Replacement rate of the lost wages by pension: Its economic meaning and problems of application in Russia

ISSN 1075�7007, Studies on Russian Economic Development, 2014, Vol. 25, No. 2, pp. 166–175. © Pleiades Publishing, Ltd., 2014.Original Russian Text © A.K. Solov’ev, 2014.

166

Economic meaning of the retirement replacementrate. The economic bases for the formation of aneffective Russian insurance pension system were laidin the “Long�Term Development Strategy of the Pen�sion System of the Russian Federation,” approved onDecember 25, 2012, by the government of the RussianFederation (hereinafter, the Strategy) [1]. Separateelements of the indicated strategy began to be imple�mented in 2013 (an increase in pension payments forself�employed categories of insured persons, the intro�duction of an additional insurance rate for employeeswho have the right to early retirement pension, etc.).However, the most principal positions of the long�term development of the pension system have not yetreceived any legal or economic specification. Amongthem, the central place is occupied by the creation ofan economically grounded and socially equitablemechanism for the formation and implementation ofinsurance pension rights.

The actuarial substantiation of the long�term bal�ance of the pension system is the most urgent in thecomplex of unsolved problems in this field, along withan increase in the general level of pensions, improve�ment of the tariff policy, and reforms of early retire�ment pensions. This being the case, the balance in theinsurance pension system should be understood as byno means a current budget balance (the absence of abudget deficit) but only as a balance of accrued pen�sion rights and financial security of public pension lia�bilities [1].

This implies that the effectiveness of any insurancesystem should be measured according to the level ofinsurance reimbursement in case of a specified insuredaccident with respect to the amount of an insurancepremium paid.

As applied to solving practical problems of assess�ing the development of the modern pension systembased on the labor nature of the formation of pension

rights for every citizen1, the evaluation of the insurancepension system must mean the ratio of the amount ofa fixed retirement pension to the normative value ofpension rights (within a comparable period of time).

In turn, the value of pension rights in the insurancepension system performs the function of the cost of aninsurance premium in the event that it is calculatedbased on the normatively fixed amount of a tariff, thepayment of which during the normative length of ser�vice provides the required level of material consump�tion of a pensioner during the entire period of life.

An actuarial insurance balance formula can accu�rately determine and quantitatively measure eachmentioned indicator [2].

In addition to the completeness, accuracy, and reli�ability that are assigned to the calculated indicators,the problem is to make allowance for the conditionsfor ensuring the universal accessibility of the pensionsystem for different categories and demographicgroups of the population, as well as its economic andsocial justice.

The economic validity and social justice of pensionprovision is shown by the world experience of success�ful pension systems to be achieved by strictly imple�menting the basic principles that reflect the unique�ness of social insurance systems. These include:

1 The modern social state provides the corresponding social ben�efits to citizens, who do not take part in labor relations, as finan�cial support upon reaching some age, in case of disability, andduring the loss of the breadwinner. In our country, such citizensalso receive an analogous benefit that however contains the wordpension in its definition, which does not correspond to its eco�nomic nature and introduces confusion in developing the pen�sion provision methodology from the theoretical standpointsand hampers the implementation of the insurance principles ofthe pension reform from a practical angle of view, since citizensidentify a social pension with a guaranteed pension minimum.

SOCIAL PROBLEMS

Replacement Rate of the Lost Wages by Pension:Its Economic Meaning and Problems of Application in Russia

A. K. Solov’evDepartment of the Pension Fund of the Russian Federation, Moscow, Russia

Received June 11, 2013

Abstract—This article examines the nature and purpose of the replacement rate as a key indicator of theeffectiveness of the insurance pension system, which allows one to estimate the level of pension payments forthe lost earnings of an employee. It analyzes the standard requirements to a typical recipient of a retirementpension for calculating the replacement rate and touches upon the problems of the adequate application ofthis index as a landmark for the implementation of the pension system in the Russian Federation.

DOI: 10.1134/S1075700714020099

STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 25 No. 2 2014

REPLACEMENT RATE OF THE LOST WAGES BY PENSION 167

—the principle of equivalence of rights and obliga�tions;

—the principle of solidary redistribution [3].

The principle of equivalence of rights and obligationsenables economic incentives to be established for par�ticipants in the pension insurance system in accor�dance with an assigned target landmark, i.e., receptionof retirement pension at “a standard rate.” This “stan�dard rate” is formalized in full accordance with objec�tive “nonsystem” conditions: macroeconomic param�eters adopted for long�term budget projects and thedemographic characteristics of the population (gen�der, age, birth rate, mortality indicators, etc.).

In the modern internationally established practice,a standard rate of retirement pension is applied forstate pension provision that guarantees every citizen“a decent standard” of material support in case of aninsured accident2. This standard rate is recommendedat the following amounts: at least 40% of the lost wagesof a pensioner (ILO Convention no. 102)3, more than45% of the lost wages (ILO Convention no. 128)4, and50% (ESSC)5. However, in all cases, this amount maynot be less than the minimum permissible level of con�sumption of a pensioner, which does not enable thisindicator to be directly compared with domestic coun�terparts, such as the subsistence level of a pensioner(SLP), minimum rate of labor payment (MRLP),average statistical salary, and the average amount of theretirement pension.

