The Bank of Latvia (BL) warns: if the Saeima decides in this or one of the next sessions that residents will be able to fully or partially withdraw funds from the second pension level prematurely, then to maintain state pensions at the previous level, it may be necessary to raise the social tax rate from the current 34% of the working salary to 39%, writes Latvijas Avize.
According to the Bank of Latvia (BL), this is the only realistic scenario, as the alternatives—reducing pensions or covering the resulting deficit through borrowing and increasing public debt—cannot be considered realistic. The Bank of Latvia's concern about the future of the pension system under such a scenario is heightened by the fact that the additional tax burden will fall on a shrinking number of workers, which will undermine the competitiveness of the Latvian economy.
The number of residents and taxpayers in Latvia is decreasing, while life expectancy is increasing, which may lead to a situation where taxpayers cannot support pensioners solely through their contributions. Citing data from the European Union's statistical office Eurostat, the Bank of Latvia reminds that by 2060, the number of working-age people per pensioner in Latvia will decrease from the current 2.6 to 1.4. The second pension level is designed to compensate for this reduction in the number of workers by ensuring that pension fund assets generate income by operating in financial markets and can over time provide an increasing portion of pensions.
The Bank of Latvia also points out an important distinction between Latvia's second pension level and similar systems in Estonia and Lithuania: the permission to withdraw pension funds in these countries is more realistic than in Latvia, as in both neighboring countries, the second pension level includes not only funds collected through taxes but also personal contributions from the workers themselves. In Lithuania, the second level is formed from 3% of the salary before taxes, to which the state additionally adds 1.5% of the average salary in the country from the budget. In Estonia, it is formed from 2% of the salary before taxes and 4% of the social tax. It should be noted that starting from 2024, every citizen of Estonia can choose whether to contribute 2%, 4%, or 6% of their salary before taxes to the second pension level.
In Latvia, however, the second pension level is currently formed only from 5% of social tax contributions. Thus, the difference is that in both neighboring countries, the second pension level has features of a third level, so the demands to allow the withdrawal of savings there are more justified, as personal funds of residents are indeed present. In Latvia, contributions to the second pension level are not private savings—they are part of the social tax transferred to managers for risk diversification. Therefore, their withdrawal would be equivalent to returning any other tax in cash, which would undermine the very essence of the social insurance system, believes Evija Dundura, head of the Bank of Latvia's insurance and pensions supervision department.
