THE LONG-TERM SUSTAINABILITY OF LATVIA’S PENSION SYSTEM: MACROECONOMIC AND MICROECONOMIC PERSPECTIVES

This study assesses the long-term sustainability of Latvia’s pension system from both macroeconomic and microeconomic perspectives, using projections of socio-economic and demographic trends up to 2070. It analyses alternative scenarios for the allocation of pension insurance contributions between the first and second pension pillars and examines their implications for public finances and future pension adequacy. The study also explores how different choices of second- and third-pillar pension schemes may affect individuals’ retirement outcomes.

As part of the study, a multifactor macroeconomic model was developed. The model’s results indicate that the cumulative balance of the State Social Insurance Special Budget would remain positive for the longest period – until 2071 – under a scenario in which 16% of the total 20% pension insurance contribution is allocated to the first pension pillar and 4% to the second pillar. The projections further suggest that the fiscal sustainability of the pension system could be maintained until 2050 under allocation scenarios ranging from 14%/6% to 15%/5% between the first and second pension pillars.

From a microeconomic perspective, these scenarios are projected to provide pension system participants with a retirement income replacement rate of around 50% from the first and second pension pillars combined, assuming a 40-year working career. This is broadly in line with the average gross replacement rate observed across OECD countries with funded public pension systems.

The study also highlights the important role of individuals’ decisions in building pension wealth. This includes selecting an appropriate second-pillar pension plan and, where necessary, changing the plan or its fund manager, as well as making voluntary contributions to the third pension pillar, either independently or with employer support. Such decisions can significantly increase accumulated pension capital and improve retirement income replacement upon reaching pensionable age.

Author: Edgars Voļskis