“We all agree, but noone is grateful”

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Fafo

Arne Grønningsæter, Aadne Aasland and Zane Loza

“We all agree,

but noone is grateful”

Developments of the

Income Maintenance System in Latvia

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Arne Grønningsæter, Aadne Aasland and Zane Loza

“We all agree, but noone is grateful”

Developments of the Income Maintenance System in Latvia

Fafo-paper 2001:9

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Preface

This paper is the second in a series of publications from the project ”Social Policy and So- cial Exclusion in the Baltic Countries”. The project is funded by the Research Council and Council of Universities of Norway, through the Cooperation Programme for Central and Eastern Europe (Programme for Research and Higher Education). The two main institutions involved in the project are Fafo Institute for Applied Social Science in Oslo and Unit of Family Studies at the University of Tartu. The present report, however, has been written mostly by Fafo researchers. In addition, Zane Loza (Latvian freelance researcher) has written about the structure of the income maintenance system in Latvia, she also assisted us in connection with our field trip to Latvia.

The paper exists in two versions: one paper version and one version on web. There are two appendixes to the paper that are only published in the web version. The web address is www.fafo.no/baltsoc. This website also contains other publications and more information from the project.

We are grateful to many people for their contributions to this report. Arnfinn Jacobsen deserves thanks for assisting us with editorial work. Both he and Olav André Manum im- proved the language and style of the manuscript. Our collegues Dagmar Kutsar, Avo Trumm and Riina Kiik at Tartu University have been important for the academic input to the project.

Warm thanks go to our collegues at Fafo, whether they are engaged in social policy studies or studies of countries in transition. We will here mention Anette Brunovskis, Stein Ringen, Guri Tyldum and Tone Fløtten. Last, but not least, we would like to thank all the informants in Latvia who have generously shared their knowledge, views and ideas with us. Short- comings and errors are naturally the sole responsibility of the authors.

Oslo, 20 July 2001

Arne Grønningsæter Aadne Aasland

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Introduction

Latvian social policies have undergone dramatic changes in the ten years that have passed since the country regained its independence. This report looks at the developments in one important part of Latvian social policy: the income maintenance system. The income maintenance system is the system where resources are distributed for the population segments that are unable, or unwilling, to earn a sufficient income through paid work. The transfers can be a substitute for income (for example pensions) or supplement the income when an individual or a household have extra expenses (such as child benefits). The transfers can be universal or selective (means-tested), and in the first case they may also cover people who earn sufficient money to uphold a decent livelihood themselves.

In Latvia the income maintenance system consists of three parts: social insurance, social assistance and family income support. A general understanding of social insurance implies a pooling of risks without differentiating contribution according to exposure to risks, and there is a condition of contribution to the funding system. The benefits are based on demographic, health or social criteria. What you get out of the system is often related to your previous contribution. The system aims to compensate for lack of labour market income caused by the mentioned criteria. Social assistance benefits are means tested and is often seen as the last security net. The receivers of social assistance are in most cases among the poorest. Family support represents different schemes that aim to compensate for extra expenses caused by having children. This report contains a description of the Latvian system itself, but the main contribution is the focus on how the system works in practice and how it is being implemented. The main focus of the report will be on pensions and social assistance, while e.g. child benefits will be covered in a more limited way. ¹

Four dimensions of the income maintenance system are discussed in the report. First, we discuss the division of responsibilities between the state, the market, family and civil society. Second, the labour market link is highlighted. Third, we assess the effect of the income maintenance system on distribution and redistribution of resources between age groups, genders, ethnic groups and regions of Latvia. The fourth dimension, which is ex- amined in the report, concerns the accountability of the system. Do people trust the system – and do they have the reason to do so?

Several options were open to the Latvian policy-makers when they decided on which income maintenance system to opt for. The report contains a discussion on the role and

1 Comparative social policy studies represent a linguistic challenge. Each country develops a language that is relevant for their specific system. When we translate these concepts into English, similar schemes might end up with very different names. In Latvia the universalistic minimum pensions are a state responsibility, but covered by the Law on social assistance. Mostly we use the concept social assistance benefits for means

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impact of different actors, or change agents, in designing the system. We focus on both Latvian and foreign institutions. Although the basic framework of the system has been es- tablished, there are still issues that need to be resolved and pressure for reform of the system. We discuss some of the most controversial issues on the social policy agenda in Latvia.

Finally the Latvian income maintenance system is put into a comparative perspective, as- sessed against the background of other welfare systems in the western world.

