Twenty million Russians may be left without a pension: they do not pay contributions to the Social Fund

How do people cope without official employment?

Every fourth working-age Russian, almost 21 million people, did not pay insurance contributions to the Social Fund in 2022. The figure reflects the impressive scale of shadow employment, which, in turn, deprives part of the population of insurance pensions. However, for many this is a completely conscious choice: people prefer to receive their salary “in an envelope” here and now, rather than share even a small fraction of officially earned money with the state and wait decades for retirement age.

Social contributions go to the Social Fund from 59 million people, according to the Rosstat report for 2022 (data for 2023 have not yet been summarized). Another 4 million citizens are considered self-employed, and just over half a million are officially unemployed. At the same time, the year before last there were 84 million working-age Russians, and 72 million working people. Having studied these statistics, analysts derived the number of those who did not transfer funds to the Social Fund. According to their estimates, the difference between the total working-age population and the official number of employed people is due to the size of the shadow economy, which employs at least 14.5 million Russians.

At the same time, gray employment is characteristic mainly of small and medium-sized businesses; over 30 million people work in this sector. Often, employers pay employees so little wages that tax costs can exceed the lost tax revenue. As they say, the game is not worth the candle. According to the Central Bank, gray schemes are most often used in the construction industry (37%), trade (29%) and the service sector (19%). It is clear that the state, in particular the Social Fund budget, is losing a lot of money on this: according to Lyudmila Ivanova-Shvets, associate professor of the Plekhanov Russian University of Economics, we can talk about 3% of GDP, or 3-4 trillion rubles.

“Many people do not transfer money to the Social Fund: self-employed people, housewives, students, disabled people, domestic staff – nannies, cleaners, caregivers, gardeners,” says Alexey Zubets, a professor at the Financial University under the Government of the Russian Federation. “Let’s add here those rural residents who are engaged in subsistence farming, as well as those unemployed who are not registered with the employment service.”

21 million is an impressive figure, but at the same time, this is not a disaster against the background of the country’s 100 million adult population and 84 million working-age citizens. It points, firstly, to the scale of the shadow economy in Russia, and secondly, it confirms the fact that the mass of people not only are not employed anywhere, but also do not intend to do so. It’s already good for them, Zubets argues. Obviously, they have some kind of income, business, real estate, bank deposits, in a word, financial sources that allow them to do without official (or even shadow) work. In old age, they are not going to live on a state insurance pension, which is not visible over the horizon for decades. And representatives of this category do not think at all about the penny social allowance (the average amount in 2024 is 13.5 thousand rubles), which they are entitled to from the state in any case.

“The shadow sector is a fairly broad definition: people can work in a completely legal organization without being registered under an employment contract,” notes Pavel Kudyukin, a member of the Council of the Confederation of Labor of Russia. – Accordingly, they do not pay any fees. In relation to the self-employed, according to their legal status, mandatory contributions to the Social Fund are also not provided for.”

The figure of 21 million is interesting because it most accurately shows us the size of the shadow segment of the Russian economy. There is nothing good about this value, Kudyukin argues: the Social Fund receives less income, which, in turn, deprives some citizens of insurance pensions. When the authorities justified the need to raise the retirement age, they referred mainly to the chronic deficit of the then Pension Fund (now transformed into the Social Fund). But the problem of lack of funds can be solved in another way – by reducing the level of gray employment. However, this is not happening yet.

“Until a certain age, people don’t even think about an insurance pension, about the fact that they need to make contributions to the Social Fund, that they need to accumulate a certain amount of work experience, pension points,” summarizes Kudyukin. “And for many, this is precisely a conscious choice: it would be better for me to receive money in an “envelope” right now, but without unnecessary hassle and without sharing with the state, than to wait for many decades until retirement age.”