Pension system collapse looms

RIGA - Latvia’s pension system is collapsing, crippled by politicians’ decisions, the economic crisis and mass emigration, said several experts during the Latvian State Television program ‘De facto’ on March 6, reports news agency LETA. Pensioners constitute almost 25 percent, or 570,000, of Latvia’s population of 2.2 million residents, and they receive old-age and disablement pensions. The social tax is paid by one-third, or 750,000, Latvian residents, according to the Welfare Ministry’s data. One-third of the taxpayers work in ministerial jobs, or in the defense, health care or education sectors, and receive their wages from the state budget. Therefore only 500,000 taxpayers are actually contributing to the social budget.
Pension system expert, economist Edgars Volskis, says that such a proportion, when there are so few employed and so many to provide for, especially senior citizens, is not sustainable.

The Welfare Ministry, however, sees no need for reforms. Volskis explains that the social budget is crippled by the falling number of taxpayers due to the significant impact of the shadow economy, mass emigration, and the government’s poor decisions during the abundance years.
‘De facto’ explained that Latvia’s pension system can only operate successfully if the number of taxpayers is increasing and Latvia experiences rapid economic growth. None of this is happening now.

Swedbank’s chief economist Martins Kazaks points out that there are only two viable solutions - to increase the tax burden or reduce pensions. A third solution - structural reforms in the state administration - seems practically impossible to carry out. Senior citizens have become hostages in this situation.
‘De facto’ pointed out that reducing pensions would be a simple solution. If pensions were reduced by 10 percent, it would save 100 million lats (142.8 million euros) in the state budget.
The experts also emphasized that the reduction of pensions would not solve the problem in the long run. Due to the current demographic situation, the number of retirees will only continue to grow, while the number of employed and taxpayers will continue to decrease.

Girts Rungainis, IBS Prudentia partner and investment banker, accused pensioners, in the business magazine Kapitals, of blackmailing society by being unwilling to solidarize in these difficult times. Commenting on the current situation in Latvia’s economy, Rungainis emphasizes that the government is “wasting its long-term mandate to carry out the changes, which it received after its victory in the elections, on a short-term policy.”

“Perhaps there is no other solution, because the actual policy always focuses on short-term goals, and certain groups of people have learned to usurp the representation of society’s interests and make a fuss,” he noted.
According to Rungainis, pensioners are “the only privileged group in the society.” Their pensions were increased during the so-called “abundant years” and now they are blackmailing the society by being unwilling to back off from the increase. “The pensioners’ attitude prevents supporting young families, and solving the demographic problem. Most of today’s pensioners used to work in Soviet times, but in the last 20 years they have been leading the country to its downfall. They did not give birth to enough children, when it was still possible. The unreasonably high pensions are not a human rights issue. Why do we have to pay for such high pensions if we cannot afford them? It also means that our pensions will be smaller, in terms of purchasing capacity,” says Rungainis.

He forecasts that inflation will help solve the “pension problem.” The investment banker also emphasizes that the indexing of pensions must not be allowed. The labor force must understand that the state will not be able to ensure their pensions above the subsistence level. Therefore each person must earn his or her pension and save themselves. Those who want to have a financially secure old age must have three children per family, raised in a decent family and educated in the sciences, he explains.

Economists point out that the government’s inability, or unwillingness, to solve this growing problem will inevitably lead to an influx of immigrants. Immigration, though, could bring with it problems of a different nature, including introducing religious and cultural tension, as is the case throughout Western Europe.