In addition to document analysis of existing writings on Latvian social policies the report draws on data from two main sources. Firstly, in February 2000 we interviewed Latvi- ans who from different angles and perspective deal with Latvian social policies in their professional life. We deliberately chose a wide selection of informants with experiences from different aspects of policy formulation and implementation. In this way we wanted to se- cure that we would obtain information from people with different perspectives and possi- bly different views on the more disputed issues. A common interview guide was compiled and used for the interviews so that the same topics were covered for all informants. How- ever, due to time constraints all the questions were not asked all informants where they were not seen as relevant. A short description of the interviews can be found in Appendix 2 in the web version of this report (www.fafo.no/baltsoc). This appendix includes the interview guide.

Information gathered from the interviews is used extensively throughout the report. The interviews helped us to get an overview of the working of the income maintenance system, and much of this information is referred to in the text without explicit reference to our informants. In other cases, where we want to illustrate an argument or an idea, direct cita- tions or references to the interviews are used. There is always a danger that the selection of informants, the number of whom is relatively low, will influence the conclusions that are drawn. However, we feel that with the deliberate inclusion of persons with very different roles at least has given us a variety of perspectives, and we have sought a critical attitude to the information gathered and to balance the input from our informants when differing views have been expressed.

The second main source of information is a large-scale living conditions survey conducted by Fafo and the Central Statistical Bureau of Latvia in the autumn of 1999. This survey, called Norbalt II, contains data on a wide range of living conditions dimensions. More than 3,000 households were interviewed in the survey, and information on more than 7,000 individuals in these households was gathered. The most relevant modules for this report are the modules on economic resources and attitudes. The survey contains detailed information on household and individual incomes. This information is used to assess the impact of government transfers on the distribution and redistribution of resources between different segments of the population. In addition the survey contains data on attitudes towards public officials in the country, which gives an idea of the trust in the implementation of the income maintenance system. The survey has resulted in a number of publications, for individual countries and comparative analyses (see eg. Aasland 1996; Aasland, Knudsen, Kutsar and Trapenciere 1997; CSB 2000, Aasland and Tyldum 2000, Vaskis 2001). More details about the Norbalt survey can be found at Fafo’s web site, http://www.fafo.no/norbalt.

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The combination of interviews and survey data gives the opportunity to go behind the rules and regulation and discuss also the actual implementation of the income maintenance system in Latvia.

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Background

Theoretical framework

Public or private responsibility?

In the economical restructuring of the Baltic countries has privatisation has been singled out as one of the main aims. Social policy obviously has an impact on the division of responsibility between the state, the municipalities, non-governmental organisations, the market, the family and the individual. One aspect of this development is seen in the inter- connection between privatisation of the economy and the market on the one side and the development of social policy and an income maintenance system on the other.

However, by focusing only on the public/private dichotomy one may over-simplify the issue. To get a full picture of the system one also needs to look at the division between local, regional and central authorities. In the private sector, the division of responsibility between the market, the civil society, the family and the individual is quite essential in understanding the different elements of the social policy development.

The welfare states differ strongly along this dimension. On one extreme one can find the Scandinavian countries where the private sector only plays a marginal role within the welfare state. The universalistic pension system, hospitals, institutions, health care, social work and childcare as well as the schools are publicly dominated. Within the public sector the primary services as well as means tested benefits are the responsibility of the municipalities. The private agencies and institutions, whether they are non-profit or commercial- ly based, play a marginal, but often innovative and supplementary role in relation to the public sector. At the same time the importance of private pension schemes is increasing , whether they are individual schemes or collective labour market based schemes. The family still plays an important role, but the access both to services and benefits, are more often determined by the situation of the individual than the family. (Langeland et al. 1999)

In the continental model, exemplified by the German, the principle of subsidiarity has lead to an important role for organisations and foundations in organising health care and social services. The model emphasises more strongly the total situation of the family than what one finds in the Scandinavian system. Public funding is dominant in this system as well, but the economy of the pension schemes is to a large extent the responsibility of the employers. The model is characterised as corporate because it integrates the different actors at all levels of the welfare state. (Stjernø 1995)

In the liberal model – e.g. the American – the individuals as well as the market play a different role. Individuals are to a large extent dependent on private insurance. The state encourages the market, e.g. by subsidising private insurance schemes. The publicly managed benefits aim at the low-income groups. (Esping-Andersen 1990)

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In a study of the income maintenance systems one has to look at the division of labour between public and private insurance, collective and individual insurance and between mandatory and voluntary insurance. The level of the public benefits is expected to have a significant influence on the importance of private schemes. It is also necessary to include the means-tested assistance into the analysis. The division between public (mostly municipal) and private (mostly charitable) social assistance is an important aspect as well.

