Development of Latvian pension system in changing economic environment

Abstract

Latvia, like any European country, is facing challenges in pension system organization due to the population age structure. In the 1990s, during the reform of the social sector, Latvia introduced a threelevel pension system aimed at reducing the effect of demographic risks and demonstrating the country’s intention to provide a viable public and private combination in old-age provision. The potential impact of demographic change on the age structure and size of the population is dramatic and the main problem is the ability of pension schemes to provide retirement incomes which fully correspond with previous employment income without reducing quality of life. Thus, personal investments in retirement income schemes are also important.

The aim of this research is to investigate what the possible solutions are for developing the existing pension system in Latvia and incentives for personal investment to ensure provision of an appropriate retirement income level.

The paper addresses the efficiency of the Latvian private pension system. The current situation is described, the efficiency of private voluntary pension schemes is estimated taking into account the Latvian demographical situation with a flow of emigration, and the impact of existing tax incentives for employees is analysed.

Qualitative methods (statistical data analysis, forecasting and other financial calculations) are used for theoretical comparison and analysis of pension systems. Interviews with experts and personal observations are used to reveal the problems in the current pension system of Latvia.

Recommendations for possible incentives for development of private pension investments are made. Also, conclusions on possible development directions are drawn.

Research paper