Pension indexing considered premature

  • 2011-07-20
  • From wire reports

RIGA - Indexing pensions would mean an extra burden for the state budget, and increasing pensions may do significant damage to the economy of Latvia, DnB Nord Bank economist Peteris Strautins and SEB Bank expert Edmunds Rudzitis said in an interview with Latvian State Radio on July 15, reports Indexation of pensions would mean new liabilities for a system that already is unsustainable, stressed Strautins.

Although the public is being told that pensions will be indexed with money from a surplus in the employment budget, using this money for indexing pensions would be premature and inadvisable, said the experts.
“Of course, if we have borrowed millions and some of the money is left over, we may erroneously think that we do have money,” said Rudzitis, who believes that separating the welfare budget from the rest of public finance would be very wrong.
Strautins went on to explain that the surplus in the welfare budget was accumulated thanks to the real estate bubble, and Latvia would not have such pensions as now if not for the property bubble.

He recalled that in 2004, when Latvia joined the European Union, the average pension in Latvia was 70 lats (100 euros) a month, whilst now it is 180 lats. In the meantime, Latvia’s economy has increased 10-15 percent at best.
“The burden of pensions on the national economy turned out to be much heavier than anticipated,” said Strautins, adding that, as a result, the current system was not sustainable.
Creating new obligations for the state now is totally unacceptable as this may damage the national economy. In Strautins’ opinion, one-off supplements could be of more use to pensioners as well as the state than the proposed indexation of pensions.

Rudzitis, on the other hand, said that the state budget would have to be consolidated by another 100 million lats or more next year. If this is done through higher taxes, Latvia’s economy will be in trouble.
“The number of workers is not increasing, and if taxes are raised, the creation of new jobs will slow down significantly, and it may well be that in a couple years there will be no money for pensions at all,” said Rudzitis.
Strautins believes that indexing pensions in the current circumstances proves that there is a lack of political maturity in Latvia.
On July 14, Saeima decided to forward to committees amendments to the Law on State Pensions, which envisage indexation of pensions, those up to 165 lats a month.

Fifty-seven MPs voted for the bill, one was against and 28 abstained. All members of Harmony Center, Union of Greens and Farmers, All for Latvia-For Fatherland and Freedom and three members of For a Good Latvia - Andris Berzins, Rita Strode and Guntis Ulmanis - supported the populist bill. The only MP to vote against it was Madars Lasmanis (Unity), whereas the rest of the Unity members and Andris Skele (For a Good Latvia), not willing to make a decision, one way or another, abstained.