Baltics look to cut pensions

  • 2009-04-15
  • By TBT Staff
TALLINN - All three Baltic states have turned their eyes to second tier pensions in their latest bids to cut back on government spending.
Estonian Prime Minister Andrus Ansip said that second-tier pension payments would be frozen in July. The government had originally planned to implement the freeze as early as May.
"There are no alternatives to cutting costs. Both Latvia and Lithuania have reduced the size of the payments and we have to do the same," Ansip told journalists on April 9.

The prime minister said the move would be part of an effort by the country to avoid taking out a large loan.
"We see the example of Latvia that borrowing is not only difficult, but may not succeed at all. The next solution would be the IMF [International Monetary Fund], which would set its requirements and we would have to take expenses in accordance with incomes anyway," Ansip said.

Both Latvia and Lithuania have also recently announced that they would slash government contributions to second-pillar pension funds to help cut back on public spending.
Ansip said it was high time that Estonia followed suit, citing that the country offered some of the highest second-tier pension payments in Europe.

The president has also weighed in on the issue, saying that the move is part of a wider plan that would see the government aim to drastically cut down on expenses in the face of a worst-case scenario forecast from the Finance Ministry to the tune of 7 billion kroons. The ministry said the deficit next year could be as high as 13 billion kroons.


The prime minister's announcement about freezing second-tier pension payments in Estonia came on the same day the International Monetary Fund criticized Latvia for its handling of pension payments.
The government had recently approved a proposal to slash social contributions to second-tier pension payments from 8 percent to 2 percent. The IMF requested that the change not go through.

LETA reported that the Finance Ministry and Welfare Ministry planned on responding to the IMF's request by explaining that the move was part of a planned structural reform and that the money saved would go toward covering costs related to social security mechanisms and reducing the country's deficit.
The two ministries would also highlight that the country would need the extra money if the IMF were to delay another payment, as it did earlier this month.

Saeima (Latvian parliament) delayed voting on the adjustments to pension payments to give the government an additional week to conclude negotiations with the IMF on the issue.  
The amendments state that as of May 1 the proportion of social payments into the second tier state pension plan will be reduced from 8 percent to 2 percent. From January 1 next year the proportion of social payments transferred to second-tier pension plan will be increased to 4 percent, and in 2012 to 6 percent.
Latvian Welfare Minister Uldis Augulis, a member of the Union of Greens and Farmers, earlier said that 106.5 million lats would be saved through decreasing the proportion of payments into the state-funded pension scheme, which would be spent on improving social security.

The ministry reported that they anticipate the situation of payments and debts to even out, and the government will be able to afford the social payments again.
Prime Minister Valdis Dombrovskis has previously announced that Latvia could be bankrupt by the end of June 2009. This problem is now even more serious as a 200 million euro payment has been delayed.
The next payment from the European Commission will be in the sum of one billion euros, expected in May or June of this year along with the delayed payments.

Lithuania has also opened discussions on slashing government contributions to second-tier pension funds (see story Page 4).