The significance and necessity of an efficient social safety net in the Russian Federation can only be understood within the context of the Soviet experience of social security and how today the ideological inclination toward a welfare state is affecting Russian society. The state's pervasive role in Soviet society affected both economic and social conditions. Economically, a state-caused inverse relationship existed between GDP and the state's commitment to social safety during the Brezhnev regime. Economic and political stagnation characterized the latter years of the Brezhnev era. Economically, GNP growth declined precipitously between 1961 and 1985 (see A1 and A2). Prior to 1960, the USSR utilized extensive rather than intensive factors of production--specifically labor, capital (stock), and natural resources. In essence, Soviet authorities were able to take advantage of Imperial Russia's lack of a strong industrial base by transferring much of the population from agriculture to industrial production during Stalin rapid industrialization drive of the 1930s and 1940s. The emphasis placed on heavy industry produced a correspondingly high rate of consumer saving which allowed for increased capital growth, that when combined with the natural resource abundance and intensive use of existing capital helped sustain economic growth The USSR's ability to sustain economic growth in the 1970s was fostered by its large reserve of oil that helped finance imports of western technology.
The exhaustion of labor surplus, declining birth rates, inefficient use of natural resources and other factors of production, the growing expenditures needed to maintain military parity with the United States, and the sudden drop in oil prices, and the mis-development of the economy all were factors that contributed to the USSR's economic stagnation in the late 1970s and early 1980s. While economic efficiency decreased during the Brezhnev period, the USSR's leadership demonstrated increased commitment to the Soviet version of the social safety net. The party-state's pervasive role in society had the effect of slowing economic growth through poor re-allocation of resources and the social effect of retarding the development of a civic society. As a result, Soviet society developed an enduring attachment to the idea of an omnipotent state which provided for their basic needs regardless of the economic costs.
From a Western perspective, the Soviet Union was ideologically a hyper" welfare state in the sense that prior to the Gorbachev era, the state attempted to provide a high level of social security for every citizen, often to the point of harming economic efficiency. Additionally, it heavily restricted the development of private sector in order to prevent wide wage disparity. As mentioned above, the CPSU's monopoly on power extended to every aspect of society and in exchange for party dominance the working population received implicit social guarantees in the form of a social contract." Linda J. Cook succinctly identifies each sides' basic commitments and responsibilities:
Basically, the regime provided broad guarantees of full and secure employment, state controlled and heavily subsidized prices for essential goods, fully socialized human services, and egalitarian wage policies. In exchange for such comprehensive state provision of economic and social security, Soviet workers consented to the party's extensive and monopolistic power, accepted state domination of the economy, and compiled with authoritarian political norms. Maintenance of labor peace in this political system thus required relatively little use of overt coercion.
The weakening of the party and other unintended consequences of glasnost and perestroika such as the emergence of the Russian Republic, the decision to release Eastern Europe from Soviet domination, and the attempt to make state owned enterprises more efficient all had a direct impact on lowering the standard living for the USSR's population. Gorbachev tried and failed to cut the guarantees of the social contract. In contrast to earlier in the Soviet period, the perestroika reforms had the effect of giving significance to money" in the sense that inputs had developed value through the economic decisions which constituted perestroika. From the center's perspective, the problems caused by the inability to cut expenditures through revision of the social guarantees were compounded by revenue loss in three key areas: vodka sales, turnover tax, and republic contribution to the center--especially from the Russian Republic.
Gorbachev began perestroika with an attack on worker efficiency. One measure adopted to combat this perceived evil was restriction on the sale of alcohol. The consequence was a loss in revenue which was further compounded by expenditures related to the Chernoybl disaster and the massive Armernian earthquake in 1987. In 1990, the center granted state owned enterprise (SOEs) greater leeway in the setting of prices--between 50 percent and 100 percent of state mandated prices. Since retail prices were unaltered, the state lost a huge amount of revenue from the turnover tax. In addition, Russia offered to lower the profit tax for those enterprises willing to pledge" allegiance to the Russian Republic. Finally, the dissolution of the Soviet Union was hastened by the rise of Russian nationalism and populism both of which had economic implications. The Russian Republic provided 80 percent of the revenue to the USSR's budget. Yeltsin, using his powerful position within the Russian parliament, declared in October of 1989 that the Republic would halt all payment to Union institutions. He followed this devastating maneuver by nationalizing" the USSR Ministry of Finance and seizing its mints. In October of that year, Russia seized her share of the USSR'S precious metals. Faced with such tremendous loss of revenue which created a budget deficit that equaled 10 percent of GNP, the Soviet government elected to increase the amount of money in circulation without a corresponding increase in the production of consumer goods and services. The decision to increase money circulation, through wage increases, had a jarring effect on Soviet society. The first impact, characterized by the indelible image of long bread lines and the stereotype that a large profit could be made on a pair of Levis familiar to many Westerner was the result of the disruption of goods and services to the general population.