Solidarity that is another principle of insurance pen�sion provision makes it possible to expand the scope ofcompulsory insurance by the economically justifiedredistribution of both current incomes of financialresources for the benefit of insured persons (frommore wealthy citizens) who have formed their pensionrights at an amount, which is insufficient for norma�tive consumption, and future (forecasted) financialresources between able�bodied and disabled citizens.

The economic mechanism of solidarity redistribu�tion must not be arbitrary, so that it will not violate thefirst principle of insurance: the equivalence of rights

2 It is important to emphasize that economically developed coun�tries supplement state programs with fixed amounts of pensionswith both public and private (corporate and individual) pensionprograms with fixed contributions, as pension provision isimproved, the population is covered with pension services morewidely, the standard of well�being grows, and demographicparameters change (growth in the expected lifespan and, corre�spondingly, the number of pensioners). The latter programs arepracticed in different forms: both purely saving��accumulativeand conditionally accumulative forms (with elements of solidaryredistribution).

3 ILO Convention no. 102 “On the Minimum Social SecurityStandards” (Geneva, 1952) [4] (hereinafter, ILO Conventionno. 102).

4 ILO Convention no. 128 “On Disability, Old�Age, and Survi�vor's Pensions” (Geneva, 1967) [5].

5 The European Social Security Code, ESSC (Strasbourg, 1964)[6].

and obligations. For this purpose, the scales of redis�tribution must on the one hand be legally establishedfor an entire pension insurance period (under thedomestic conditions, it lasts 70–80 years) and on theother hand affect only the segment of formation ofpension rights without changing different methods forthe redistribution of pension obligations themselves.

In the context of the domestic legislative pensionstandards, this economic principle means that the fol�lowing can be subject to redistribution:

—the parametric characteristics of the tariff policy(the amounts of contributions, their structure, upperlimit of an accounting base, etc.);

—the minimum cost of an insurance year;—the minimum and normative pensionable ser�

vice, which may be both generally established andpreferential, etc.

This being the case, pension obligations must notbe redistributed during an entire pension insurancecycle. For insured persons, this means in practice thatthe state guarantees the level of material security thatis stipulated by the fixed amount of pension and corre�spondingly maintains the purchasing power of anearned pension during the entire actual period of sur�vival regardless of the changes in its normative value.

The economic essence of the replacement rate fol�lows from the economic essence of retirement pensionitself. However, there is still no methodologicallyaccurate definition of the object of public pension pro�vision, i.e., retirement pension. According to its insti�tutional nature in the system of market production andlabor relations, retirement pension is an instrument forthe material support of a worker in case of normativelyspecified events (insured accidents). In the interna�tional legal practice, old age, disability, and the case ofthe loss of the breadwinner (CLB) are taken for suchevents6.

The well�known standard formulation of “com�pensation for lost earnings” in the event of terminationof labor activity or a change in the employment condi�tions is only one of the ways to determine the amountof retirement pension [7, p. 57]. Thus, the age of apensioner, disability, or CLB must be an initial sign ofthe onset of an insured accident with the correspond�ing start of implementing pension rights at a standardrate (the payment of retirement pension).

Based on the economic nature of retirement pen�sion, the replacement rate is traditionally accepted asan indicator of the efficiency of the pension system inrelation to an object of the pension system (an insured(protected) figure) that is expressed in the ratio of his orher pension and previous earnings.

The replacement rate is calculated for pensioners,whose pensions are fixed in a year; moreover, the cal�

6 ILO Convention no. 102 [4], paragraph 1, clause 15; ILO Con�vention no. 128 [5].

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culation includes indicators of pension, salary, andbenefits for the same time interval, i.e., for themoment when the pension is fixed. However, unlikethe domestic practice of applying this indicator, theinternational practice requires that the existing meth�ods be reduced to generally accepted standards tomake comparisons.

The requirements for international comparisons ofpension provision are most completely reflected inILO Convention no. 102.

The replacement rate is calculated for a typicalrecipient (beneficiary) of each type of retirement pen�sion (old�age, disability, and survivor’s pensions). Thereplacement rate standard for a typical recipient ofeach type of pension is 40% of the previous earningswith allowance for the family benefits paid to a person,who does not differ from a typical recipient in thenumber and category of dependents.

Standard requirements for the characteristics of atypical recipient. A typical recipient (beneficiary) mustcomply with the requirements for sex, length of ser�vice, the number and category of dependents, and age(for old�age pension) that were established by ILOConvention no. 102 (Table 1). Men are taken for a typ�ical recipient for all kinds of retirement pension.

The requirements of ILO Convention no. 102 forthe age of a beneficiary are made only to recipients ofold�age pensions in order to protect their insurancerights: the maximum age of retirement must notexceed 65 years, which is fully observed in our country.

Due to the fact that retirement pension in the Rus�sian Federation is calculated based on the salary of aninsured person and that the payments formed andfunded at the expense of insurance contributions areprevalent in its structure, a typical recipient is chosenin accordance with article 65 of ILO Convention no.102, which implies that pension is calculated for a typ�ical recipient based on the salary of a male skilledemployee. Thus, the concept of a “typical recipient”and a “male skilled employee” are identical as regardswages.

