Pension system takes a Western shape

RIGA - The pension reform launched in Latvia in 1995 is in its final phase. The Ministry of Welfare has started a campaign to persuade Latvians that the new pension system is just, humane, modern and compliant with Latvia's financial and demographic situation.

The starting point in the transition from the Soviet-style stable pension system to the Western-style, input-dependent system was in 1996, when every taxpayer received an account where the information on his social tax payments were accumulated.

"Lack of personal motivation required this system, that the pension amount did not depend on personal payments," said Ingus Alliks, director of the social insurance department of the Ministry of Welfare.

People are financially more interested to pay taxes more honestly and for a longer period of time, because the amount of the pension is connected to the pension capital, which is accumulated through the years.

The formula for determining the amount of the pension is pension capital divided by the year coefficient which stands for the expected average length of life after retirement.

According to the formula, the earlier one retires, the less money he receives as a pension.

There are some groups of people whose pension, according to this system, would be very small. Some of these are people in rural areas, others are dependent mostly on goods produced at home, people with low salaries, or people who worked for few years and have insufficient pension capital. That they would receive small state pensions must not raise concerns, said Lilita Velde, deputy director of the social insurance department.

Anyone who pays the social insurance tax for at least 10 years and retires at the official retirement age of 58 for women and 60.5 for men will receive the minimum social insurance benefit, currently 30 lats ($50).

The necessity to raise the age of retirement to 62, initially opposed by Latvian society, is explained by the changing demographic situation. First, life expectancy rises, second, more people are willing to retire earlier, while there is not a large enough work force to support them.

Today there are 380 people of pension age for every 1,000 people of working age. The number of pensioners is forecast to increase to more than 500 per 1,000 by the year 2050.

Another problem for the pension system is currently a 57.6 million lat fiscal deficit in the social insurance fund. The deficit occurred after Parliament passed amendments in 1998 which allowed 16,000 pensioners to receive higher pensions. This caused unplanned expenses from the social insurance fund, as well as violated fair play regulations, said a Ministry of Welfare statement.

According to Alliks, by the end of the year, the deficit will reach 83 million lats, and zero deficit will be reached only in 2006.

The new pension system is based on the solidarity principle, meaning that money is paid into and out of the social insurance fund simultaneously. The younger, working generation supports the pensioners.