In the former socialist and Soviet countries the transfers were based on allowances and subsidies, and were state managed (Wiktorow 1992). There is a division between these countries in the speed of the privatisation process as well as in how they view which services that should be covered by the public authorities. In this report we discuss what role respectively the public and private sectors in Latvia play in regards to the social insurance and social assistance system.

Labour market connection

“Labour market connection” is one of the main characteristics dividing the different welfare state models. Esping-Andersen describes three welfare regimes and uses the concept of de-commodification as his main criterion for differentiating between them.

“De-commodification occurs when a service is rendered as a matter of right, and when a person can maintain a livelihood without reliance on the market” (Esping-Andersen, 1990);

The concept of de-commodification is used to describe the link between social insurance and the labour market. In a de-commodified system, the individual’s relation to the social security does not dependent much on the relation to the labour market. The word is used as a description of the individual’s dependency on selling his or her workforce in the market. The distribution of resources in our societies is based on the principle of everyone making money by selling their labour in the market. That important differences in income maintenance systems are linked to the individual’s position in the labour market comes as a logical consequence.

In the universalistic Scandinavian welfare state model the individual’s place in the labour market is less important than in the corporatist continental model. In the latter the most important pension schemes are based on work experience. The liberal approach puts the main responsibility for the insurance/pensions systems on the individual. Deacon (Dea- con et al. 1997) points to a common characteristic of the corporatist and the communist models. They are both organising the basic welfare benefits linked to the workplace. There could be good reasons for the models developing in the former communist countries to build on the past, and one could therefore expect a drive towards a corporatist model. However, many of the countries of the former East Bloc would like to see radical changes in their systems and remove any remnants from the past. Hence, a move away from the workplace- based system could also be a plausible outcome. It is therefore interesting to find out to which extent former socialist countries move towards other types of models than the corporatist

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Social assistance benefits are means tested, and consequently independent of previous work experience. The word re-commodification has been used by several authors about the increased use of activation as a condition for means tested social assistance and the increased use of active labour market policies (Lødemel 1997) A common criticism against the present welfare states is the lack of work incentives. There has been a diverse range of responses to this criticism. Examples are tighter eligibility, cutbacks in benefits, active labour market measures, and workfare². The increased use of active measures can be understood as a new paradigm in social policy (Gilbert 1999). One of the questions asked in this report is to what extent these developments have influenced the social policy development in transitional countries such as Latvia.

The level of work incentives in the welfare system is an aspect of the labour market connection of the different schemes. Many governments have seen these measures as a part of the general economic or labour market policy of the country. It has been seen as a way of encouraging entrepreneurship and job creation. Several critics of these measures have pointed out that they have very limited influence on the economies of the country. These policies have mainly had an impact on the individual level. Whatever the results are, these measures will influence both the generosity of the system and the labour market connection. The European Union has in the last years actively promoted active labour market measures, e.g.

in the programmes for increased employment.

Distribution – Redistribution

Apart from education and health services, the organisation of economic benefits is one of the most important aspects of welfare policy. The welfare state makes up a frame for distri- bution and redistribution of resources in society. The income maintenance systems are cor- nerstones in these distributional mechanisms. There are several dimensions to the distributional mechanisms, e.g. those of economic resources, gender, age (distribution between generations) and region. In Latvia, with large ethnic minorities, one can even talk about a possible ethnic dimension.

Income transfers tend to reduce poverty significantly. Kangas (Kangas 1999). uses income study data from Luxembourg to show the effect of transfers on poverty reduction in different European countries. It seems that in most countries income transfers play a significant role in income distribution, especially for people over 55 years of age.

A pension system with income based input and flat rate output has a relative high level of redistributive effect. In a system where both the input and the output are based on income, or where the output is purely based on input, differences are maintained. A universalistic system represents a certain level of redistribution based on the fact that it reaches everybody. An individual insurance system necessarily has less of a redistributive effect than a tax-based system that covers everybody. Pedersen (1998) points to the fact that the Scan- dinavian countries with their universalistic pension systems have the lowest degree of difference among old-age pensioners among the OECD countries. Clasen (1997) argues that social insurance programmes in most European countries are mainly reproducing the ine- qualities in the labour market, and claims that they represent a horizontal rather than a

2 By workfare we mean that contribution by work is a condition for receiving social assistance benefits.

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vertical income redistribution. He also maintains that there is an internal conflict in most of these systems, between the object of status maintenance and solidarity. Families with children and old persons are usually at the highest risk of poverty. The income maintenance systems aim at reducing the risks that are linked to phases of life.

