Business to pay for pension increases

The Russian government wants to triple pensions for less well-off. But it will come at the expense of business which will have to pay higher taxes.

$160 a month – that is the average pension of a Russian citizen – well below the cost of living.  Health Minister, Tatyana Golikova says that will change with the radical reform of the pensions system proposed by the government.

“From January 2010, the current unified social tax will be replaced by insurance payments. They would amount to 34 % of the payroll fund. 26% will go to the Pension Fund, 5 % to the Mandatory health Insurance Fund, and the rest to the Social Insurance Fund.”

Like the current unified social tax, the insurance fees will be paid by employers. But unlike the existing system the new one targets the poor. Companies will only pay for those who earn less than 415, 000 Rubles a year – which is 85% of Russia's population according to Natalya Orlova, Chief Economist at Alfa-Bank.

“We have 15% of the population which is receiving revenues higher than 415 thousand Rubles, these people will have to take care of their pension future and their pension savings and about their medical needs themselves.”

The measure is designed to compensate for rising inflation by increasing pensions. But it also means increasing the tax burden from 26 to 34%. And this conflicts with the government's promises.  The President of the Russian Union of Industrialists and Entrepreneurs, Aleksandr Shokin says the tax rise could scare off investors.

“Foreign companies coming to Russia first of all think about costs, which will rise when the new system comes into force. We have to think about global competitiveness and create a well-balanced tax system to attract more direct investment. We think it's possible to keep the social tax at a rate of 26%.”

But other experts point to rising inflation and insist the measure is needed to cover a growing deficit in the pension fund.