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Theoretical Old-Age Pension Benefits and Replacement Rates in the Baltic States: A Retrospective Simulation

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Rajevska O.

Economics and Business

2016

vol. 28

issue 1

13-19

The author presents a comparative analysis of old-age pension systems in Estonia, Latvia and Lithuania using a method of retrospective simulation run on a self-developed model. The model baseline case is a person retiring in December 2014 after 40 years of service with nationwide average salary. Other cases include low and high-earners, funded schemes participants and simulations for modified notional capital valorisation formulae. Three study countries return very dissimilar results, which is caused by differences in their pension systems’ designs. Lack of non-contributory element (basic pension) in Latvia leads to a low degree of progressivity, with inexcusably low pensions to low-earners and excessively generous pensions to high-earners. Participation in funded pillar II schemes has not brought any significant gains to pension plan sharers. Notional capital valorisation rules adopted in different countries that use the NDC-system significantly influence pension amount.

NOTIONAL DEFINED CONTRIBUTION PENSION SCHEME EXPERIENCE IN LATVIA: SOME LESSONS

63%

Rajevska O., Rajevska F.

Studia Humanistyczne AGH

2014

vol. 13

issue 4

In 1996 Latvia became one of the first countries in the world to adopt the notional defined-contribution (NDC) pension system. The authors have been studying the distribution of old-age pension benefits in Latvia and its dynamics over recent years. They conclude that the Latvian pension formula practically lacks any redistribution mechanism, pension benefits do not have any upper limits, and the minimum level is set as inadequately low. Pure NDC systems are not adequate for countries with a relatively large gap between the rich and the poor (as is the case of Latvia); material stratification is not evened out in old age, and combined with low replacement rates it leads to massive poverty among the elderly. Latvian authorities have recently recognized the need for NDC pension system improvement, and elaboration of the basic pension concept in Latvia should start in 2015. The authors provide a brief comparison with the situation in neighbouring Estonia, where the distribution of pension benefits is much more even.

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1 Economics and Business

1 Studia Humanistyczne AGH

2 Rajevska O.

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Theoretical Old-Age Pension Benefits and Replacement Rates in the Baltic States: A Retrospective Simulation

NOTIONAL DEFINED CONTRIBUTION PENSION SCHEME EXPERIENCE IN LATVIA: SOME LESSONS