Modeling the transition from pay-as-you-go to a fully funded pension system in Russia

TL;DR

This paper uses an Overlapping Generations Model to analyze Russia's transition from a pay-as-you-go to a funded pension system, highlighting long-term welfare impacts and transitional burdens on all generations.

Contribution

It is the first study applying an Overlapping Generations Model to simulate Russia's pension transition, revealing welfare effects and economic implications of the reform.

Findings

Long-term welfare of pensioners slightly decreases.

Transition imposes heavy burdens on current generations.

Transition can cause economic growth or recession depending on scenarios.

Abstract

In countries with a growing number of elderly and a shrinking workforce, one of which is Russia, it becomes impossible to maintain a solidary pension system and a need to switch to a more stable funded system appears. This paper analyzes various scenarios of Russia's transition to such a system. This is the first study on the Russian economy in which an Overlapping Generations Model is used to simulate the pension transition. It is demonstrated that in the long term, the transition to a funded system slightly reduces the welfare of pensioners, and during the transition, the situation of pensioners deteriorates strongly. However, it is also important to emphasize that the transition imposes a heavy burden on all generations living during the reform, they are forced to consume less and greatly change their savings, while also often starting to work more. Such conclusions are made concerning average population cohorts, and the results may not be the same for different groups of individuals within these cohorts. In different scenarios, the pension system transition can cause both economic growth and economic recession, as well as a corresponding increase or decrease in wages and consumption.