Maxim Shipenkov/AP

• Russia's prime minister said Thursday the government wants to raise the retirement age.

• He also said the country could also see higher value-added tax rates.

• The proposals are aimed at raising government revenue amid a falling working-force population.

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In efforts to tackle demographic challenges to Russia's economy, Moscow looks poised to keep people working longer. 

Prime Minister Dmitry Medvedev announced Thursday the government wants to gradually raise the retirement age from 55 to 63 for women and from 60 to 65 for men.

An increase in the retirement age could ease the "demographic squeeze" significantly, according to William Jackson, a senior emerging markets economist at Capital Economics.

"Russia’s demographic problems have been obvious for many years and the plans announced today are really the least that could have been done (and should have been done years ago)," he said. 

The workforce in Russia has been shrinking and is expected to decline more sharply in coming years, which has raised concerns about funding for pensions. Analysts estimate the working-age population would fall of 0.4% a year under current policies.

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A higher retirement age could cause the working-age population to increase over the next 15 years, according to Capital Economics. That could raise the potential growth rate, currently a relatively sluggish 1.25%, by as much as 50 basis points. 

In another unpopular effort to tackle a stagnating economy, Medvedev said the government wants to raise value-added taxes in the country to 20% from a current level of 18%.

While that would raise government revenue, it could mean there would be less scope for monetary easing. Capital Economics predicts inflation would increase to about 4.7% next year after a VAT hike, compared with their current forecast of 3.5%. That could discourage the central bank from rate cuts that tend to stimulate the economy. 

Jackson is remaining cautiously optimistic with his economic outlook for the country, saying the plan isn't a mark toward "more reformist policymaking."

He said the government would need to work toward measures to boost investment and productivity growth, such as privatisations and judicial reforms, for more meaningful results. 

The legislation looks set to next go to the Duma, the lower house of parliament, which is controlled by the ruling party and rarely pushes back on policy initatives. 

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