Macroeconomic Effects of Pension Reform in Russia

IMF Working Papers, August 1, 2008

Source details

Putting the pension system on a sustainable footing arguably remains the biggest challenge in Russia's economic policies.
The debate about the policy options was hitherto constrained by the absence of general equilibrium analysis.
This paper fills this gap by simulating their macroeconomic effects in a DSGE model calibrated to Russia's economy—the first of its kind to the best of the author's knowledge.
The results suggest that a minimum benefit level in the public system should optimally be financed through lower government consumption, while higher taxation of labor and capital should be avoided.
Reducing public investment spending is superior to increasing consumption taxes unless investment generates high rates of return.

The DSGE model calibrated to Russia's economy provides general equilibrium analysis previously lacking in the policy debate.
Optimal financing of a minimum public pension benefit:
- Prefer financing through lower government consumption.
- Avoid higher taxation of labor and capital.
Trade-off between public investment and consumption taxes:
- Reducing public investment spending is superior to increasing consumption taxes unless investment generates high rates of return.

Finance a minimum benefit level in the public pension system by reducing government consumption.
Avoid increasing labor and capital taxation to finance pension benefits.
Prioritize evaluation of public investment returns; only when investments generate high rates of return should reductions in investment be avoided in favor of consumption tax increases.

Source: "Macroeconomic Effects of Pension Reform in Russia", David Hauner, IMF Working Papers 2008, 201 (2008).