Whether someone likes it or not, the question of the fate of the second pension level, as they say now, has come to the table. Active discussions have been started on this. What to do with this accumulated capital? Continue to grow and let the banks operate with it and make money, or let people withdraw this money and decide for themselves what to do with it? The question is not simple, because it can be viewed on several levels: political, economic, social, psychological and even purely domestic.
Although sometimes bringing this issue into the light of day is closely related to the upcoming elections, it is more of a coincidence and only a contributing factor. A much more significant role in the actualization of this issue was played by the fact that this step has been taken in our neighboring countries.
Since we live in constant comparison with neighboring countries (in Lithuania this way, in Estonia this way), then it simply could not be that in Estonia and Lithuania people have been given the opportunity to withdraw this money from the second pension level, but in Latvia society will grit its teeth in a united determination and say: let the neighbors do as they want, we will keep the second pension level sacred and inviolable. We trust the state and well-educated banking experts.
I have already mentioned that this issue can be viewed in several planes. In this article, we will completely abstract from the political dimension of this issue. It is undoubtedly very relevant and interesting, but more on that another time. Also, I would not like to delve into the purely economic dimension of this issue: which investment plans are more profitable and what is the economic effect of these pension investments both for the country as a whole and for each individual.
Let’s look at this question from a conceptual point of view. In essence. Ontologically, so to speak. This issue of withdrawal/non-withdrawal of the second level of pensions shows extremely clearly what happens when something is done wrong at the very beginning.
Excellent “on paper”
The Latvian pension system was developed in the first half of the nineties of the last century under the leadership of Jānis Riteņas, who lived most of his life in Australia, and it entered into force on January 1, 1996. Theoretically “on paper” it was considered very good, correct and responsible. It was recognized as one of the most modern and advanced in the world at that time. But it had one major drawback. It was excellent “on paper”, but did not take into account the reality that was “behind the window” in Latvia at that time.
Today’s economists, including the head of the Insurance and Pensions Supervision Department of the Bank of Latvia, Evija Dundure, in the LTV program “What’s happening in Latvia?” clearly states: “The pension system is not primarily aimed at today’s retirees. The pension system is long-term. We have been in the system for (only) 25 years, and initially its contribution rates were very small. A rapid increase can be seen in the last ten years.”
What does Dundure want to say? The existing pension system is good if it works for the full life cycle of a person. It is good for those who start working with this system and work in it throughout their conscious life. Namely, this system will show its good qualities when those who started their working life already in this century and during their entire working life made relatively decent contributions to their future pension will retire.
But what to do until that lovely future? What should be done for those for whom, according to the words of an official of the Bank of Latvia, the pension system is not targeted (intended)? Namely, those who retire today? If the system is not for today’s retirees, then the state should adjust the system so that it is more “targeted” at “today’s retirees” while maintaining its “long-term” good qualities.
One of the methods to address the shortcomings of the system for those who are “not primarily targeted by the system” is this possibility to withdraw the second level of pensions. I’m not saying it’s the best possible method, but nothing else is offered for now. Moreover, at the official level, it is not recognized at all that the pension system is not entirely fair to “today’s pensioners”, and Dundure also admitted it, most likely by accident, to justify another thesis – the second pension level should not be touched in the name of the future.
If we have once touched on the shortcomings of the pension system and the fact that it is not “primarily aimed at today’s pensioners”, then we will also name these shortcomings and remind how they were once tried to be amortized. What was “behind the window” in Latvia at that time?
A dubious solution
The fact that the pension system created by Riteņi is not intended for those pensioners who will retire in the next ten years was already clear at the very beginning of the development of pensions more than 30 years ago, because this pension system is based on the logic of a “normal economy”: a person works all his life, contributes part of what he earns to the social insurance system and, at the end of his career, receives a pension back from this system.
Until the retirement of those who started employment only after January 1, 1996, this system will work in an incomplete mode. This was already clear at the time, and a highly questionable solution was invented to circumvent this acute problem. Extrapolate social contributions from 1996 to 1999 to work experience before January 1, 1996. If these contributions are large, then seniority becomes extremely valuable, but if these contributions are small or non-existent, then this seniority becomes completely worthless.
