Feliciana Rajevska, ass. prof., Vidzeme University of Applied Sciences Olga Rajevska, PhD student, University of Latvia How policy design influences sustainability of pension systems in Latvia and Estonia Baltic University Programme Teachers Conference Sustainability - Security and Stability - in the Baltic Region Kazimierz Dolny, Poland, 7-10 November 2012

Pension systems in Latvia and Estonia  I pillar – mandatory public pay-as-you-go scheme Latvia – NDC system since 1996 Estonia – points system since 1999  II pillar – mandatory private pension funds since 2001  III pillar – voluntary funded pension funds Pension tax, % of gross salary (I+II pillars) Latvia – 20%Estonia – 22%

At what cost?

Sustainability: World Bank vs. EU  A sustainable [pension] system is one that is financially sound and can be maintained over a foreseeable horizon under a broad set of reasonable assumptions (World Bank)  Member States are committed to providing […] the financial sustainability of public and private pension schemes, bearing in mind pressures on public finances and the ageing of populations, and in the context of the three-pronged strategy for tackling the budgetary implications of ageing, notably by: supporting longer working lives and active ageing; by balancing contributions and benefits in an appropriate and socially fair manner; and by promoting the affordability and the security of funded and private schemes […]. (EU)

Sustainability: OECD Fiscal sustainability implies four main characteristics: solvency, or governments’ ability to finance existing and probable future liabilities/ obligations; growth, or the capacity of government to sustain economic growth over an extended period; fairness, or governments’ ability to provide net financial benefits to future generations that are not less than the net benefits provided to current generations; and stable taxes, or the capacity of governments to finance future obligations without increasing the tax burden.

Observance of the principles of fairness Estonia - YES Latvia - NO Intragenerational :  redistribution between income groups by:  flat basic component  positive discrimination in indexation: small pensions grow faster Intergenerational :  effective value of contributions grows proportionally for all cohorts (already retired and prospective pensioners)  Negative growth is prohibited Intragenerational :  no redistribution between income groups (disadvantage of NDC) Intergenerational :  effective value of contributions grows at different speed for different cohorts  Negative growth is allowed (disadvantage of chosen indexation rules)

Valorisation (indexation) of pension capital in Latvian NDC system Source: authors’ calculations

Credibility  Can a socially unfair system be sustainable? or  Can a system be sustainable if people do not trust it?