In a system where the family economy is based on the husband’s income, a pension-system that gives equal rights to the wife might be said to have a redistributive effect between the genders. In most European countries this is changing with and increased number of two- income families. Women tend to work more part-time than men do, and a factor that influences the gender dimension is therefore how the wage-related part of the pension system looks. In a worst case scenario there might be a transfer between low paid part-time working women to well paid over-time working men. A system where the pension level is based on the individual’s contribution can lead to a lower pension for women, since they have a higher life expectancy. If the calculation is based on average for all the impact will be a redistribution favour of women. To provide childcare benefits and single parent benefits is also a way of protecting women with children from poverty.

Means-tested social assistance systems necessarily work in a different way. Contributions are all paid through taxes and are meant to cover those with the lowest income – the poor.

The system is intended to have a certain level of re-distributive effect. Since social assistance schemes work as the last safety net, the level of and access to the pension schemes have an impact on the role of the social assistance. Lødemel (1997) points to what he calls a paradox: In a country like the UK the insurance schemes are limited, whereas the social assistance system seems to be relatively generous. The opposite situation is found in the Scandinavian countries, with generous pension systems and tight social assistance. The relation between social insurance and social assistance strongly affects the distributive consequence of the income maintenance system.

The points made above show that to be able to analyse the level of distribution and redistribution of the different welfare regimes, it is necessary to look directly at how the different schemes work. The economic problems and the increased level of poverty in the transitional countries, and among them Latvia, make the question of the distributive and redistributive effects of the income maintenance scheme there acute.

Accountability

For the dimension accountability we have in mind whether the population trusts the system, and whether they have reasons for trusting it. The question of reliability is linked to the sustainability, the efficiency and the eligibility of the system.

One would expect that the historical experiences of the post-communist countries should lead to a lack of trust in state driven services. If this is correct, there could be a scepticism towards a Scandinavian kind of model, with a dominant role of the state in the welfare sector. On the other hand there are also likely to be expectations in the population that the basic existence should be secured. It is difficult to see how the political institutions of the transitional countries, that are described as “fragile and in poor societies”, should be able

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Different groups in society have an impact on people’s attitudes towards income maintenance schemes. The labour movement has historically had the role of fighting for active measures promoting reduction in income inequality. The role of the middle class is also essential. If the middle class believes the system does not deliver according to their expectations, they have the economic resources to find alternative ways of securing their social situation. In this way their behaviour might have a great influence of the sustainability of the system. The European welfare state is to a large extent a result of a compromise between the labour and the middle class (see e.g. Seip 1994).

One problem for the western welfare state is said to be that people’s expectations sur- pass what it can deliver. This is called the crisis of expectations. In the former communist countries people tend to compare their level of living with the western countries, and therefore see a connection between market economy and high standards of living. Another factor is that people compare their situation with the situation before the changes, and deteri- orating living conditions also lead to distrust. At the same time, a slow improvement of living conditions as well as growing inequality can be expected to have the same kind of impact.

The individual’s and the community’s experiences with service delivery and the quality of the welfare bureaucracy are important for a continued support for a high level of welfare benefits and services. The late modern welfare state is squeezed between the demand for individual freedom and the expectations to communal responsibility (Langeland et al 1999).

The general support for well-developed welfare services and benefits seems to be relatively high and surprisingly stable, in spite of these dilemmas.

Another issue linked to the accountability of the welfare system is the level of benefits and services. The question is whether people receive what they need from the different agencies involved. There are obvious dilemmas for the politicians in a relatively poor country such as Latvia where the expectations to service delivery can be expected to be relatively high.

The three pillars

In a discussion about the income maintenance and pension reforms the concept of “three- tiered” or “three pillar” system of social insurances is important. This concept is crucial element in the social policy recommendations of the World Bank. The WB version of the three-pillar system consists of a pay-as-you-go social insurance pension (the first pillar), a mandatory system of regulated private pensions (second pillar) and individual private pension schemes encouraged by tax incentives. Barr (1994) argues that these are typical elements of a western European system and should be applied to the new schemes of the countries in transition. The World Bank has generally promoted this way of thinking to the Central and Eastern European Countries.

