LATVIA S PENSION SYSTEM: CURRENT SITUATION AND FUTURE PROSPECTS. Monika Queisser Directorate for Employment, Labour and Social Affairs, OECD

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1 LATVIA S PENSION SYSTEM: CURRENT SITUATION AND FUTURE PROSPECTS Monika Queisser Directorate for Employment, Labour and Social Affairs, OECD

2 Demographic challenges Major demographic trends in Latvia Declining total and working-age population Growing old-age dependency ratio Factors contributing to these trends Low fertility rates Ageing population Emigration trends 2

3 Change in % Shrinking working-age population 3 Change in working-age (15-65) population between 215 and 25/ Poland Japan Latvia Estonia Germany OECD Finland USA Sweden Source: Calculations based on data from United Nations, World Population Prospects: The 215 Revision 3

4 In % Rising old-age dependency ratio Old-age dependency ratio (65+/2-64) in 215 and USA Latvia Sweden Estonia Finland OECD Germany Poland Japan Source: United Nations, World Population Prospects: The 215 Revision 4

5 LV EE HR DK LT SE NL RO UK IE CY BG CZ SK PL ES EU HU FR DE MT FI PT LU IT EL AT BE SI Despite demographic trends: gross public expenditures on pensions are predicted to fall... Projected public spending on old-age pensions as % of GDP Source: 215 European Commission Ageing Report 5

6 ... but this also implies falling pension replacement rates. Gross average replacement rates in the public earnings-related old-age pension 213 and Latvia Sweden Estonia EU average Finland Source: 215 European Commission Ageing Report, OECD Reviews of Labour Market and Social Policies: Latvia 6

7 The risk of poverty is high. Especially for the elderly. Share of people at risk of poverty or social exclusion by age Latvia Estonia Switzerland Poland EU average 6+ <6 Finland Sweden France Czech Republic Source: Eurostat 7

8 The high poverty risk translates into high rates of material deprivation Percentage of population with an enforced lack of at least three out of nine material deprivation items in the 'economic strain and durables' dimension Sweden Switzerland Finland France Czech Republic Estonia Poland Latvia Greece Source: Eurostat 8

9 Low satisfaction with pension system 6 Survey results: Satisfaction with the current pension system (+=most satisfied, -=most dissatisfied) LV PL CZ ES EU IE SE FR FI DK LU Source: European Commission (215): Special Eurobarometer 418 Social Climate 9

10 Improving pension adequacy Possible ways of improving pension adequacy: - Encourage longer working lives - Strengthen/improve funded defined-contribution tier and voluntary private pensions - Decrease operational costs / improve efficiency - Improve financial literacy - Increase minimum pension? - Currently discussions to raise minimum pensions to 4% of median household income - This would approx. double today s level

11 Iceland Switzerland Sweden New Zealand Norway Denmark Japan Germany Czech Republic Finland Estonia United Kingdom Isreal The Netherlands Korea Australia Latvia Canada Chile United States France Slovak Republic Hungary Austria Ireland Mexico Italy Belgium Luxembourg Portugal Poland Spain Slovenia Greece Turkey There is space to increase employment rates of older workers OECD OECD 6-64 OECD Source: Pensions at a Glance 215, Eurostat 11

12 ...and to raise effective retirement ages OECD Effective age of retirement OECD151 OECD 62 OECD 61 6 LATVIA LATVIA LATVIA LATVIA 57 men 2 men 214 women 2 women 214 Source: OECD Population Statistics Database 12

13 Only few students have very low skills in financial literacy. But the share of students with good financial skills is small, too. Percentage of students at each level of proficiency in financial literacy (5= highest performance, 1= lowest performance) Level 4 or 5 (best) Level 2 or 3 Level 1 or below (worst) Source: OECD Pisa 212 results,: Students and Money 13

14 Conclusion Demographic developments challenging Pension reforms after 1996 aimed to tackle these challenges Reforms achieved financial sustainability Risk of social unsustainability, old-age poverty Thorough monitoring/assessment of social sustainability needed. Low pension levels increase the risk of political pressure for higher public expenditures on pensions threat to financial sustainability? 14