With respect to a male skilled employee, severalvariants are stipulated:

(a) a mechanic or turner at a machine�buildingenterpise, including electrical machine�building;

(b) a person considered as a typical representativeof skilled labor employed in the main branch of eco�nomic activity and in its subdivision, where the highestnumber of economically active insured persons orbreadwinners of insured persons work;

(c) a person, whose salary equals or surpasses thesalary established for 75% of insured persons and isdetermined for a year or shorter period, as can beascertained;

(d) a person, whose salary is 125% of the averagesalary for all insured persons.

A typical recipient is chosen for each type of retire�ment pension with allowance for the availability ofstate statistics on his or her salary proceeding from thesimultaneous fulfillment of two conditions:

– the salary of a typical recipient ensures the bestreplacement rate;

– the replacement rate stipulated by ILO Conven�tion no. 102 for the corresponding type of pension isensured in no less than 50% of the total number ofemployed insured persons.

Information support for calculating the efficiency ofthe pension system when estimating the replacementrate. Statistical reports on labor and salaries accordingto the forms of the Russian State Statistics Service canbe used as a source of data on the salary of a maleskilled employee [8]:

—form P�4 “Information on the Number, Salary,and Movement of Workers” (for the full range ofenterprises and organizations, the periodicity ismonthly);

—form no. 1 “Information on the Distribution ofWorkers by the Amount of Salary” (April, every twoyears);

—form no. 57�T “Information on the Salary ofWorkers according to Professions and Duties” (Octo�ber, every two years).

Form P�4 is the most complete by the list of pay�ments taken into account in the structure of salaries. Itincludes payments for both worked and not workedtime, one�time incentives and other payments, food,residence, and fuel payments. The salary according toform no. 1 and no. 57�T does not include the follow�ing: year�end bonuses, one�time rewards for years ofservice that are paid once a year, one�time bonusesand incentives, including the cost of gifts, releasedbenefits, and other payments that have a one�timecharacter regardless of whether they are provided toseparate or all employees.

Obviously, the salary that was taken into account inform no. P�4 and forms nos. 1 and 57�T is not fullycomparable in structure (it will always be higher inform P�4).

Table 1. Requirements for the characteristics of a typicalretirement pensioner

Pension

Requirements

to the length of service of a recipient

to the number and category of depen�dents of a recipient

Old�age pension

30 years of contribution payments or employment

Pension�age wife

Disability pension


Wife and two chil�dren

Survivor’s pension


Widow with two children



The main disadvantage of forms nos. 1 and 57�T isperiodicity (every two years), and this makes it impos�sible to perform an annual analysis of the dynamics ofchange in the salary of a worker taken for a qualifiedone to calculate the replacement rate. Another disad�vantage of reporting forms nos. 1 and 57�7 in compar�ison with form P�4 is that they incompletely cover theeconomic activities and structure of surveyed organi�zations (surveys are not performed at small andmicroenterprises), as well as the number of employees.

Forms nos. P�4 and 1 do not contain informationon an employee’s gender, which does not allow one todistinguish the salary of a typical male recipient inthem.

However, due to a lack of state statistical reportsthat allow one to obtain more complete informationon the salary of a skilled worker, the necessary compar�isons between these forms will all be made withoutmaking allowance for methodological inconsistenciesin the structure of indicators.

The average salary in a corresponding field (aregion, type of economic activity) can be exclusivelyconsidered as a source of information on the salary ofa skilled employee in the regions of the Far North andequated localities, and in Russia’s regions with high orlow salaries, in various types of economic activities,since the sources of state statistical reports give infor�mation on salary according to variants (“a”–“d” ofarticle 65 of ILO Convention no. 102) exclusively forthe Russian Federation as a whole.

The choice of a male skilled employee, whose sal�ary is taken as the salary of a typical recipient to calcu�late the replacement rate, is carried out each timebased on comparing statistical reports.

The group of occupations “machinists, fitters, andrepairers of industrial equipment and vehicles” in thesubsection DK “Machinery and Equipment Manu�facturing” of the section D “Manufacturing Industry”(the All�Russian Classification of Economic Activities(OKVED)) most fully corresponds to a mechanic orturner in machine�building, including electricalmachine building (variant a) in the Russian state statis�tical reporting.

The average salary of a male mechanic at an engi�neering enterprise was 24272 rubles according to a sur�

vey (form no. 57�T) in Russia in October 2011(102.8% of the average nominal gross salary in theeconomy for the same period according to the data ofmonthly form P�4 for the complete range of enter�prises and organizations) (Table 2).

Taking into account national statistics, a personconsidered as a typical representative of skilled laborwho is employed in the main branch of economic activityand in its subdivision, where the highest number of eco�nomically active protected male persons, breadwinners,or protected persons work (variant b), is related to thesection D “Manufacturing Industry” (OKVED), inwhich the share of employees is 16.9% of their totalnumber. Workers of the metal�processing and engi�neering industry account for their greatest share in thiskind of economic activity (in accordance with theNational Classification of Occupations (NCO)).

The average monthly gross salary for workers oforganizations for the subsection DK “Machinery andEquipment Manufacturing” (OKVED: 29), in which1.82% of workers are employed, can be used to deter�mine the salary for a typical representative of this cat�egory of skilled labor.

In 2011, in accordance with form P�4 collectedevery month, their average monthly salary was22777.9 rubles (Table 3). This sampling most fullycorresponds to the subsection C28 “Manufacturing ofMachinery and Equipment not Included in OtherCategories” of the section C “Manufacturing Indus�try” in the International Standard Industry Classifica�tion (ISIC, the fourth revision) that is required to beused by ILO Convention no. 102.

