Baltic pensions need indexation

The three Baltic states will have to revise their pension policies after joining the European Union to avoid strains on their state budgets from aging populations, a panel of international experts meeting in Tallinn recently concluded.

Pension-fund and reform experts from Estonia, Latvia and Lithuania gathered in Tallinn April 23 - 25 for a conference aimed at analyzing pension reform in Central and Eastern Europe.

Estonia has implemented a three-tier pension system that includes a state pension, personal pensions partially funded by the state and private pensions. About one-third of the country's population participate in partially state-funded private pension funds, according to the Bank of Estonia.

Latvia and Lithuania's pension systems are similar, after hard-fought reforms.

"Pension reform in Latvia is legislated and successfully implemented, yet there are several issues to settle," said Laima Zilite, an official with the Latvian State Social Insurance Agency.

Fewer people participate in private or semiprivate pensions in all three countries because knowledge of the financial services markets is still fairly limited, she said.

Veiko Tali, head of the financial services department at Estonia's Finance Ministry, said Estonian pension funds included a wide variety of investment options and would continue to provide returns higher than the annual inflation rate.

"Pension payments from the state budget, guarantees of the pension funds and pension indexation are our main tasks today," said Tali.

Tali added that increases in the pension system to keep up with cost-of-living increases will be introduced in the next several years. The pensions will either be indexed to follow consumer price increases or wage and price increases.

Another benefit to pensioners is breaks on personal income taxes.

Edward Whitehouse, director of Axia Economics, a London-based consultanting firm specializing in the microeconomic analysis of public policy, said the present treatment of pensioners in the Baltics under the personal income tax was "exceptionally generous" when compared with developed country standards, where the tax rates for workers and pensioners are different.

According to Whitehouse, it is natural to question whether older people should pay less tax than people of working age with the same income.

"Pensioners no longer need to cover the cost of work such as commuting and clothing," explained Whitehouse.

The incomes of most pensioners in the Baltics are far lower than most working people.

Whitehouse said that even after the first stages of reform in Estonia, Latvia and Lithuania, pensions were "more generous and less distributive" compared with West European countries'.

In all three countries, workers with higher than average incomes receive higher pensions.

"Further changes in the pension systems might be necessary to ensure that these (relatively high pensions) can be afforded in the long term," he said.

Michal Rutkowski, the manager for social protection in Europe and Central Asia for the World Bank, said indexation of pensions is inevitable.

"Ageing societies are a blessing for the people, but not for the pension system. Estonian pension reform is on the right track when it is moving toward indexation," he said.

The European Commission forecasts that by 2050 each person over 65 in the EU will be supported by two working-age people, rather than the four workers per pensioner that exists presently.

Pension systems in the 15 EU member states are as different as they can be and Michal Krejza, the head of the political and economic section of the European Commission delegation in Estonia, said the harmonization of the pension systems of EU member states was never planned.

"However, cooperation in this field has been good. People can move to other EU countries without losing their social benefits," he said.

"There are many colonies of German and Danish pensioners in Greece. These people move to sunny southern Europe and receive their pensions there," said Krejza.

According to Krejza, after EU accession pensions are likely to grow in Estonia because of the overall GDP growth of some 2 percent.