Pension Costs To Hit Russian Firms

by Tatiana Smolenska, Tax-News.com, Moscow

06 October 2008

Russian plans to modernize and enlarge the country's pension system will help capital markets but mean extra costs for business, it became clear when Prime Minister Vladimir Putin announced sweeping reforms.

Until now, Russia has operated a 'pay-as-you-go' system of social security funding. A set of three separate 'funds' (which weren't) for pensions, medical and social insurance existed until 1994, when they were replaced by a 'unified social contribution' of 26%, which declined on incomes of over RUR300,000. Effectively the government is going to return to the old system, with the difference that pension costs, by far the largest of the three, will be funded through a series of privatized investment funds.

While the creation of a large and stable pool of investment capital can only help to stabilize Russia's fevered markets, the bad news for business is that the total cost of social contributions will rise to as much as 34% of the wage bill on incomes up to RUR415,000.

Pensions will be increased in several stages over the next two years, by 37% in 2009 alone, and the new contribution structure will also be phased in over the same period. The government has talked vaguely about measures to soften the impact of the new system on smaller businesses, but has made no specific announcement.

Recommended