A person, whose earnings equal or surpass the earn�ings of 75% of all insured persons that are determinedfor a year or a shorter period, as can be ascertained(variant c), is determined based on surveying the dis�tribution of workers by the wage level that is performedby the Russian State Statistics Service according toform 1 every two years in April.

The main disadvantages of this survey are as fol�lows: the above�noted rare frequency; lack of genderdivision of salaries; and accounting of only large andmedium enterprises and organizations during survey�ing, which allows one to extend the results of the sur�vey to only 65% of all employees. The salary of workers

Table 2. Average nominal gross salary of a male mechanic or turner in machine building, including electrical machinebuilding (October) according to the data of a survey by form no. 57�T*

Index Information Source 2005 2007 2009 2011

Average monthly nominal gross salary:

(a) a mechanic or turner in machine building, including electrical machine building, rubles

Form no. 57�T, October, every two years

10028 15272 19256 24272

% of the average monthly nominal gross salary in the economy for October

Form P�4, monthly 115.2 109.2 102.4 102.8

* Tables 2–8 were composed and calculated using the data of the Russian State Statistics Service [8].

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of small and microenterprises is not reflected in thesurvey.

The upper limit of the interval containing theassigned cumulative proportion of workers (75%) isused as a required salary according to variant c. InApril 2011, its value amounted to 30000 rubles or133.2% of the average salary in the economy (Table 4).

Variant d implies that the salary of skilled worker is125% of the average earnings among all ensured per�sons. In 2011, the average nominal gross salary in Rus�sia was 23369 rubles, and 29211 rubles were 125% of it(Table 5).

With allowance for the fact that this option sharplydiffers in the standard level of wages from the previousthree ones, it is the least acceptable at the present stageof development of the Russian pension system.

From the standpoint of the value of salary, variantsa and b are the most acceptable for the Russian Feder�ation. The indicated variants are also preferredbecause salary is the most approximated to the averagesalary in the economy (≈±3%); therefore, the lattercan be used as the salary of a skilled worker (and for thepurpose of calculating the rate of pension for a typicalrecipient on its basis). The salary in variants c and d

seems to be inapplicable for calculating the replace�ment rate for retirement pensions in the Russian Fed�eration owing to significantly surpassing variants a andb, as well as due to the fact that an equal or higher sal�ary is received by 25% of workers.

Problems of making allowance for payments to dis�ability pensioners and survivors when calculating thereplacement rate. Payments taken into account in cal�culating (the numerator) the replacement rate dependon the number and category of dependents of a typicalrecipient, and disability pension payments alsodepend on the degree of disability.

When old�age pension payments are calculated, awife at the retirement age is a dependent of a typicalrecipient. In this case, the Russian legislation providesthe following rules:

—If a woman has reached the retirement age buthas not worked out the five�year length of servicerequired for granting a retirement old�age pension,she has the right to a social pension paid from federalbudget funds upon reaching the age of 60.

—If the amount of a wife’s pension is significantlylower than her husband’s pension (i.e., she is fullymaintained by him or gets help from him, which is a

Table 3. Average nominal gross salary of workers of organizations for the subsection DK “Machinery and Equipment Man�ufacturing” ((OKVED:29) without “Weapon and Ammunition Production” (OKVED: 29.6))

Index Information source 2005 2007 2009 2011

Average monthly nominal gross salary:

(b) a person considered as a typical representative of skilled labor (OKVED: 29 without OKVED: 29.6), rubles

Form P�4, monthly 8380 13480 17010 22778

% of the average monthly nominal gross salary in the economy Form P�4, monthly 98 99.2 91.3 97.5

Table 4. Average nominal gross salary of workers of large and medium organizations that equals or surpasses the wages of75% of all insured persons


Average monthly nominal gross salary, rubles:

(c) a person, whose wages equal or surpass the wages of 75% of all insured persons that are determined for a year or a shorter period, as can be ascertained

Form no. 1 April, every two years

10600 17000 21800 30000

% of the average monthly nominal gross salary in the economy Form P�4, monthly 132.5 136.1 121 13.2

Table 5. Salary that is 125% of the average monthly nominal gross salary in the Russian Federation


Average monthly nominal gross salary, rubles:

(d) a person, whose salary is 125% of the average salary in all insured persons

Form P�4, (monthly)

10694 16992 23297 29211

% of the average monthly nominal gross sal�ary in the economy

125 125 125 125



constant and the main source of livelihood), then thewife may be recognized as his dependent by the deci�sion of territorial authorities of the Russian PensionFund or by a court order. This decision results ingranting the husband an increased fixed base amountof the insurance component of old�age retirementpension (hereinafter, the FBA) with allowance for thepresence of a dependent.

The average social pension as of January 1, 2013,was 5919.23 rubles, and the old�age retirement pen�sion (without public pension benefits) was9676.18 rubles; i.e., the social pension is 61% of theaverage retirement old�age pension. Taking intoaccount this ratio, one can assume that a wife’s pen�sion is significantly lower than a husband’s pension,owing to which he must be granted an increased FBAas a person having one dependent.