It is true that most Western European pension systems are built on the above mentioned three tiers. However, the relation between the three tiers and the way they are managed vary quite substantially around Europe. The first pillar can e.g. be universalistic or means tested. The second pillar can be publicly or privately managed. It can be mandatory or based on collective agreements. Both Deacon (1997) and Standing (1996) discuss this system and point to the influence this concept has had on development in the CEECs. The way in which

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these pillars are managed and the relation between them can be taken as indicators of the influence of international organisations on the social policy making in the country.

The Soviet income maintenance system

In Latvia until 1990 the social security system was fully integrated with the social programmes of the Soviet Union. The Soviet system was characterised by a relatively high public spending on social sectors. Higher ranking on the Human Development Index than on the index of per capita income reflects the investments in social sectors of the economy. In addition, the systematic policy of consumer price subsidies held down costs of living for the entire population (Standing, 1996).

Soviet social policies were characterised by the crucial role of the workplace in providing welfare to the citizens. The social security system was part of labour market policy based on the twin principles of the right and the duty to work. As a result, access to social security depended to a large extent on current or, in the case of pensioners, previous work. Aside from cash transfers, social security included a great variety of benefits-in-kind provided by enterprises to their employees. Such services included facilities for child and health care, recreation and housing, as well as some consumer goods in short supply under communist rule. The principles of the right and the duty to work meant that virtually all households were eligible to benefits. Targeted support was minimal.

Due to the comprehensive distribution of social services through the state-run enterprises, local authorities rarely intervened. Only families in extreme distress, people unable to work and handicapped people and a few others qualified for social assistance.

One of the main objectives of the socialist income policy was to ensure a minimum standard of living for all citizens. Another objective was to achieve a relatively flat income distribution. The government regulated the salaries, and the minimum wage was set sufficiently high to ensure a basic standard of living (UNDP, 1998). Comprehensive social insurance schemes included accidents, sickness, parental death and child benefits. Because of the full employment policy, there was no need for a system of compensation for unemployment.

Many socialist states had a high level of child allowances, often representing more than 2% of GDP. In the former Soviet Union, however, the child allowances amounted to less than 1% of GDP. Nevertheless, transfers in kind were very common, and, as noted above, basic goods and services were heavily subsidised (UNDP, 1998).

There can be no doubt that Soviet social policy provided a great degree of security to the population. As long as there was economic growth and the economy did not experience any pressure from international economic forces, one could even say that it functioned relatively well. However, with the general decline of the Soviet economy starting in the late 1970s, the system of social security also showed clear signs of inefficiency. Guy Standing points to several ’distortions’ in the labour system that were of direct relevance to the development of the new system from the late 1980s (Standing 1996).

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most efficiently allocate the resources available. Thus, the quality of services provided was often poor, and many services were heavily undervalued. Services were often provided to elites and the nomenklatura rather than to the needy.

Under the Soviet system the focus was on the large enterprises, huge industrial companies with several thousand employees. These units had their own agencies providing social services to their employees. The monopolistic structure of production and distribution tended to be associated with monopolistic control over the generation and distribution of social services. As a result, services were much more important than social transfers in the Soviet economic system.

The benefits and services a person was entitled to were often based on the period em- ployed in one enterprise, and changing jobs often lead to loss of earned rights. Most people worked for a long time, and many people were life-time employees in an enterprise. The Soviet social security system was therefore not well fitted for the labour mobility needed in a dynamic economy. In many cases benefit provision was used to retain and attract workers.

In Latvia the pension and social security system were determined by all-union laws and regulations. The pension system was based on the pension law of 1956 for state pensioners and the law of 1964 for collective farm workers. According to this system those who had participated in the labour market were entitled to an old-age pension. Civilian state employees who had reached the age of 55 (women) or 60 (men) were eligible for an old-age pension provided they had spent at least 20 or 25 years respectively in state-sector employment. Minimum and maximum pensions were stated in absolute terms, and the pension depended on the earnings in the last 12 months before retirement (van Arkadie and Karls- son 1992)

Pensions were low, and it was difficult to uphold a decent living standard on a basic pension. At the same time salaries were too small for employees to make savings for their retirement age to live on. The result was that a majority continued to work into their retirement. The low retirement age also became more of a problem in the 1980s when fertil- ity rates declined and a large proportion of the population reached the retirement age and were entitled to pension.

The problem of poverty was not discussed openly in the former Soviet Union. It was taken for granted that the social security system in place combined with total employment, adequately satisfied the needs of those unable to work. However, in the real world terms poverty did exist also in the Soviet Union. In 1975 an allowance for children was introduced for low-income families (for families in which the per-capita income was less than 50 roubles) (Korchagina, Ovcharova and Turuntsev 1999). By 1985 the poverty threshold was increased to 75 roubles, and used as the criterion to determine minimum wages and minimum pensions.

