Why the share of small amount pensions is so substantial in Latvia?

¹ University of Latvia, Riga, Latvia
² Vidzeme University of Applied Sciences, Valmiera, Latvia

Abstract

More than 70% of all old-age pensions in Latvia are smaller than 300 euro, which is close to the monetary value of the at-risk-of-poverty threshold. There is a number of reasons for it: the lack of non-contributory component and inadequately low minimum pensions, the absence of redistribution mechanisms in the mandatory notional defined contribution (pillar I) and funded (pillar II) schemes, an unfair conversion of pre-reform employment record into pension formula, and a high tax burden on pensioners. The authors proposed a package of measures to improve the situation: an introduction of basis pensions, linking minimum pensions to the country average wages, increasing income tax exempt for pensions, restoration of the supplements for pre-reform employment and their regular indexation, removal of the threshold in initial notional pension capital calculation or its reduction from 30 to 20 years.