Russia’s Pension Put-Off Could Have Consequences

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Since 2013, Russia has diverted more than $30 billion worth of pension contributions to plug holes elsewhere in the country’s budget.

Pension360 covered a brief, abrupt press conference earlier this month where Russia’s Economy Minister hinted the country could take money from the pension fund to assist companies hurt by Western sanctions.

Now, that has come to fruition – Russia will withhold over $8 billion from its pension fund, and much of that money will go to a “reserve fund” to aid state-owned companies affected by sanctions.

But there are consequences to this decision, writes Mark Adomanis, a Forbes contributor. From his editorial in the Moscow Times:

Rather than long-term improvements to Russia’s economic competitiveness, this money will be spent, in business parlance, “just to keep the lights on.”

…The costs [of withholding pension payments] will grow exponentially more severe the longer they are incurred.

Due to demographic changes that have seen the number of young adults halved, one of two things will happen: Russia’s pension system will need a lot more money, or pensions will become a lot less generous. There is simply no other way to make the math work. Maybe there is a better example of the tension between the short and long terms, but I can’t think of a more illustrative example than raiding the pension fund to give a bunch of money to Rosneft.

Russia can get away with such short-term-focused policies for a while. As Adam Smith noted, there is a lot of ruin in a nation, and even with all of the mounting difficulties Russia will likely find a way to stumble through. But in mounting such a panicky and reactive response to U.S. and EU sanctions, Russia is setting itself up for some really serious difficulty a few years down the line.

Earlier this year, a decision by Russia to freeze its pension contributions caused “deep disagreement” among government officials. The money was used to plug budget holes elsewhere.

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