Political insincerity about the pension system?

RIGA - The high rate of emigration, unemployment and an ageing population will soon be hitting Latvians in the pocketbook, because this demographic alert now demands changes in the way the pension system operates, warns Roberts Kilis, social anthropologist and advisor to Latvia’s president, Valdis Zatlers. To the BBC news agency he explained that the birthrate in the country is below an average of 1.4 children per woman, which is not enough to sustain the population, even without emigration, which also is remarkably high.

The BBC writes: “By the end of the year, [Kilis] says the government will no longer be able to cover pension payments.” In the daily Latvijas Avize it is written that Kilis has been misinterpreted, and that he actually meant the pension system will experience a rather shocking change.

Kilis predicts that changes in the pension system could be established only after the parliamentary election, to be held on Oct. 2. In speaking to Latvijas Avize, he said that politicians are avoiding talking about the problem, and are postponing any consideration of it; Kilis calls this avoidance “a political insincerity.”
The social anthropologist assumes that pensions won’t be cut off in a direct way; most probably they will be affected by taxes. Kilis predicts several changes – an increase in the retirement age, cancellation of pre-retirement pensions, and paying specific attention to private investment in pensions.

Economist Janis Berzins (who is a columnist for The Baltic Times) agrees with Kilis that these threats are serious and real. He clarifies the issue by saying that the high rate of emigration shows that the choice of policy in Latvia in recent years has been wrong, and the result of this is that a “fictional economy” has been established. Berzins thinks that this could mean that a ‘Latvian’ Latvia was able to survive in the Soviet Union, but very possibly won’t be able to survive in the era of globalization. “The conclusion is simple,” he says, “If there are no Latvians in Latvia, then Latvia as a social and cultural entity disappears.”

Aina Verze, the head of the Latvian Pensioners Federation, assures The Baltic Times that she has all the statistics in her hands, and the situation where the budget won’t be able to cover pension payments is impossible.
“The Ministry of Finance denies, point blank, the opinion that at the end of year the budget won’t be able to cover pension payments,” says the head of the Communication Department at the Ministry of Finance, Baiba Melnace. She explains that the government can provide liquidity to fulfill all the obligations, that is, pension payments. She admits that there will be a budget deficit this year, but this is a planned process which will be financed from other financial sources, and won’t be a threat to the pension system.

The head of the public relations department at the Ministry of Welfare, Marika Kupce, says that as a result of the economic crisis, the proceeds in the special budget of the social insurance system can’t cover expenses. To provide the service payments, which are demanded in the normative documentations, funds remaining from previous years are now being used. On Aug. 1, the remaining amount was 503 million lats (715 million euros), though on Jan. 1 of this year it was 737.8 million lats, says Kupce.

“There is only one solution – Latvia has to develop fast,” says Berzins with certainty. “If we will continue with the same economic policy, it won’t happen. We count on the possibility that after implementation of the euro, the trust of foreign investors will increase, and we will get a lot of money from abroad, and we will finally develop. If it didn’t happen in the ‘fat years,’ when there were a lot of credits, it won’t happen in the nearest future,” he explains.
The Ministry of Welfare has created a program for the long term stability of the social insurance system. The planned term of the program is 2011 – 2060. According to their research, in 2060 only 54 percent of inhabitants will be of working age.

In the program it is shown that because of the economic problems, unemployment and the decrease in mid-level salaries, proceeds didn’t cover expenses in the budget for 2009, and a negative balance in the budget is also predicted in the following years. The budget deficit in 2009 for the special budget was 213 million lats; the planned deficit in 2010 is 354.6 million lats; in 2012 – 432.4 million lats. “It clearly shows that the remaining funds in the special budget will be consumed, but improvements in the nearest years are not expected,” writes the program.

The long term stability program for the social insurance system offers several possible directions for action, with predictable consequences. One solution offered by the program is to increase the rate of social insurance tax. If this were to be selected, then starting with the year 2011, tax rates will have to be increased, from 33.09 percent of wages, as it is currently, to 46.8 percent. This, however, would place an enormous additional tax burden on employees.
A second solution is to restructure the expenses in the social insurance system, a process which includes 11 steps. Some of these steps would include, starting in 2016, an increase in the retirement age by half a year, so that by 2021 the retirement age would be 65. Other steps would be to increase the ‘long service’ retirement age, which currently ranges from 38 – 55 years old; a freeze in the pension indexation for a definite period of time; increase the minimal length of service to qualify for insurance to 15 years, starting in 2016.

If all 11 steps are performed, in 2027 the Ministry of Welfare expects that the financial stability of the special budget will be achieved, according to the program.
According to the statistics from the state Social Insurance Agency, in July of this year 567,600 people in Latvia were receiving pensions. Verze says that more than 80 percent of all pensioners received a pension that is below the subsistence wage. The minimum pension is 49.50 lats; the maximum is 1,000 lats; the average is 182 lats.
Kupce says that in 2010, for all the pensions the budget is planned at 1.2 billion lats. By July 31, 728.8 million lats were already spent.