Thus, the replacement rate for an old�age pen�sioner can be calculated in two ways: without takinginto account the growth in the FBA and with itsincrease in the presence of one dependent. Dependingon the degree of disability, a recipient of a disabilitypension is granted two (for the first�degree disability)or one (for the second�degree disability) FBA, towhich payments for dependents are added.

It is suggested that the replacement rate for thefirst�degree disability pension be calculated as a basicvariant. However, with consideration for the fact thatsecond�degree disability pensioners are the largest cat�egory, a variant for calculating the replacement ratemust also be considered for it.

For disability pension, a wife and two children aredependents of a typical recipient.

A dependent wife at the able�bodied age, who is notdisabled, does not receive her own pension. The aug�mentation of the FBA for a husband’s pension is notestablished in the presence of a dependent wife. If awife at the able�bodied age takes care of a first�degreedisabled person and does not work, she must be givena compensation payment (in accordance with thepresidential decree of December 26, 2006, no. 1455“On Compensation Payments to Carers of DisabledCitizens”) [9], the value of which is 1274 rubles inRussia as of January 1, 2013. A compensation bonusfor care is not provided for second�degree disabilitypensioners.

An increased FBA for the pension of a father whoreceives a disability pension is provided by the legisla�tion for each of two dependent children.

The general rule for the funded component is itspayment to recipients of disability retirement pensionupon reaching the retirement age, owing to which itwill not be taken into account in calculating thereplacement rate.

According to the Federal Law as of November 24,1995, no. 181�FL On the Social Protection of Dis�abled People in the Russian Federation, disabled peo�ple are paid a monthly cash payment (MCP), the value

of which depends on the degree of disability [10].Despite the fact that this payment does not relate topension payments, it can also be taken into accountwhen calculating the disability replacement rate, sinceit is paid to all disabled persons.

A typical recipient of a survivor’s pension is anunemployed widow with two children. According toparagraphs 2 of clause 2 from article 9 of the FederalLaw as of December 17, 2001, no. 173�FL On Retire�ment Pensions in the Russian Federation, a spouse ofa diseased breadwinner has the right to receive survi�vor’s retirement pension, if she takes care of childrenunder the age of 14 and does not work [11].

In this case, when the replacement rate is calcu�lated, allowance is made for the fact that the childrenof a deceased breadwinner have not reached the age of14 years and the widow takes care of them. Therefore,a survivor’s pension is paid to three dependents, eachof which must be given one FBA for this type of pen�sion, and the insurance component is divided intothree equal shares.

Thus, the Russian pension legislation does not stip�ulate the payment of a single survivor’s pension to awidow with two children; therefore, in order to calcu�late the replacement rate in accordance with the ILOrequirements, the insurance component must be cal�culated as for the case when a deceased breadwinnerhad one dependent and the fixed base amount must betaken into account three times:

3 × FBA CLB + insurance component (in total forthree recipients).

Since the current legislation does not stipulate anypayments for a father with dependents, no family ben�efits are taken into account in the denominator of theformula for calculating the replacement rate for old�age, disability, and survivor’s pensions.

Methodological properties of calculating the disabil�ity and survivor’s pensions for a typical recipient inaccordance with the Russian legislation. In the Russianpension practice of granting a disability retirementpension, fundamental significance in determining itsamount is assigned to the expected pension paymentperiod that depends on the age of a recipient. Theamount of a disability retirement pension is deter�mined using the formula:

P = PC/(T × K) + B,

where P is the amount of a disability retirement pen�sion; PC is the amount of the calculated pension cap�ital of an insured person (disabled person) that is takeninto account as of the day, since which he is granted thedisability retirement pension; T is the number ofmonths in the expected disability retirement paymentperiod; and K is the ratio of the normative pensionableservice (in months) as of the indicated date to180 months. The normative pensionable servicebefore a disabled person’s reaching the age of 19 yearsis 12 months and grows by 4 months for each full year

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of age since the age of 19 years, but not more than upto 180 months; B is the fixed base amount of the dis�ability retirement pension.

Factor K lowers the expected old�age retirementpayment period for a disabled person depending onthe age of the onset of the disability. At the age of19 years, K = 16 months/180 months = 0.0889; at theage of 60 years, K = 180/180 = 1 (the increment of Kis 4 months for a year since the age of 19 years).

According to the requirements of ILO Conventionno. 102, a typical recipient of a disability pension musthave a 15�year length of service. The concept of a“skilled worker,” on the basis of whose salary theamount of pensions is calculated, means the presenceof secondary special education rather than higher edu�cation. Consequently, the working age can be assumedto be 19 years. In this case, the onset of disability in atypical recipient and granting him a pension will takeplace upon reaching the age of 34 years (19 years +15 years of service).

Consequently, the value of the denominator (T ×K) in the formula for calculating the insurance com�ponent of a disability retirement pension will be

228 × (76/180) = 228 × 0.4223 = 96.2844 months = 96 months.

