We noted back in autumn last year that once the government steps onto a policy path of short-term stopgaps, it would be hard to reverse. Doing so would require either a fast track unpopular reform of the PAYG system (involving a higher pensionable age or slower pension indexation) or a cutback in the spending commitments that these stopgaps help to fund.
Currency weakness has bought the government some space for this year and next, but apparently not enough both to unfreeze the funded part and continue increasing military spending. The intensification of the budget debates in the public space over the last month – first, tax increases and now pension system – suggests that the government is trying to sound out public sentiment as to which is the lesser of two evils. Our opinion is that containing military spending growth (as well as increasing the efficiency of other spending lines) is the better solution, although the current geopolitical context makes this policy option politically complicated.