The crooked cornerstones of the pension system need to be changed

The new Minister of Welfare Gatis Eglītis mentioned in the LTV program “1:1” that not everything is in order with our pension system, and therefore it is necessary to correct it. Exactly what corrections Eglītis wanted to suggest could not be really understood. He said something offhandedly, causing a storm of public outrage.

Even later, Eglītis, apparently afraid of his own statements, did not provide any explanation, but when he began to talk about how what he said was "taken out of context", it became clear that the new minister did not have a serious, detailed plan to improve the pension system. He is only irresponsibly throwing words around. Without any grounding.

However, it is necessary, even very much so, to talk about the adjustments of the pension system, because only those who are completely detached from the reality of Latvia can believe that everything is in order in this area. The thing is that, in theory, we do have a very good and fair pension system, but only in theory. Why? Because this pension system would be good and fair if it were implemented and operated in a society with long-term stable and healthy economic development.

In Latvia, this system was introduced in 1995. It entered into force on January 1, 1996, when Latvia was going through very difficult times. It should be reminded that during this time the average gross salary (on paper) was 125 euros (90 lats) per month. It must be emphasized that this was the average salary. For a large part of the population, the salary was below 100 euros (70 lats) per month. To these sad conditions, a high level of unemployment must be added, especially in the province. But that is not all. As public institutes were still in their infancy, working "without papers" was widespread, i.e., no social contributions were paid by the employer to the employee, and the employee had little choice in the context of widespread unemployment.

In such a situation, a Latvian in exile, pension “guru” Jānis Ritenis, arrived in Latvia from Australia. I do not want to say anything bad about him, because he was not the one who should have understood the real situation in real Latvia. He simply wanted to introduce a theoretically "ideal" pension system on paper that no one even in Australia, with its decades of stable economic growth, had thought of implementing. Latvia was a completely different matter, where everything was a blank slate. And this experimental “City of the Sun” (a utopia of an imaginary ideal society written by Tommaso Campanella in prison at the very beginning of the 17th century) created by Ritenis in exile in Australia was realized in the reality of Latvia.

As a result, a system was created in which some receive very large (up to 17,000 lats per month!) pensions, while others receive ones that are below the subsistence level. A special case was the procedure for calculating social contributions from the length of service at the time of occupation for future pensions. It was decided that social security contributions for length of service up to April 1, 1996 would be recalculated in line with these contributions for the three-year period of 1996-1999. If during this time a person received a very low salary or, even worse, was unemployed, worked odd jobs or worked for an entrepreneur who did not pay social security contributions for employees, then the social contribution for the future pension was calculated for the entire previous length of service - 0.00 lats/euro. On the other hand, if you knew all the nuances of the law, you had a long previous work experience and enough money (perhaps even illegally obtained from today's point of view) to pay as a social contribution, then you could create for yourself a huge pension, which would pay off in a few years.

It should be noted that a similar pension system was adopted in Estonia, but only a similar one. Same, but without the defects already mentioned. There, before the reform, seniority was recalculated at a certain basic salary plus a bonus in line with the social contributions for the transitional period, but with a certain ceiling so that this transitional period could not be abused. No such damping mechanism was implemented in Latvia. It is clear that the injustice of the system was soon noticed by those who deal with it on a daily basis and pointed to the need to correct it. The obvious question is: why hasn't this been done for 25 years?

The answer is provided by the fundamental book “Latvijas tautsaimniecības vēsture” (History of the Latvian Economy) published in 2017, edited by Professor Gatis Krūmiņš. One of the most interesting chapters in this book is the one that describes the development of the social security system from 1991 to the present day. This chapter was written by a long-term official of the Cabinet of Ministers, in the presence of whom this social system was created - Pēteris Leiškalns. He admits that the issue of correcting this unjust pension system has been raised several times, but it has never been implemented. Why? Because in all cases where it had to be decided whether to support the needy or the rich at least minimally, the political class always leaned in favor of the rich. It was an indisputable practice, and unfortunately, nothing has changed now.

The specific statements of Eglītis that it would be necessary to reconsider the use of more than five billion euros in the second tier of the pension system are, in fact, only natural. At present, these billions are accumulated in private banks and 90% are located outside Latvia. Someone had to start raising this issue. Of course, it is unfortunate that the Minister did not come up with carefully crafted and well-considered proposals, but just with an idea, which immediately gave its opponents a great opportunity to ridicule it and stop it from being developed.

A separate remark should be made to those who are worried that their second pillar of pension savings might be redistributed in favor of today's pensioners. This should be a concern if future economic growth is not expected and future workers' wages remain at current levels. If we assume that future salaries will be significantly higher than current ones, then a situation arises - the higher the first tier share in the total pension, the better. If a worker today pays mandatory social contributions lower than the national average salary, then this redistribution would just be beneficial for him in the future. In any case, I do not see much cause for concern here. On the other hand, if the whole social security system collapses (for example, in the case of an overarching war), then it will not matter how much you have contributed to it today.

Discussions on the adjustment of the pension system are needed for another reason. Finally, the debt should be returned to those who have suffered most from the economic chaos that arose after independence. Those people who stood on the barricades and formed the bulk of the people there deserve a much more humane old age and, consequently, higher pensions. How to achieve this is another matter.