Price stability began to go by the wayside in the fall of 1988 with an estimated inflation rate of 7 percent which mushroomed to 10 percent in 1990. As Table A3 and A4 indicate, the state increased both the level of wages and subsidies in the other which constituted the component parts of the Soviet safety net. Real wages, however did not compensate for inflation. The decline in social welfare from a monetary angle was compounded by quality decline in social consumption areas. Although the state increase subsides to social consumption areas, the collapse of the Council on Mutual Economic Assistance (CMEA) which provided much of the USSR's medicine and medical supplies and a growing environmental movement which forced the closure of many chemical plant that supplied the limited domestic market. Gorbachev's attempts at reforms destroyed not only the social contract which existed between the state and its citizens but the USSR as well. The late Soviet period thus provides the starting point for examining poverty and the Russian Federations response to it in the form of the social safety net.
The Soviet social welfare system was effective in that absolute poverty, i. e. wide spread hunger or inadequate diet, was avoided in the latter years of the Soviet period since the state could supply the basic needs of the population through its control of USSR's resources and society as a whole. Research into question of poverty and therefore poverty alleviation policy (specifically the question of income inequality and distribution) was hindered by the imposition of political rather than economic explanations. In 1965, the Soviet Labor Research Institute adopted a social minimum income norm which was derived from the estimated costs of human consumption. Goskomstat revised the income level based on the prices reported by state-owned stores. The price consumers were faced with, however, due to their shopping habits, the existence of a black market," and inflationary pressures dramatically reduced their purchasing power. The Russian Federation revised the poverty line in 1992 to encompass the age and gender of individual households. The six categories are: children under six years of age children between the ages of 6 and 17, men between the ages of 18 and 59, women between the ages of 18 and 54, men age 60 and above, and women age 55 and older
Closer to the U.S poverty line definition, the Russian poverty level is established by first collecting low-cost cost food baskets for each demographic group... [and] after pricing each market food basket at national prices, age, and gender-specific multipliers yield individual poverty line for each demographic group. The definition of poverty is critically important to social welfare of Russia because, in theory, it sets pension, minimum wage level, and welfare payments. The USSR's dissolution has altered the scope, source and method of financing of social welfare programs. The Soviet state provided a broad range of social services, through state owned enterprise. From a public finance perspective, the transition to a more market oriented system has meant the diversification of social spending responsibility through the creation of off-budgetary funds (OBF) and passing down the bulk of public social spending mandates to sub-national governments. The following are the major OBFs: Pension Fund, Social Insurance Fund, Employment Fund, and the Fund for Social Support.
Created in 1991, the Pension Fund was designed to take pressure of federal budget and is authorized to collect a mandatory payment from employers in the form of a mandatory 28 percent contribution while from agricultural enterprises the mandatory contribution is 20. 6 percent and 5 percent of the total income of self-employed individuals. Employees make a 1 percent contribution to the Fund. Labor pensions, financed from these contribution, and social pension which are financed from the federal budget are administered by an independent government agency. The former constitute the majority (80 percent) of Russian pensioners and thus the level of labor pensions affect the lives 19. 5 percent of the Russian population. To be eligible for labor pensions, men must have made 25 years worth of contributions while women must have made 20 years of contribution. Eligibility for labor pensions can be lower depending on occupation--hazardous occupations such as coal mining and military service are two examples. Social pensions are for individual with less than 5 years of work experience and is equal two-thirds of the minimum old-age pension or in the case of disability the amount varies but does not exceed the minimum labor pension.
