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Russia: World Bank Loan To Help Poorest Citizens

Washington, 27 June 1997 (RFE/RL) - For 15 million low income Russians who collect minimum pensions, unemployment benefits, social support payments or child allowances, standards of living should begin rising a bit by the end of the year.

World Bank Vice President for Europe and Central Asia, Johannes Linn, says that will be the most immediate benefit from a loan of $800 million approved for Russia Wednesday.

In addition to allowing the Russian government to pay off the several trillion rubles worth of pension arrears it had run up in recent months, the bank loan will allow the minimum pension for the elderly to be raised about eight percent by the end of the year. This will mean that no pensioner in the country will collect a pension of less than 80 percent of subsistence level.

For those who receive unemployment benefits, child allowances or other social payments, such as sickness and maternity benefits, the loan will underwrite immediate plans to assure that ALL state benefits are implemented more efficiently and paid on-time.

But far more importantly for Russia's future, Linn says, the loan will support an overhaul of the entire social safety net. It is the "critical next-step," he said.

Economic stability has helped Russia achieve a great deal over the past year, Linn told a press conference in Washington Thursday. This has created a "window of opportunity" to "start addressing the pressing needs of those who have been most adversely affected by the country's economic transition."

Sadly, he said, the transition has imposed "severe social costs." As a result of falling output and high inflation, real wages in 1996 averaged less than half their level in 1991, he said. Underemployment has reached 15 percent and only about 40 percent of the work force was paid fully and on time last year.

Worse, he says, an estimated 25 to 30 percent of the population is now living under the poverty level in "serious and dire straits."

The bank's Human Development Manager for the region, Robert Liebenthal says that in the long run, the resumption of economic growth will generate job opportunities, higher wages, and greater investment in health and education services. But "an efficient social safety net, that delivers benefits to those adversely affected by the economic changes, will also be essential."

The proposed reforms, already being worked out by Russian experts with World Bank assistance, cover four key areas:

PENSIONS - Pensions take 5.5 percent of Russia's economy, supporting 37 million pensioners through a 29 percent payroll tax and federal budget support. Better collection efforts and enforcing compliance by larger companies will help keep pensions current and raise minimum pensions. Longer-term, a three-tiered pension system is envisioned for Russia. The first tier would be a tax supported but limited system to protect the elderly against the lowest levels of poverty. The second tier would be a compulsory private pension system. The third tier would be a voluntary private pension system designed to increase private savings.

The loan conditions require the plan to be drawn up and presented to the Duma by the middle of next year in order for Moscow to draw the final $250 million of the loan.

UNEMPLOYMENT ASSISTANCE - With the decline of output, many workers have moved into the informal sector of the economy, accounting for 16 percent of the labor force in 1996. Open unemployment has increased only gradually but while it was estimated at 6 million people last year, only about 2 million collected benefits. The benefits, paid by the Employment Fund, start at 75 percent of previous wages, and fall to 45 percent after 12 months. There are, however, great disparities between regions and little retraining or counseling offered to the jobless.

Under the loan, the employment fund will be centralized up to 30 percent to assure fairness between regions and better targeting to make sure that the poorest recipients get the most help. Programs of training, counseling and job researching will be developed. A new labor code to introduce mobility in the labor market will also be drafted.

SOCIAL ASSISTANCE - The working poor have emerged over recent years as the largest group in need of help, according to the bank. In 1995, 66 percent of poor households were headed by an employed person. The Russian federal government provides limited support only to the elderly and disabled and benefits are "poorly targeted", says the bank. Benefits are irregular due to funding shortages and there has been no national mechanism in place to channel support to the poorest regions. The shift of responsibility from the federal to regional levels has only made matters worse.

Sickness and maternity benefits are paid out of the Social Insurance Fund (SIF), which gets its money from a 4.3 percent employer payroll deduction. The maternity benefit is a one-time grant of three times the minimum wage and a continuing payment of the woman's wage for 140 days. Sick pay is currently provided in an amount equal to the individual's wage until recovery.

Under the loan, the bank will help establish three pilot projects in the Komi Republic and in the Voronezh and Volgograd oblasts to test alternative ways of targeting and providing social assistance in a more efficient way. The results of the pilot projects will be used for later programs.

On the federal level under the loan, reform of the SIF will include making a comprehensive assessment of the sickness and maternity benefits, spa and sanatoria vouchers, recreation camps, and funeral benefits currently being provided.

Then the SIF will be given a new role, limiting public provision of sickness and maternity benefits and shifting to the system used in most of the rest of the world of employers paying for sick leave and maternity benefits.

CHILD ALLOWANCE - At the end of 1995, 52 percent of households with children under 18 were living in poverty. Child allowances cost one percent of the economy, but they are poorly targeted and only 50-60 percent of the poor children actually get them. In addition, regional differences are serious and arrears have been rampant.

Under the loan, new legislation will be introduced to allow means-testing of households with children (at first on a voluntary basis), with responsibility for administering child allowances to shift from enterprises to local social assistance offices.

In a small but broader part of the loan, Russian officials will also address gender-related social issues throughout the social system, including measures to better protect women and children.