World Bank suggests alternatives

RIGA - Although she commended the efforts of the Latvian government to solve its budget woes, the message presented by World Bank chief economist Louise Fox was "the pension law needs to be changed."

"We generally support the government's intent," Fox said at an Aug. 27 news conference. But she said two key aspects of pension reform proposed by Latvia's government "may not have been properly analyzed."

The two aspects were the increase in the pension age and the cut-off of pension benefits to working pensioners.

Although the pension age undoubtedly has to be increased "to activate people for the longer working life," Fox said the proposed amendments provide for too steep an increase on a stage from 60 to 62.

And, she says, it looks like the government got it wrong with the working pensioners.

"The amendments were proposed on an assumption that all working pensioners will carry on working and simply stop drawing pensions," Fox said. "Our estimates show that it is not correct. About half of the working pensioners are likely to quit their jobs."

This may not have a desired effect of lightening the burden on the social budget, since the previously employed pensioners will stop paying social security contributions, reducing the income side of the social budget.

Forbidding working pensioners from drawing their pensions may also create a black market for jobs.

"The government has to be consistent here. It is trying to eliminate the underground economy in other areas. It must make sure it continues its efforts in the labor market too," Fox said.

On the whole, in the World Bank's opinion, most problems with the pension system stem from the fact that nobody knows what it is about. People simply don't understand how the system works.

"If the system was better understood, the government wouldn't have been able to pass many of the amendments to the pension law" in the earlier years, Fox said. The World Bank is particularly bitter about using up all social budget reserves in 1998 to introduce a "large and unsustainable" increase in pensions.

Right now, the World Bank is gently pushing Latvia toward introducing a state-funded pension system of the type that operates in Poland and Hungary. This system, among other things, implies the distribution of free reserves among the privately managed individual accounts, where they accumulate and are ready to be used when a person wants to take out a pension. This system would ensure stability against demographic changes and is less prone to political manipulation, Fox said. It also places less of a burden on younger generations who no longer have to support current pensioners who to an extent support themselves.

World Bank promised Latvia assistance in reforming its pension system, both financial, in the form of grants, and consultation.

"We will work all weekend with the Welfare Ministry to analyze alternatives to the reforms proposed by the Latvian government," Fox said. "Of course, the Latvian government is under no obligation to accept these alternatives."