It is this decision that is the basis of almost all accusations about the unfair nature of the existing pension system. The fact that some have a pension of over 40,000 euros per month, while others have less than 200 euros per month. The defenders of this system appeal to the fact that everyone could have made larger contributions to the system in 1996 and later received a larger pension, but there is some deception hidden in this statement.
Not everyone could be ‘everyone’. Not everyone had that kind of money. Not everyone had money at all. It should not be forgotten that in 1996 there was an economic disorder incomparable to today. It should be pointed out here that many who smoothly transitioned from the “socialist” economy of the USSR to the “free market” economy of independent Latvia (working in schools, hospitals, militia/police, state administration, public transport, communal economy, media, etc.) know this phase of disorganization only in connection with the low pay and some domestic complications, but not as a complete social confusion, because their working life continued as before.
On the other hand, those who lost their jobs, the usual rhythm of life and the former social order during these changes found themselves in an unenviable situation. Unemployment was high, and in many places, especially in the regions, entrepreneurs did not make social contributions or made as little as possible for the workers in the local getter, shop or cafe.
It should be noted that no social agitation was carried out during the introduction of the new pension system. Advertising slogans were nowhere to be seen or heard: today’s social contributions will determine the “capital” of your pension for the length of service during the occupation. I will not say that this fact was particularly hidden, but it was not popularized in any way. Those who were in the know were able to make additional contributions, while others who had never heard of this “extrapolation” realized what had happened only when they received the estimate of their expected pension.
Many were living in survival mode at the time. They simply did not have the money to make additional contributions to the social system and later get the money back. Others, especially in rural areas, survived by doing odd jobs and had no social security contributions at all. Today, they are mostly those who receive a pension under 200 euros and even less.
Our own fault, goes the standard answer, and it’s hard to argue with that. Everyone is the maker of their own happiness. If you were so careless that you didn’t know how to use the opportunities provided by the Latvian pension system, you didn’t work in a job where all social contributions were properly paid, then now you sit with your miserable pension and don’t worry much.
Who owns this money?
But in the world, every action causes a counteraction. If many perceive the pension system as unfair (primarily not aimed at today’s pensioners), then they will look for an opportunity to make this system fairer for themselves. The ambiguous status of the second pension level allows us to try to achieve something at this stage of the system.
What kind of unclear status are you talking about? About who really owns this second pension level money? Is it private money contributed by these potential retirees, which belongs to them and has been temporarily placed in the management of others, or is it public money?
On the one hand, it is personalized money that is paid to a specific person during his retirement and is inherited in the event of his death. A person has paid it from the money he has earned. On the other hand, it is a mandatory contribution that cannot be missed. Similar to a tax.
But here we come again to a conceptual ambiguity (blur). Whenever someone calls mandatory social insurance contributions a “social tax” in the public space, there are objections from state officials: it’s not a tax, it’s mandatory social insurance contributions.
As if an insignificant clarification, but now it has consequences. If the state had already determined that everyone has to pay a social tax, which will later pay you a pension, then there would be no questions: if it is a tax, then it is state money, even if it is personified and the future pension depends on the amount of these paid taxes. But if it’s contributions (albeit mandatory) and not a tax, then it’s more like private money. Then the situation is already different: why deny those making these contributions the right to withdraw them in certain situations?
Currently, there is talk that this money could be withdrawn in special cases for health care needs. One can understand politicians who try to touch on this issue as delicately as possible, but since this time there is not a word about politics (also economic benefit/disadvantage) (about that another time), it will suffice to say: there is no reason to allow money to be withdrawn in one case and not in another. If once it is allowed to some, then sooner or later it will have to be allowed to others as well.
So what can be done in order not to destroy all the “good” pension system, which, as the representative of the Bank of Latvia pointed out, is intended for the long term? The way out is relatively simple: it is necessary to allow those who, in the words of this same expert, are not targeted by this pension system to withdraw this money. If not already targeted, then there is no need to keep them in this system. Let those for whom it is intended work in the system.
In other words, all those who started working before January 1, 1996 should be allowed to withdraw the money of the second pension level. Separately, we should talk about those who have a disability group, but that is already another specific topic.
