Kudrin: Oil Fund Can Save Pensions

Money from Russia's growing oil windfall fund can help pay pensions for future generations, Finance Minister Alexei Kudrin said in an interview published in the government's Rossiiskaya Gazeta on Monday.

"Spending this money would be harmful because it is not backed up by anything. In the future, when the economy is growing, this money could save a whole generation," Kudrin said.

Russia's pension fund, based on a Soviet-style pay-as-you-go system, expects to run a deficit of 94 billion rubles ($3.29 billion) in 2006 and its problems could steadily worsen as the active population goes into decline.

A fully funded pensions system is gradually being phased in.

Monthly pensions averaged 2,325 rubles ($81.35) in June 2005, roughly one-third of the average salary and only 26 percent higher than the minimum subsistence level.

The stabilization fund, which collects revenues from windfall oil taxes, reached $38.3 billion as of Nov. 1.

State pensions remain the main source of income for 29 million elderly people in Russia, where the first few private pension funds have appeared only recently and have not yet won over the trust of the public.

Meanwhile, the government has barred people born before 1967 from participating in a pension savings scheme it runs under a pension reform plan initiated in 2002. Many middle-aged people who are still working are trapped in the old system.


The state only guarantees a basic pension of 450 rubles.

"Since we do not have enough money for pensioners now, it would not have been fair to say: 'Let's better save for younger ones,'" Kudrin said. "Therefore we had to give in, but the problem of younger people remains."

Kudrin said Russia had four choices: raise employer tax, promote mandatory or voluntary pension saving schemes or use stabilization fund money.

"I think the correct choice is between the third one, voluntary saving schemes, and the fourth, using stabilization fund money," Kudrin said, but did not explain exactly how he envisaged the money being used to shore up pensions.

However, with most Russians struggling to make ends meet and very little money to put aside, voluntary schemes are unlikely to prove very popular. "The majority ekes out a living from one pay check to another, and our stabilization fund could thus be made to work for future pensions," Kudrin said.

Earlier this year, the government faced popular protests after a law replaced various benefits in kind, such as free public transport, with small cash handouts for many vulnerable social groups including pensioners.

Russia's population has been shrinking since the collapse of the Soviet Union in 1991.

The World Bank said in its report published last week that the decline of the working-age population will be especially visible after 2007, a result of low birth rates during the turbulent reform years in the 1990s. The World Bank urged Russia to put some of its oil riches aside for future generations.