Most old age pensions fall short of basic needs

Gunta Berzina
MiTi Foundation

In the mid-1990s, Latvia became one of the first countries in Central and Eastern Europe to undertake radical pension system reforms, introducing a three-tiered system, raising the retirement age and limiting the possibilities of early retirement, all in the name of ensuring the system’s sustainability. A decade later, up to 90% of retired people receive pensions that fall below the minimum subsistence wage level. Thus, instead of a time of well-deserved rest, retirement for the majority is a time of financial constraints and social exclusion.

On 18 December 2003, Latvian Minister of WelfareDagnija Stake, together with Anna Diamantopoulou, member of the EuropeanCommission responsible for Employment and Social Affairs, signed the JointMemorandum on Social Inclusion. The aim of the memorandum was to prepare thecountry for full participation in the European Union open method of coordination onsocial inclusion upon joining the bloc in May 2004.[1]

The memorandum was to have strategic significance by guiding the design andimplementation of social inclusion policy based on defined priorities. It was apolitically declaratory document defining short- and long-term activities to beimplemented by the country to reduce social exclusion and poverty, payingparticular attention to the people most vulnerable to the risks of socialexclusion.

One of the principal political goals stated in the memorandum was to ensure anadequate income distribution. Considering that the social insurancecontributions made by workers are rapidly increasing – the average wage hasrisen from EUR 215 (USD 288) in 2000 to EUR 550 in 2006 – one could presumethat pension indexation would reflect this growth in income. Yet this has notbeen the case, as will be illustrated later in this report.

Pension reform and the adoption of athree-tier system

Latvia was one of the first countries in Central and Eastern Europe to introducea multi-tiered pension system. Pension reform was set into motion in 1995, whenParliament approved the general reform guidelines developed in 1994. The Law onState Pensions, which enabled the implementation of the first pension tier, wentinto effect in January 1996; the Law on Private Pension Funds, which correspondsto the third tier, entered into force in July 1998; and the Law on State-FundedPensions, which regulates the second tier, went into force on 1 July 2001.

The first tier in this new pension paradigm is astate compulsory non-funded social insurance pension scheme, based on theprinciple of intergenerational solidarity. It is essentially a traditional‘pay as you go’ (PAYG) system in which those who are working pay for currentpensioners’ benefits.

The second tier is a state compulsory funded pension scheme, based on individualcontributions to
privately managedsavings accounts financed from payroll taxes. Second-tier contributions aremandatory for employees who were under 30 in July 2001, when the scheme cameinto effect, and optional for those aged 30 to 49 at the time. Contributionswill rise gradually from 2% of income between 2001 and 2006 up to 10% from 2010onward, and contributions to the first pillar will be reduced proportionally(from 18% in 2001 to a matching 10% as of 2010).[2]

This mandatory fully funded scheme was originally administrated by the LatvianTreasury only, which was allowed to invest the contributions solely ingovernment securities and term deposits with banks. Since 2003, however, workershave had the option to choose from a group of private providers who areauthorized to offer a wider range of investment options and more diversifiedportfolios.[3]

The third tier is a system of voluntary private pension funds. Upon retirement,individuals who have invested in private pension funds can either receive a lumpsum payment or life annuity from the private fund provider, or transfer thecapital accumulated to the first pension tier in order to receive a pensionbased on the first-tier calculation formula.[4]

Other reforms adopted to ensure the future sustainability of the pension systemincluded raising the age of retirement and reducing the possibility of earlyretirement.
The transition tothe new retirement age of 62 is being carried out on a step-by-step basis, witha six-month increment each year. The retirement age for men reached 62 in 2003,while the retirement age for women will reach 62 in 2008.

Workers who have made social insurance contributions for at least 30 years willstill be able to opt for early retirement up until mid-2008, but from that pointon, this possibility will be eliminated. For now, early retirement can be takenup to two years before the official retirement age.

Another form of early retirement that was a feature of the fully state-financedpension system before the reform was undertaken was that of ‘long-servicepensions’, also referred to as service pensions. The former system allowedworkers to retire with a pension before the regular retirement age inoccupations that involved health-threatening working conditions – high stress,exposure to dangerous substances, noise, etc. – or when the ability to work inthe occupation depended on age, as in the case of performing artists likemusicians and dancers. Service pensions were also granted in the case ofoccupations or work positions considered to have special merit.

Whenthe new three-tier pension system came into effect in 1996, it limited theavailability of long-service pensions to a small number of public sector posts,such as civil servants at the Ministry of Internal Affairs and theConstitutional Protection Bureau and public prosecutors. This move was highlycriticized, especially since it eliminated the possibility of early retirementin occupations where continued activity genuinely depends on the workers’ ageand state of health. Performing artists, for example, are often not able tocontinue working in their professions until the age of 62, yet there are fewother jobs they can turn to as an alternative.[5]

Pensions within the social insurance system

Funding for the social insurance system as a whole isbased on the social insurance budget, which is divided into four ‘special budgets’: occupational accident specialbudget 1%; employment special budget 8%; disability, maternity and sickness specialbudget 16%; state pension special budget 75%. There are two basic principlesunderlying the current national social insurance system. The first is thatsocial insurance service corresponds to the social contributions made, and thesecond is solidarity between those who pay social insurance contributions andthe recipients of social insurance services.

