Players compete in the opening match of the FIFA World Cup between Russia and Saudi Arabia at the Luzhniki stadium in Moscow, Russia. (Photographer: Andrey Rudakov/Bloomberg)

World Cup Gives Russia Cover for Unpopular Pension-Age Increase

(Bloomberg) -- With Russia gripped by World Cup fever and the national soccer team preparing for the opening game, the government moved ahead with an announcement the public has been dreading for a decade.

The country that has one of the lowest retirement ages in the developed world will next year start to gradually push back the time people will be allowed to leave work, if the cabinet’s proposal is accepted by lawmakers. Prime Minister Dmitry Medvedev said in Moscow on Thursday that a draft bill will be sent to parliament “in the nearest future” so it can be voted on before a summer break -- putting it on track to be adopted before the World Cup ends on July 15.

Russia’s aging population is weighing on the economy and the federal budget, which faces an increasing burden as the labor force shrinks. Calls by some officials over the past decade to raise the retirement age have been met with strong public opposition, even though pensions are low and many choose to continue work during their retirement. The timing of the announcement may help keep the reaction muted this time.

“The chosen moment is good: the start of the summer, minimal social activity and a ban on mass gatherings during the World Cup,” Sergey Aleksashenko, economist who was a central bank deputy chairman in 1995-1998, said on Twitter. “From all the possible options to increase the retirement age, the government has chosen the toughest one.”

‘Live Longer’

Under the proposal, the retirement age for men will rise to 65 from 60 by 2028 and for women to 63 from 55 by 2034, Medvedev said. The move was needed to boost the living standards of pensioners and to balance the labor market, he said. At-birth life expectancy is forecast by the Federal Statistics Service to rise to 74 years for men and to 82 years for women in 2034, when the pension-age increases should be fully imposed.

“People now don’t just live longer, they remain active,” Medvedev said. “Many at this age are full of energy and desire to work, many still have small kids.”

As part of a package of budget measures, the government also proposed increasing the value-added tax from 2019. The VAT will rise to 20 percent from 18 percent if the government’s plan is approved. Medvedev suggested to complete a so-called “tax maneuver” in the oil industry over a six-year period starting in 2019. The shift would include abolishing export duties for crude and oil products, and raising a production levy.

All these tax changes should boost economic growth, Medvedev said.

The increase in the retirement age may add 0.5 percentage point to economic growth in the medium-term, according Oleg Kouzmin, an economist at Renaissance Capital in Moscow. Gross domestic product will rise less than 2 percent a year through 2020, according to a Bloomberg survey.

The decisions on raising the pension age and the VAT were made on Thursday because that was when the positions of all interested parties “were agreed on,” Medvedev’s spokeswoman Natalya Timakova said by phone.

The measures, taken together, may be a risk to the living standards of people close to retirement, who won’t have the option of collecting a pension and part-time wages at the same time, according to Natalya Zubarevich, head of regional studies at Moscow’s Independent Institute for Social Policy.

Poverty Effect

“Usually people get a small pension and also a salary -- in Russia a pension is additional income and now it will be gone,” she said by phone. “An increase in VAT is a tax on final consumption and means an acceleration in inflation, so prices for goods will rise, but incomes will be reduced.”

President Vladimir Putin aims to cut poverty by half during his new term, which will run through 2024. More than 19 million people , or 13.2 percent of the population, were recorded as living in poverty in 2017, according to official statistics.

“What is encouraging is that the government is moving ahead with the changes at the time when oil prices are rising, which has taken away the urgency to change the fiscal framework,” said Liza Ermolenko, an economist at Barclays Capital in London. “In the past, the government often opted to delay reforms during periods of high oil prices.”

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