Payroll contributions are the also the main source of funding for the Social Insurance Fund (SIF) and the Employment Fund. Created in August 1992, the SIF is funded by a 5.4 percent payroll deduction from every worker. The SIF is intended to fund child care, maternal care benefits, and sick care. Generally, 74 percent of revenue collected from the SIF contributions remains with the enterprise while the remainder is sent to the center to finance federal responsibilities. Workers who have accrued eight or more years of experience receive their entire salary as do Chernobyl victims, parents with three or more children, and war victims. Workers with less that five years experience receive 60 percent of their salaries while those with between five and eight years experience receive 80 percent of their salaries. It is accepted practice that benefits are paid until the worker recovers or is granted a disability pension.
Mothers receive support through a maternity grant which equals five times the amount of the present minimum wage. Additionally, working mothers receive a maternity allowance, over the span of 126 days, which is equivalent to her entire salary. When this time has elapsed, the mother can receive a payments that equals the minimum wage for up to a year and half.
The expenditure responsibility for family benefits, which generally are divided into the following broad categories: payment made to all families with children without regard to income or prerequisites, cash transfers to disadvantaged families, and payments made to working mothers, is unequally shared among all three levels of government. Although the national level contributes, it mandates the levels of benefits while often leaving it to the sub-national governments to finance the increase.
Unemployment in the region in a relatively new phenomena due to the general nature of the Soviet system. The Employment Fund was created in 1992 to pay unemployment benefits to those affected by the transition to a market economy. Contribution to the fund comes from a mandatory two percent payroll deduction and budget transfers. Revenue collected from the payroll tax is shared between the raion and oblast governments on a 45 percent to 55 percent ratio. The former then remits 10 percent to the center for federal responsibilities. Benefits, from Western perspective, are considered generous. Individuals just entering the work force receive the minimum wage. Workers who have been laid of receive in the first three months receive a cash benefit equal to 75 percent of their previous salary. The benefits level drops to 60 percent for the following six months and 45 percent for the remainder of the year.
The Fund for Social Support (FFS) is a limited national source for sub-national funding of social programs. In 1992, the FFS accounted for only.01 percent of GDP. The stated purpose of this fund is to aid rayons that have been particularly hard hit in the transition from a command economy. The FFS began operations in 1992 with revenue from seized Party assets and tax from re-appraised inventories. It is also supposed to receive revenue form the privatization process (although it did not receive the ten percent assigned in 1992) and "receipts from the revaluation of commodities in state stores and ruble receipts from sale of food aid."
Although inflation increases revenue to the Russian government, it naturally impoverishes the population when adjustments are not made (or insufficient to deal adequately with inflation) to monetary benefits such as the minimum wage and pensions which provides the basis for the social safety net. Inflation was one of the primary causes of poverty in Russia. As chart A5 shows, social subsidies and transfers have also been ineffective because they do not reach the truly needy. The primary reason for this economic waste is the lack of means based testing.
The problem of hyper-inflation which had plagued Russia earlier in the transition period has been replaced" by the dramatic reduction in real wages and severe dilemma of arrears. By December 1995, real wages declined by 13 percent and real consumption declined by 5.3 percent. Real wage decline, and unexpectedly low levels of unemployment, can be attributed to evasion of excess wage tax and inside the gate employment" by which enterprise managers hoard labor by paying minimum wage and compensation workers in non-taxable manners such as payment in kind, low interest long-term loans that have questionable repayment terms. It should be noted that the Pension Fund is becoming more experienced in detecting methods of tax avoidance and recent action has been taken to close loopholes
Reduced inflation has given way to arrears as one of the primary causes of poverty in the Russian Federation and has primarily been the result of international pressure to reduce the budget deficit by ending emission based methods of covering the deficit" and tax avoidance and evasion. According to ITAR-TASS, pensioner were owed nearly 3 billion dollars in October 1996. Revealing the revenue gap, 22 regions were able to make pension payments while the remaining 69 needed transfers from the federal fund. Wage arrears for both private and public sector were estimated at 43 trillion rubles--9 billion of which was the state's responsibility.
An area of concern which was not addressed in 1992 and continues to be a problem today is a rapidly deteriorating income distribution between the regions of the Russian Federation. The disparities between the rich and poor regions could possibly be the worst amongst all the federations.