According to the commitments made by the government, adequate state supportshould be available to everyone who needs it. Given that 75% of the total socialinsurance budget corresponds to the state pension special budget, and the vastmajority (80.8%) of pension recipients are old age pensioners, it would be quitetelling to take a closer look at the reality of retired people’s lives inLatvia.

Pensioners living under minimumsubsistence level

Two years after signing the JointMemorandum on Social Inclusion, Ministerof Welfare Dagnija Stake acknowledged in an interview with Latvijas Avize on 27 October 2005 that in order to provide asubsistence wage level pension for all the retired people in Latvia, the countrywould need an extra EUR 7 billion. In the same interview, she was forced toadmit that 94% of pensioners were living under the minimum subsistencewage level at the time.

Latvia has no official poverty line or basic poverty line that could apply toits population and be accepted as the sort of critical minimum applied in otherEuropean countries. Under normal circumstances, the underprivileged can be seenas those whose monthly income per household is below the basic minimum wage. In2006, the official minimum wage was EUR 130 or 76% of the minimum subsistencewage. This hardship is endured by 19% of the population.

On November 2005, the Cabinet of Ministers defined a new state-guaranteedminimum income (GMI) level, which was to be increased from EUR 30.17 in 2005 toEUR 34.48 in 2006. The amendments adopted provided for an increase in the incomelevel for families or persons living alone and whose income does not exceed EUR34.48 per person a month. According to statistical data, around 150,000 peopleor 6.5% of the total population fall in this group. There is no data provided onthe age groups of those being forced to beg for help from the state to receivethe miserable sum of just over EUR 34 per month.

On 17 June 2006, the national news agency LETA reported that according to datafrom the State Social Insurance Agency(VSAA), 405,900 old age pensioners, or 86% of the total, receive pensionsthat are below the minimum subsistence wage. In other words, of the 471,200people provided with old age pensions by the VSAA, only 14% receive a pensionthat exceeds the minimum subsistence level of the population as defined by theCentral Statistical Bureau of Latvia. In fact, the lowest pension paid in 2006was only 43.14% of the minimum subsistence wage.

The percentage of consumption expenditureallocated to food is recognized as an internationally comparable materialwelfare indicator. The provisional data from a household survey on consumptionexpenditures in 2006, compiled by the Central Statistical Bureau, reveals thatin households of employers and the self-employed, as well as households of wageand salary earners, expenditure on food constituted 26% of consumptionexpenditure. Households of pensioners, however, devoted 43% of their totalconsumption expenditure to food.[6]

The Central Statistical Bureau also conducted a household survey in 2005 inwhich respondents were asked to self-appraise the financial and materialsituation of their own households. According to the survey results, slightlymore than one fourth of households (26%) expressed the opinion that they are onthe threshold of poverty, while another 5.6% of households consider themselvesto be poor. In view of the income and cost of living figures presented in Table1, these results come as no surprise. The situation is particularly difficultfor pensioners: while the monthly cost of a minimum consumer basket of goods andservices is estimated at EUR 157.57, the average pension is only 115.70, whilethere are some who receive pensions as low as EUR 71.12.

TABLE 1. Minimum cost of living andincome indicators (in EUR)









Average value of minimum consumer basket of goods and services








Minimum wage








Average pension[7] in EUR








Minimum pension








State guaranteed minimum income








Is it possible to survive?

On 17 April 2007 one ofLatvia’s leading daily newspapers, NeatkarigaRita Avize Latvijai, publishedan article entitled “Pensioners survive by working together”. The articlewas an interview with Zenta Denisova, a retired history teacher who runs aRetired Teachers’ Club.

“Complaining achieves nothing,” said Denisova. “One may claim that youcan’t survive on one lat (EUR 0.7) per day, but we can. Only it is not apleasant form of retirement, it is rather merely an existence. For many of itsmembers, this club is the only hope in these booming millionaire times not tofall in a depression, and to be among peers. If the poor countries of the worldhave to survive on a dollar per day, pensioners in Latvia in comparison to mostAfrican countries don’t even get that, due to the extra cost of winterheating.”

During a meeting with Minister of Social Integration Oskars Kastens on 29 May2007, representatives of the Latvian Pensioners Federation (LPF) pointed outthat the elderly have been marginalized from general society. LPF leader AinaVerze noted that “pensioners are a central part of society who have giventheir working lives for the benefit of the state, and of course they arebelligerent at the injustice forced upon them.”

“Approximately 36,000 pensioners live below the poverty line and consequentlyhave no possibility for a fulfilling life,” she stressed, noting that theexclusion faced by the elderly impacts on almost every facet of life, fromtaking part in cultural events to maintaining their state of health.

Clearly, the government has a long way to go in making the promise of socialinclusion a reality for the country’s senior citizens.


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[4] Ibid.
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[7] The decrease inpension amounts in EUR is the result of rises in the exchange rate for thenational currency, the lat. Expressed in national currency, the average pensionhas gradually increased from LVL 84.16 in 2000 to LVL106.14 in 2005.