Pension problems are hardly unique to the U.S. Russia’s system, for example, looks worse than unsteady. The government there has decided, for the second consecutive year, to spend the money that was supposed to go toward investments for future pension payments on current payments instead. Russia Beyond the Headlines reports:
Contributions for 2013, amounting to some 550 billion rubles ($15.2 billion), have already been frozen, with the government intending to do the same with a further 700 billion rubles’ worth of pension savings for 2014.The move, which the Ministry of Labor and Social Protection says is necessary in order to finance current pension payments, will leave major Russian companies without investment and will force banks to raise interest rates.
The system, as originally conceived, was supposed to encourage employees to save for retirement. Out of the 22 percent taken out of their paychecks for pensions, workers were supposed to be able to put 6 percent into private investments (leaving the other 18 percent for present-day pension payments). But this year, like last year, all 22 percent of employees’ contributions will go directly to pay off the fund’s current obligations.So much for encouraging fiscal responsibility. Funds are falling short because the workforce is aging, but skimping on investments now will make things even worse down the line, when Russia’s population is even older. Russia is showing us why propping up a financially unsustainable present by depriving the future of investment returns isn’t a good idea—which makes us wonder why some U.S. states seem to want to follow a similar path.