The Economist
6 December 1995


[In Russia, pensioners will vote in their millions for the Communist Party on December 17th, giving credence to the idea that the old have suffered most from market reform in Eastern Europe. That idea is wrong.]

If poverty in Eastern Europe makes you think of a `babushka' hidding in the snow hawking a bottle of moonshine, think again. A whey-faced child whining in a communal kitchen would be more accurate. Families with children have done worse than pensioners from Eastern Europe's transition. "I tell people in Eastern Europe...pensions policy is impoverishing their children," says Louise Fox, a World Bank pundit. "The demands of pensioners are taking food out of the mouths of working people's children." That is a big difference from 1989, when children were better off than their grandparents.

The reason is...wages plus welfare have fallen sharply in real terms, hurting families, while pensions have generally stayed high enough to keep grandpa out of penury. The United Nations Children's Fund...has looked at 18 countries of Eastern Europe and the former Soviet Union. It points out...if official statistics are to be believed, pensions have kept ahead of the average wage in ten countries since 1989 and fallen only slightly in another four.

That does not mean...the old have become better off: pensions have still fallen relative to prices. But wages and children's benefits have fallen even more. Compared with the rest of the population, pensioners tend to be...well sheltered from acute poverty by non-monetary forms of protection: many pensioners work or farm on the side, live with another pensioner, get money from relations or live in cheap housing.

Pensions have kept their relative value while most other benefits declined, because post-communist countries wanted fifty-somethings to retire early, and used generous pensions provisions to bride them to make way for new generations at work. In Poland, the average pension 1994; it is now indexed to wages. The cost of this generosity has been huge. Bulgaria, Hungary and Latvia each spend more than 10% of their GDP on old-age pensions, higher the much richer G7 countries...

In contrast, children's welfare is dependent on real wages, which have fallen everywhere. The drop ranges from 15% in the Czech Republic to more than 80% in Azerbaijan. is clear that, in most countries, wages have fallen a lot.

Several other factors have worsened the plight of families with young children. The rise in unemployment since 1989 has produced more one-income families. have social changes, such as the growth in out-of-wedlock births, the number of absent fathers, and deaths among middle-aged men.

Payroll taxes...provide a fourth set of reasons for declining take-home pay for families; in contrast, pensions go untaxed. ...since 1990 child allowances and family benefits have kept up neither with inflation nor - except in Azerbaijan - as a proportion of average wages. ...

The outlook for families may not be quite as bleak as all this suggests. Poor families can work their way out if poverty; poor pensioners...tend to stay poor until they die. As economic recovery boosts incomes and creates new jobs, working families can expect to benefit the most. In the meantime...the face of poverty will remain a young one.

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