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The new public pay-as-you-go pension system is a notional defined contribution one. It is designed to mimic the contribution-based pension that would be offered in the private sector by an efficient insurance company. The system starts by giving an account to everyone paying the social tax. As contributions earmarked for the pension system are paid, the account is credited as if it were a savings account. The "capital" in the account earns a rate of return just as a savings account would. This rate of return is equal to the growth of the sum of wages on which contributions are collected (the contribution wage base). At retirement, the pension paid is equal to the total capital in the person's account, divided by the expected postretirement life span for all those of that person's age. For example, if a person has 10,000 lats in his or her account at retirement and is expected to live 10 more years, the pension will be 1000 lats per year or 83 lats per month. The pension will be indexed, adjusting for price changes.5

In this system, individual benefit levels are not specified until retirement. However, each contributor gets an annual statement showing the capital in his or her account. A table of average life expectancy at retirement (called the G-value) is also published every year by the government. Since life expectancy changes very slowly, and the amount of capital in the account is known, those nearing retirement can roughly estimate their future pensions (as they did under the old system).

In the new system, there is no mandatory retirement age and no "full pension." The minimum retirement age will be 60 years for most participants. However, the system provides strong incentives to work longer. Longer working years will shorten the number of payments, allowing each to be higher, and increase the initial capital. As a result, assuming a constant wage, the pension will double when an individual works until age 70 instead of 60.

The new system also includes a minimum guaranteed pension for all those who reach the age of 60. This minimum is set at the level of the social pension, a social assistance pension for those adults who were disabled at birth. The social assistance pension is also available to those who reach the age of 65 but do not have 10 years of service. The nominal level of the social pension is set by government. It is currently 25 lats (60 percent of the average pension and 20 percent of the average wage). Once the second tier is in place, the minimum will include both first- and second-tier funds, providing a floor under the total pension.

Transitory provisions in the new law gradually enforce the minimum retirement age of 60. Some politically sensitive exceptions remain, including a provision for early retirement at 55 for women and a few occupations (e.g., wind instrument players, ballet dancers). However, the minimum guarantee does not apply to anyone who takes a pension before age 60. Thus, these

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For a detailed analysis of the new system, see Fox et al. (1996).



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