Cutting pensions not the solution

RIGA - Pension cuts of up to 10 percent in order to stabilize the social budget would be the worst case scenario, said Prime Minister Valdis Dombrovskis (Unity) in an interview with Delovije Vesti, a business supplement to the newspaper Vesti Segodnja. Dombrovskis says that the pensions were already reduced by 10 percent once, but the Constitutional Court ruled that the cuts were against the Constitution.

The Constitutional Court’s verdict prevented the government from saving 120 million lats (171.4 million euros) in the state budget, which would be enough to ensure the stability of the pension system. The court’s decision does not improve the economic situation in the country and the government must discuss pensions again, said Dombrovskis.
The prime minister acknowledged that currently there are many rumors about the collapse of the pension system and loud promises calling for no reduction in pensions.
He previously told Latvian State Radio that the 50 million lats budget consolidation measures do not envisage pension cuts. Dombrovskis believes that pensions should be discussed within the framework of the social budget, but not the consolidation measures.

The head of state said that the government is looking into the sustainability of the social budget, and the Welfare Ministry is also evaluating several proposals. However, the government has not planned any reductions in this sector.
According to Dombrovskis, there are several proposals regarding social benefits, which will be evaluated within the framework of the 2012 budget.

Welfare Minister Ilona Jursevska (Union of Greens and Farmers) in a press conference on March 9 affirmed that the pension system needs to be “altered,” and that the Welfare Ministry is “working on it,” but the ministry will not support “linear pension cuts,” reports news agency LETA. She says that “We must consider not how much to cut and for who, but how to restore people’s confidence in the state, and willingness to pay taxes,” said Jursevska.

Jursevska also said that the social insurance system should be viewed as a component of potential economic development and stabilization, whereas pensioners should be considered as not a burden, but as potential labor market participants. The government must support the creation of new jobs, make health care  more accessible, and offer lifelong education measures, said the minister.
Politicians’ recent statements about the collapsing pension system mount pressure on society, pitting various social groups against each other, warns Jursevska. Furthermore, this “marketing campaign” shows disdain for pensioners, added the minister.

The government used to have a successful dialogue with pensioners, but Jursevska is not sure if further dialogue will be equally successful after such a “marketing campaign in the media.”
The Welfare Ministry will not be the one to urge pensioners to give up the supplementary payments they receive along with pensions; the initiative must come from the pensioners themselves. “Will artificial pension reductions solve economic problems in the state? Will this prompt a higher birthrate and the return of economically-active residents to Latvia? No, it will be mending holes in the budget, pushing even more residents into poverty and causing even greater distrust toward the pension system and the state as a whole. If it is considered natural that the state must honor its obligations to the international lenders, then the state must even more so honor its obligations to the people, the taxpayers,” said the Welfare Ministry’s Social Insurance Department director, Jana Muizniece, in a statement.

The Welfare Ministry has appraised the problems in the social insurance system - demographic processes, decreasing social budget revenue - and set forth several tasks already last year to make the system viable. One of the tasks is to increase the retirement age to 65 by 2021, and freezing the indexing of pensions by 2013 to save another 1.3 million lats in the budget, as well as others, for instance, lifting the supplementary payments to pensioners that are currently paid from the social budget.

Prime Minister Dombrovskis says that there is no reason to worry about the stability of Latvia’s pension system. He said that while the government is discussing the sustainability of the social budget, the Welfare Ministry is evaluating several proposals. However, the government has not planned any cuts in this sector.
Many experts believe that the current pension system, as it is, is not sustainable, and that the retirement age may even reach 70 years in the future.