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they desirable in market economies, since their purpose was to reduce labor supply and create dependency. From an economic perspective, there are a number of feasible options. The political and social dimensions of the reform are what has prevented countries from resolving the issues.

The future social safety net of the transition economies will need to be anchored by an old-age security system. Fixing the old-age security system involves, first and foremost, a strong effort to convince the population of the need for reform. This effort must be combined with plans for a new, economically viable system that is affordable and equitable and promotes growth. Experience from other countries, both members of the Organization for Economic Cooperation and Development (OECD) and middle-income countries in other parts of the world, indicates that a successful pension system will have more than one pillar, with a significant role for privately managed savings and insurance programs (see also Kornai, in this volume). For the post-communist states of Central and Eastern Europe and the New Independent States, this means scaling back the public system while building up the funded, privately managed one to take the pressure off the pay-as-you-go system.

As in other key areas of the transition, innovation and risk taking will be necessary. The new Latvian system is an example of just such action. It involves a whole new approach to providing pensions in the public system, while adopting some of the successful features of recent Latin American reformers in building a funded system. Three features of the package seem key to its political success. First, it offers something for all key stakeholders, even if not as much as they originally sought. Second, the new public system—a "notional" defined contribution one—has fundamentally changed the tone of the debate. By making explicit much of what is normally hidden in a traditional, defined-benefit pension system, it has revealed the cost of providing guarantees and special benefits, thereby reducing antireform political pressure. Third, the new system is flexible, allowing a high degree of individual choice and automatically adjusting to significant demographic and economic changes.

This chapter examines the legacy of central planning as regards pension systems in the post-communist states, the prospects for change, and the new Latvian system as an example of the potential for reform.


Under central planning, the command economy promised cradle-to-grave income security, including pensions replacing roughly 80 percent of wages. These systems have been viewed as compensation for relatively modest wages during the working years. By Western standards, they were quite generous. Retirement ages were set very low: in every country except Poland, the statutory retirement age was 55 for women and 60 for

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