Latvia’s pension pot is half empty; tough decisions are inevitable

LATVIA – PENSION FUND

From 1 January, the retirement age will be raised by another three months to reach 64 years and 6 months next year. Although raising the retirement age, which began in 2014, has helped to reduce the burden on the system, Latvia still lags far behind the European Union average in terms of pensions. One possible solution to improve the situation would be the introduction of basic pensions.

Latvia's pension pot is half empty; tough decisions are inevitable

As Sandra Stabiņa, director of the Social Insurance Department at the Ministry of Welfare, explains, the balance of the special state pension budget currently stands at €1.3 billion. The ministry’s representative added that as a result of the economic crisis in 2009, the accumulated reserve of the special state social insurance budget at the time decreased by 80%, or 1,087 million euros, despite additional measures to cut costs and increase revenues.

In order for the special state pension budget to be financially resistant to the effects of economic and financial crises as well as demographic and ageing challenges and to be able to fulfil its future obligations, the most important prerequisite is the establishment of sufficient financial savings or reserves. According to international practice, they are desirable in the amount of at least 2 years of pension expenditure or more than 4 billion. In turn, as Stabiņa points out, in Latvia they are smaller, i.e. just over half of the 1-year pension payment amount.

«It is therefore important that when measures are introduced to increase the costs of the special state social insurance budget or to reduce the rate of mandatory state social insurance contributions, compensatory measures are simultaneously taken to ensure a fiscally neutral impact of the special state social insurance budget,» explains the ministry’s representative.

Raising the retirement age helps to reduce the burden

To reduce the expected risks related to the ageing of the population, the retirement age in Latvia has been gradually increased by three months every year since 2014. The current increase of the retirement age will stop in 2025, when the attained age will be 65 years.

Stabiņa explains that since the retirement age has been gradually raised, the number of recipients of old-age pensions has decreased every year. Comparison of the data of the State Social Insurance Agency shows that the number of recipients of old-age pensions in November 2022 has decreased by 8% in comparison to November 2013.

Thus, both the burden on the pension system (the number of pensioners compared to the number of compulsory contributions to state social insurance) and the annual funding required in the special state pension budget to ensure the value of old-age pensions have been reduced.

To be fair, Latvia (and the world as a whole) is currently living in a difficult financial situation, where the cost of living, including public expenditure, is rising almost every day. Asked whether, against this background, the ministry considers it necessary to further raise the retirement age even after 2025, Stabiņa replies: «There are currently no plans to raise the retirement age.»

In order to bring the average pension level closer to the EU, a possible solution would be to introduce basic pensions

There are no plans to increase the retirement age further, but as is already clear, this does not necessarily mean that the Latvian pension system does not have problems of its own. Stabiņa explains that ensuring financial sustainability of the pension system does not always ensure its social sustainability, which is currently the main task of the Latvian pension system.

The size of pensions and their replacement (adequacy) both at present and in long-term forecasts lags behind the average of the Organisation for Economic Co-operation and Development (OECD) and the European Union countries. Both the European Commission and the OECD have repeatedly pointed out in their reports the problem of low pension provision and its possible consequences.

According to the Ministry of Welfare, what needs to be done to improve the situation in the pension system? «To solve the problem of low replacement rates today and especially in the future, a solution for the introduction of a basic pension – as a supplementary pension for all recipients of old-age pensions – should be developed. The size of the basic pension could depend on a person’s insurance record and should be paid from the state core budget,» Stabiņa suggests.

It should be noted that this summer former Welfare Minister Gatis Eglitis explained to Neatkarīgā that social measures require more than 150 million euros next year. The largest part of the required funds are basic pensions, which are planned in the form of regular monthly payments to be paid from the state basic budget for additional state social insurance contributions to the accrued old-age pension.

For this purpose, the Ministry of Welfare intends to allocate more than 50 million euros from the required supplementary budget. It should be noted that basic pensions were to be introduced next year. However, whether there will be money for such a priority in the state budget 2023 is a complicated question that is now in the hands of the new government.

Data source: bb.lv

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