Analogously, the lowering of factor K is taken intoaccount when calculating a survivor’s pension accord�ing to the following formula:

P = PC/(T × K) ND + B,

where P is the amount of a survivor’s pension; PC isthe amount of the calculated pension capital of a dis�eased breadwinner as of the day of his death; T is thenumber of months in the expected old�age paymentperiod; and K is the ratio of the normative pensionableservice of a breadwinner (in months) as of the day ofhis death to 180 months. The normative length of ser�vice before the diseased breadwinner reaches the ageof 19 years is 12 months and grows by 4 months foreach full year since the age of 19 years but no morethan up to 180 months; ND is the number of disabledfamily members of the diseased breadwinner, who arerecipients of the indicated pension fixed in connectionwith the death of the breadwinner as of the day, sincethe survivor’s retirement pension is granted to the cor�responding disabled family member; and B is the fixedbase amount of the survivor’s retirement pension.

With allowance for the fact that the present meth�ods assume that a diseased breadwinner has childrenyounger than 14 years (and his able�bodied wife takescare of them and does not work, which ensures herreceiving a survivor’s pension that is provided for atypical recipient according to the standards of ILOConvention no. 102), the age of the diseased bread�winner, like that of a disability pensioner, is taken to be34 years: the working age of 19 years + 15 years of ser�vice. Correspondingly, the value of the denominator(T + K) in the formula for calculating the insurance

component of a survivor’s retirement pension for eachdependent recipient, like for a typical disability pen�sioner, is:

228 × (76/180) = 228 × 0.4222222 = 96.2666 months.

The value of factor ND is 3 (according to the num�ber of dependents of the diseased breadwinner).

Consequently, the total survivor’s pension paid tothree dependents will be

Psurv 3dep = 3 × [PC/96/3] + 3 × FBACLB = 3 × (PC/32 + FBACLB).

Problems of making allowance for the personalincome tax (PIT) when calculating the replacementrate. The comparability of pensions and salaries dur�ing calculating the replacement rate must be ensuredby correctly taking into correct the legislatively estab�lished rules for calculating the personal income tax.

The pension of a typical recipient is estimatedbased on the contributions calculated from the nomi�nal gross salary (the salary before taking the PIT, i.e.,the net salary) of a skilled male employee.

However, a family itself is exempt from the PIT.Consequently, a pension payment, which a personreceives after taxes (and of which he can fully disposeof without any deductions) is more correct to be con�sidered as a net pension. In this case, when calculatingthe replacement rate, it is not correct to correlateit with the nominal accrued salary (reflected in formsP�4, no. 1, and no. 57�T), which is a gross salary, sinceit is subject to the PIT.

In order to calculate the replacement rate, it is nec�essary to reduce a nominal gross salary to a net salaryby decreasing it by the value of the PIT with allowancefor the tax deduction that is due to a skilled employee,who has the number and category of dependentswhich correspond to a typical recipient.

The PIT rate is 13%. The standard tax deductionsfrom salary are applied, if a taxpayer has a disability, aswell as dependent children. The presence of a depen�dent wife at pensionable or able�bodied age is not areason for a tax deduction. Consequently, in order tocalculate the old�age replacement rate, the salary of askilled male employee is only subject to the PIT at a13% rate. In order to calculate the disability replace�ment rate, the standard tax deductions from salary fortwo children are used. A tax deduction for a dependentwife is not stipulated.

Alternatively, the tax deduction for a disability(which implies that the pension of a disabled person iscorrelated with the salary of a skilled worker, who isalso a disabled person) can be used to calculate thereplacement rate for receiving the net salary. Taxdeductions for two children who were dependent on adeceased breadwinner are applied to calculate thereplacement rate for a survivor’s retirement pensionfor wages.



The order and amount of tax deductions are as fol�lows. According to paragraph 4 of clause 1 in article218 of the second part of the RF Tax Code, the taxdeduction for each month of the taxation period isextended to a parent, wife (husband) of a parent,adoptive parent, guardian, foster parent, and wife(husband) of a foster parent who maintain a child atthe following amounts: 1400 rubles for the first child;1400 rubles for the second child; 3000 rubles for thethird and each following child; 3000 rubles for eachchild, if the child at the age of 18 years is disabled or afull�time student, graduate students, registrars,interns, and students at the of 24 years, if he or she is afirst� or second�degree disabled person.

The tax deduction is valid until the month, inwhich the taxpayer’s cumulative income calculatedfrom the beginning of the tax period exceeds 280000rubles. A tax deduction is not made in the month, inwhich the indicated income exceeds 280000 rubles.

According to paragraph 2 of clause 1 in article 218of the second part of the RF Tax Code, the tax deduc�tion for a first� or second�degree disability is 500 rublesper each month of the taxation period [12].

Comparative analysis of the replacement rate fordifferent types of retirement pensions. Taking the salaryof a mechanic for the salary of a skilled worker (varianta), we will calculate the replacement rate for personswho will retire in 2015, 2030, and 2045 for differenttypes of retirement pensions with allowance for theabove approaches (Tables 6–8).

Predictive calculations were carried out under thefollowing conditions of a change in the average salaryin the economy [13]. At the beginning of the forecastperiod in 2015, the average monthly nominal gross sal�ary in the economy will be 36613 rubles. By 2030, it

will increase by a factor of 3.5 and in 2045 it will growby a factor of 8.5 compared to the level of 2015.

