How to Raise Pensions by Legalizing Informal Employment

Abstract

The article presents the study on the problems of imbalances in the Russian pension system, which prevent ensuring the provision of decent pensions for the population at a level that is adequate to their labor contribution. In this study, the authors set a goal of substantiating proposals for building a balanced pension system in Russia. They considered the possibility of increasing the number of workers (contributors to the pension system) by legalizing the informal employment as a reserve for increasing the receipts of insurance contributions to the pension system. In performing of the study was tested the working hypothesis, which is: to ensure a balanced pension system in Russia and raise the pensions, such reserve of increasing the number of contributors as the legalization of informal employment is sufficient. The article set and addressed the optimization problem of legalizing the informal sector of the Russian economy within the existing unfunded pension system in case of raising the pensions to 40% of lost earnings. The authors built a non-linear programming optimization problem based on the balance equation of unfunded pension system. They presented a number of test estimates and conclusions drawn on their basis. First, to ensure a balanced pension system in Russia and raise the pensions, such reserve for increasing the number of contributors as the legalization of informal employment is significant but not sufficient. Secondly, a 40% wage replacement rate can be achieved only in case of virtually complete legalization of population employment in the informal sector. Thirdly, the authors identified the particular characteristics of informal employment legalization in specific economic activities.

Keywords

• pension system
• informal employment
• wage replacement rate
• economic activity
• optimization problem