In recent months, the topic of pensions in Latvia has been frequently discussed. The main reason, of course, is the upcoming elections. But there are also other significant reasons.
This, along with the deteriorating demographic situation (the population is rapidly aging and the number of working individuals per pensioner is decreasing), and the desire of some politicians, and most importantly – many ordinary Latvians, for our authorities to follow in the footsteps of Lithuanian and Estonian politicians and allow residents to choose their savings in the second pension level.
As we know, a process has been initiated to collect signatures for a referendum on this issue, and over 60,000 signatures have already been gathered for the launch of the referendum. Let us remind you: to hold a referendum, it is necessary to collect more than 152,000 signatures from eligible voters in Latvia.
It should be noted that the savings of the second pension level are formed from contributions of 5% of the social tax for each working individual. These are personalized savings. The main goal is to provide Latvians with a sort of supplement to their pension upon retirement, as it was clear at the time of the formation of Latvia's pension system that considering the size of salaries, the standard of living, and inflation – the basic pensions for many future retirees would be very modest.
The peculiarity of funded pensions is that our money in the second pension level does not just "sit in a safe"; it works – banks and pension funds invest these funds in businesses – mainly abroad, and future retirees thus receive passive income in the form of interest from investments.
Three Positions on the Second Level
In the current Saeima, there are three positions regarding savings in the second pension level.
- Some politicians firmly adhere to the opinion of "hands off the second pension level!". That is, these politicians are categorically against touching the existing system at all. The most they are willing to do is to find a fairer solution for the inheritance of savings in the second pension level.
Currently, if a person has not made a note during their lifetime that they want to pass their savings to close relatives, upon their death, these savings go to the state’s revenue. It is obvious that this order needs to be changed and allow for the automatic inheritance of second pension level savings.
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The second group of politicians is convinced that residents of Latvia should have the right to choose (fully or partially) their savings in the second pension level even before reaching retirement age and to dispose of this money at their discretion.
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Another group of deputies is willing to support early withdrawal of funds only in exceptional cases – if the funds are needed for medications or, for example, for surgery abroad for life-threatening illnesses.
"They Will Take It, Spend It, and Drink It"
The arguments of opponents of fund withdrawal are as follows.
Firstly, they say that people, especially those lacking financial literacy, will quickly "spend" these funds, and when they retire, it will turn out that their pension is below the subsistence minimum, and the state, that is, taxpayers, will have to provide them with social assistance.
Secondly, a mass influx of pension money into the market will lead to a surge in inflation (due to increased consumption), and as a result, those who do not spend their savings for retirement will also suffer.
At the same time, opponents of fund withdrawal – the banks managing the savings – forget to acknowledge that they earn from both storing the money and using it. And, of course, banks think more about themselves than about ordinary mortals – the holders of savings in the second level.
Money Does Not Work in Latvia
Even those experts who are negatively inclined towards the possibility of withdrawing money before reaching retirement age acknowledge that the savings of the second level, which exceed 10 billion euros (!), could be used more effectively for the economy of Latvia. Today, only 7-8 percent of the second pension level funds are invested in the Latvian economy. That is, the lion's share of these Latvian savings helps the economies of other countries!
On the other hand, in Latvia itself, there is a lack of investment objects into which the aforementioned 10 billion could be invested – firstly, profitably, and secondly, without the risk of losing these billions.
"Our Money and Our Right!"
So what are the arguments of those who want to achieve the right to withdraw second-level funds?
First Argument. After all, these are personal savings of Latvians, and therefore Latvians should have the option to choose how to manage their money.
Second Argument. The experience of Lithuania, as well as Estonia, where the most radical option (free withdrawal of funds) was adopted, shows that these savings were simply "eaten up" by a small number of residents. A significant portion of the population used the withdrawn funds either to pay off existing loans and leases or, for example, as a down payment on a mortgage.
Other residents simply invested part of the withdrawn funds in stocks with higher returns. Some actually spent the withdrawn funds on treatment and/or dental prosthetics.
There were also those who decided to leave these savings untouched for the time being.
It can be assumed that Latvians will act in a similar manner.
So How Much Have We Saved?
In any case, the ongoing discussions among politicians and experts regarding the fate of second-level savings have prompted many Latvians to recall funded pensions and start wondering how much money they have saved. And in general, which bank (or pension fund) they entrusted with managing their savings at the time. As well as what investment plan (conservative, active) they chose.
And this is already a positive result from such discussions!
At the same time, it is quite clear that with or without a referendum, the current parliament will not have time to make a decision, for example, on the right to early withdrawal of pension savings. This will already be a question for the next parliament. And if it comes to a referendum, the fate of the savings will be decided by the people themselves.
For Reference
A total of 1,316,260 residents of Latvia participate in the second pension level system.
The largest group – 260,602 Latvians – have saved between 5,000 and 10,000 euros in the second level. The second largest group – 236,523 Latvians – have savings ranging from 10,000 to 20,000 euros.
130,000 Latvians have saved between 1,000 and 2,000 euros.
It is noteworthy that savings exceeding 40,000 euros are held by only 19,733 Latvians.