During the forecast period, the nominal gross sal�ary of a skilled mechanist will grow at the same rate asthe average national salary, and, as a result, their ratiowill remain constant. The calculations were carriedout under the existing legislation without taking intoconsideration the implementation of the measuresprovided by the “Long�Term Development Strategy ofthe Pension System of the Russian Federation.” Thevalue of Russia’s average FBA for the correspondingcategories of persons, which was forecasted based onstatistical data, was used as a fixed base amount of theinsurance component of a corresponding retirementpension. Due to the slowdown in the growth inincomes for the insurance component of retirementpension per pensioner7, the indexation rate of theinsurance component and the fixed base amount willgradually slow down and approach the inflation rate,which will negatively affect the ratio of fixed pensionsand the average salary in the economy.

A comparative analysis of the obtained values of thereplacement rate for different types of retirement pen�sions reveals the following regularities.

The replacement rate tends to decrease in the long�term outlook for all types of retirement pensions (old�age pension (Table 7), disability pension (Table 8), andsurvivor’s pension (Table 9)), if the same characteris�tics of a typical recipient persist.

This is due to several reasons. The first one is agradual slowdown in the indexation of pension rights

7 The growth in the number of pensioners and the withdrawal ofan increasingly greater amount of funds for the purpose of form�ing the funded component of retirement pension owing to thegrowth in the number of insured taxpayers born in 1967 andlater.

Table 6. Replacement rate for a typical recipient of an old�age retirement pension in different years of its fixation

Index 2015 2030 2045

Gross salary of a skilled worker (mechanic), rubles 38027 132103 322951

Net salary of a skilled worker (mechanic), rubles 33446 115311 281331

FBA, rubles 4238 11668 24655

Calculated pension capital (CPC) at the moment of retirement, rubles 850295 3528133 9450455

Pension savings, rubles 221498 1660903 5099817

Survival (T), months 228 228 228

Insurance component of a retirement pension, rubles 3729 15474 41449

Funded component of a retirement pension, rubles 971 7285 22368

Amount of a wife’s social pension, rubles 4272 8970 13263

Amount of an old�age pension + a wife’s social pension, rubles 13211 43397 101735

Old�age replacement rate + a wife’s social pension with respect to the gross salary of a skilled worker, %

35 33 32

Old�age replacement rate + a wife’s social pension with respect to the net sal�ary of a skilled worker, %

39 38 36

174


SOLOV’EV

in connection with a growing number of pensionersand an increase in the share of pension rights formedin the funded component and the associated decreasein the amounts of fixed pensions due to the low profit�ability of investment (less than the indexation rate ofthe CPC). The latter circumstance affects all types of

pensions (and not only old�age pension), since therate of premiums taken into account when forming thepension rights to the insurance component for the ser�vice period of persons, who will retire in 2045, is lowerthan for pensioners, who will be granted pensions in2015.

Table 7. Replacement rate for a typical recipient of a first�degree disability pension in different years of its fixation*

Index 2015 2030 2045

Gross salary of a skilled worker (mechanic), rubles 38027 132103 322951Net salary of a skilled worker (mechanic), rubles** 33446 115311 281331FBA in the presence of a first�degree disability and two dependents*** 10770 29652 62654CPC at the moment of retirement, rubles 524305 2034800 5138766Period (T*K) for a first�degree disabled person 96 96 96Insurance component of a retirement pension, rubles 5446 21137 53381Compensation bonus for the care for a first�degree disabled person 1908 3328 5189Amount of disability pension with allowance for two dependents and compen�sation bonus for the care for a first�degree disabled person, rubles

18125 54117 121223

Replacement rate for a first�degree disability with allowance for two children and compensation payment for the gross salary of a skilled worker, %

48 41 38

Replacement rate for a first�degree disability with allowance for two children and compensation payment for the net salary of a skilled worker, %

54 47 43

* Conditions: a recipient of a pension is a first�degree disabled mechanic, the gender is male, the age is 34 years, the working age is 19 years,the pensionable service is 15 years, the dependents are his wife and two children.

** The salary of a skilled worker (mechanic) with the deduction of the PIT (with allowance for the tax deductions for a first�degree dis�ability and two dependent children.*** The FBA in the presence of a first�degree disability and two dependents according to statistical reports

Table 8. Replacement rate for a typical recipient of a survivor’s pension in different years of its fixation*

Index 2015 2030 2045

Gross salary of a skilled worker (mechanic), rubles 38027 132103 322951Net salary of a skilled worker (mechanic), rubles** 33446 115311 281331FBA per dependent, rubles*** 2015 5547 11720CPC at the moment of retirement, rubles 524305 2034800 5138766Payment period (T*K) of a survivor’s pension, months 96 96 96Insurance component of disability retirement pension per dependent, rubles 1815 7046 17794Amount of survivor’s pension per dependent, rubles 3830 12592 29514Replacement rate for a survivor’s pension with respect to the gross salary of a skilled worker, %

10 10 9

Replacement rate for a survivor’s pension with respect to the net salary of a skilled worker, %

11 11 10

Amount of survivor’s pension for a typical recipient (a widow with two children), rubles

11491 37777 88542

Replacement rate for a survivor’s pension with respect to the gross salary of a skilled worker, %

30 29 27

Replacement rate for a survivor’s pension with respect to the net salary of a skilled worker, %

34 33 31

* Conditions: the recipients of the pension are disabled family members (a wife and two children) of a mechanic (the gender is male,the age is 34 years, the working age is 19 years, and the pensionable service is 15 years).

