Russian economy could be out billions with pension fund freeze

For the second consecutive year, the Russian government have agreed upon a decision to freeze the amount of pension contributions that are allowed for investment. A response given by the ministry of social protection and labor suggested that the funds would be utilized to finance current pension payments instead. Contributions for last year, (2013) equaled approximately 550 billion rubles, which equates to about $15.2 billion.

For the second consecutive year, the Russian government have agreed upon a decision to freeze the amount of pension contributions that are allowed for investment. A response given by the ministry of social protection and labor suggested that the funds would be utilized to finance current pension payments instead. Contributions for last year, (2013) equaled approximately 550 billion rubles, which equates to about $15.2 billion.

These finances have already been frozen by the government, and they aim to do the same with the savings of approximately 700 billion rubles that have been gathered during 2014. Although the ministry of labor and social protection believe that this move is necessary to finance current pension payments, the move could cause problems:

* Leaving important Russian companies lacking in investment. 

* Forcing banks to enhance rates of interest. 

* Higher costs for debt refinancing and loans. 

The current system in Russia

The current system regarding pensions in Russia was first introduced in 2003, and allows citizens the opportunity to manage and control a fraction of their pension savings, helping to influence and inflate the size of their future pensions. Employers generally contribute approximately 22% of their worker’s salaries into the pension fund, 16% of this amount then forms the insurance segment of the pension and the payment of current policies, while a further six percent is invested into an accumulation fund.

However, this year, and next year, the accumulative portion of the payments are going to be redirected towards the distribution component instead, meaning that the finances that are collected from employers will instead be used to pay current retirees. Economists have begun to explain that the deficits that exist within the pension fund are taking place as a result of the demographic decline of the country. Although twenty to thirty years ago there were approximately six workers to every one pensioner in the population, there are now fewer than two, with contributions which do not match current needs.

This is the same thing happening in America with social security. The democrats ignore it though and act like the problem will solve itself. How wrong they are!

In a sense, the cost of money in Russia is beginning to rise, and internal refinancing has become a more expensive endeavor, resulting in a devaluation of the ruble and a rise in foreign exchange rates. The negative effects that this economic problem is having are starting to impact Russians already, with loans becoming two percent more expensive, and interest rates starting at 10%.

No worries though, Putin will just take over Ukraine and steal all their assets while Obama plays golf. That seems to be Russia’s solution rather than cutting taxes and having a stable democracy.

Who will suffer, missing out on pension investment?

The mechanism that is used for investing in pension contributions has envisaged that the money acquired via management firms will be invested mainly in major Russian companies, as well as corporate and government bonds.

Russia is slowly collapsing

The economic changes will result in the cost of debt refinancing and loans growing larger throughout 2015 for corporations and banks, and for regional and federal finance ministries. It is currently difficult to estimate the extra figures that will have to be paid, but experts suggest that they will be comparable with the amount of frozen funds, such as the 700 billion rubies expected to be frozen this year.