Income transfers in Russia : problems and some policy directions

The decision to move to a market economy sets in train two major forces. 1. The fall in output has led to a reduction in personal incomes and created a fiscal crisis. 2. A widening earnings and income distribution is a result of wage and price liberalisation, and is an inherent part of the reform. The change leads to rising unemployment and increased poverty. It also has major administrative implications. Thus, by its very nature, the reform process creates forces which require a major reshaping of the social safety net to address three major issues: poverty relief, cost containment, and strengthening administrative capacity. Of the recommendations, five are paramount. 1. The minimum level of the major benefits should be at or above subsistence and, at least in the short run, should be fully protected against inflation. 2. Cost containment implies that, in the short run, benefits above the minimum should be protected only to the extent that resources permit; and, to the maximum extent compatible with political realities, the right to combine full old age or invalidity pension with more or less full-time work should be withdrawn for individuals below normal retirement age. 3. Administrative capacity should be strengthened. In particular, the administration of cash benefits requires modernisation. Such a process is crucial both to ensure effective benefit delivery, and to containing costs. 4. Social insurance and pension contributions should be shared between worker and employer, with the worker's contribution appearing on his/her payslip. 5. Short-run problems should be addressed in a manner consistent with long-run policy design. In particular, as soon as economically and administratively feasible, the relationship between social insurance benefits and individual contributions should be strengthened.