** The salary of a skilled worker (mechanic) with the deduction of the PIT (with allowance for the tax deductions for a first�degree dis�ability and two dependent children).*** The FBA per dependent according to statistical reports.



The second reason is that the replacement rate cal�culated with respect to the net salary is higher thanwith respect to the gross salary. In particular, this dif�ference is 4% for old�age and survivor’s pensions in2015 and 2045, and it is 6 and 5% for disability pen�sion, respectively.

The third reason is that the retirement replacementrate surpasses the minimum standards established bythe ILO only for disability pension: in 2015 by 8% withrespect to the gross salary and by 14% with respect tothe net salary. Moreover, such a high level of thereplacement rate for disability pension has beenachieved even without taking into account the MCPthat is payable to disabled persons in its calculation(the numerator).

The old�age replacement rate calculated from thenet salary is the closest to 40% in 2015; however, thelag will grow in the following years and come to 4% in2045. The return of the accumulation rate (full or par�tial) to the distribution system or a significant increasein the yield from the investment of pension savingsmight help increase the replacement level of lostincome. Even at the beginning of the forecast period,Russia does not reach even the minimum ILO stan�dards for the replacement rate calculated for old agepension with respect to the nominal gross salary. How�ever, the presented calculation does not make allow�ance for the growth in the FBA that is due to old�agepension, if the amount of a wife’s social pension ismuch lower than her husband’s pension, and she isactually his dependent. In this case, in 2015 thereplacement rate will come close to 40% of the grosssalary and will exceed it for the net salary.

The lowest level of pension payments is provided bythe system of compulsory pension insurance for typi�cal survivor’s pensioners (30% with respect to the grosssalary and 34% with respect to the net salary of adecreased breadwinner in 2015 and even a loweramount in the following years).

The problems associated with using the replace�ment rate in the Russian Federation, which have beenanalyzed in this paper, and the obtained results of itsapplication in calculations for different types of retire�ment pensions permit them to be taken into accountwhen developing correct methodological approachesfor calculating this index under the conditions of along�term reform of the Russian pension system.

ACKNOWLEDGMENTS

The article was prepared according to the results ofa survey at the expense of budget funds by the StateTask of the Financial University under the governmentof the Russian Federation for 2013. The calculationswere made by S.A. Dontsova (deputy head of theDepartment of Actuarial Calculations and StrategicPlanning of the Russian Pension Fund (RPF)) andE.B. Novikova (deputy head of the Department of

Actuarial Calculations and Strategic Planning of theRPF and head of the Department for the Long�TermForecasting of the Development of the RPF).

REFERENCES

1. The Long�Term Development Strategy of the PensionSystem of the Russian Federation. Adopted by theDecree of the Government of the Russian Federation asof December 25 2012 no. 2524�p, Rossiiskaya gazeta,Dec. 28 (2012).

2. A. K. Solov’ev, “Pension Systems in the Context ofInsurance Principles,” Zhurnal Novoi Ekonom�icheskoi Assotsiatsii, No. 3 (2012).

3. A. K. Solov’ev, “Pension Provision in the Russian Fed�eration: an Insurance Balance Model,” ProblemyTeorii i Praktiki Upravleniya, No. 2 (2013).

4. International Labor Organization Convention no. 102“On the Minimum Social Security Standards”(Together with “The International Standard IndustryClassification), An Official Site of the "ConsultantPlus” Company http://base.consultant.ru/cons/cgi/online.cgi?req=doc;base=INT;n=16217;dst=0;ts=148FBF0CAD39F7F3DA158C8FC2AA1FE8;rnd=0.9915593164041638.

5. International Labor Organization Convention no. 128“On Disability, Old�Age, and Survivor’s Pensions(Together with "The International Standard IndustryClassification), An Official Site of the "ConsultantPlus” Company “http://base.consultant.ru/cons/cgi/online.cgi?req=doc;base=INT;n=16215;dst=0;ts=148FBF0CAD39F7F3DA158C8FC2AA1FE8;rnd=0.2718619145452976

6. The European Social Security Code ETS no. 048(Strasbourg, April 16 1964) http://base.consult�ant.ru/cons/cgi/online.cgi?req=doc;base=INT;n=26845;fld=134;dst=4294967295;rnd=0.6715216364245862

7. International and Russian Social Provision Standards:a Comparative Analysis, Ed. by E.G. Tuchkova,Yu.V. Vasil’eva (Moscow, Prospekt, 2013) [in Russian].

8. The Federal State Statistics Service, http://www.gks.ru

9. The Decree of the Government of the Russian Federa�tion as of December 26 2006 no. 1455 “On Compensa�tion Payments to People Who Take Care of DisabledCitizens,” http://base.consultant.ru/

10. The Federal Law of the Russian Federation as ofDecember 17 2001 no. 173�FL “On Social Protectionof Disabled People in the Russian Federation”, AnOfficial Site of the “Consultant Plus” Company,http://base.consultant.ru/

11. The Federal Law of the Russian Federation as ofDecember 17 2001 no. 173�FL “On Retirement Pen�sions in the Russian Federation”, http://base.consult�ant.ru/

12. The Tax Code of the Russian Federation, An OfficialSite of the “Consultant Plus” Company, http://base.consultant.ru/

Solov’ev, Arkadii Konstantinovich,Dr. Sci. (Econ.), Professor, Head of Department

Translated by S. Solov’eva

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