Those who have written about Soviet social policies tend to agree that although the system had serious distortions, the system worked smoothly in many respects and provided a significant level of social security to the population. Many people came to expect a broad range of at least minimum benefits from the state. This had important implications for the development of new social policies in Latvia after the collapse of the Soviet Union and the re-emergence of a Latvian nation state.

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Brief description of the present income maintenance system in Latvia

In order to discuss the different aspects of the Latvian income maintenance system, we believe that it is useful for the reader not familiar with the system to have some information about the main laws and regulations. Such a description is provided in the Appendix 1 of the web version of this report (www.fafo.no/baltsoc). In the following we give a brief summary of the description provided in the Appendix. (See also MWL 1998, MWL 1999b)

Social insurance

Latvia’s social insurance system has since January 1998 been regulated by the “Law On State Social Insurance”. It is an insurance-based system, supplemented by benefits to the unin- sured. The social insurance tax rate is 36.09%, and payments are compulsory except for retired people. The law takes form as an umbrella with four groups of benefits; pensions, unemployment, occupational injury and maternity and illness.

Pension insurance

Latvia’s pension reform started in 1991 with the law “On State Pensions”, providing income at old age, disability or with loss of provider. However, it lacked a connection between individual contributions and pensions paid, and it was replaced by a three-tier pension system. The law on state pensions came in 1995. (MWL 1999a)

The first tier is the “State Compulsory Non-Funded Pension Scheme”. It creates incentives for pension instalments throughout the career as well as for stretching it out. Anybody above 15 years is eligible to join, and pensions are determined by the insurance terms, retirement age, average wage, social insurance contributions, index regulations and life expectancy after the pension is granted. The minimum pension is LVL30 per month, and pensions payments above LVL100 per month are taxed.

The second tier, “State Compulsory Funded Pension Scheme”, will be implemented in 2001. Participation is mandatory for people under 29 years, and voluntary for people between 29- 49 years. People above 50 years are not eligible to participate. To generate re- turns tax payments will be invested domestically. Initially only 2% of the capital will be invested, and the State Social Insurance Agency, or SSIA, will administer and invest the capital in safe, local projects.

The third tier, “Private Voluntary Pension Scheme” provides people with an opportunity to save in pension funds in addition to the state pension. No income or social taxes are paid on investments, creating incentives for people to save in funds. The funds have to limit their investments to state securities, Riga Stock Exchange listed companies, real estate and investments in “first world countries”. The accumulated capital becomes available when a person turns 55 years.

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Sickness and maternity insurance

The “Law on Maternity and Sickness Benefits” regulates sickness, maternity and funeral benefits. Benefits are granted proportionally to insurance contributions from the 15th sick- day, with a 52-weeks limit. The amount paid in sick-leave is 80% of the average wage over six months, two months prior to the day of absence. If the criterion is not met, the benefits paid equal 80% of the minimum wage. Maternity benefits are granted for 56 days before and after giving birth, with an additional 14 days in case of medical complications or if more than one baby was born. The maternity benefit is 100% of the average wage over six months, or 100% of the minimum wage.

Insurance against unemployment

A new “Law on Employment” was implemented in 1997. A person needs a nine-month insurance record for the last twelve month to qualify for unemployment benefits. The unemployment benefits depend on social insurance contributions and cannot exceed five minimum wages, or LVL200. Benefits are reduced over time, encouraging the unemployed to actively seek employment.

Insurance against occupational accidents and occupational diseases

An important characteristic of the “Law On Compulsory Insurance Against Accidents at Work and Occupational Diseases” is that all contributions are paid by the employers, creating incentives to improve working conditions. The insurance rate is 0.09%, and because industry risks are undetermined, employers pay a flat tax regardless of the risks involved.

Also here benefits are calculated from the six months average wage. A 100% loss of working ability implies 80% in compensation.

Social assistance

Latvia’s social assistance system aims at protecting individuals without sufficient income from work, social insurance payments, or state social benefits from poverty. According to the “Law On Social Assistance”, support is provided in three forms; material, social care and rehabilitation. Since the implementation the state has focused on establishing support functions at the local level, with development of alternative care centrally placed in this process.

The state’s key responsiblities are payment of social benefits, financing of national pro- grams, supporting children, vocational training and rehabilitation of disabled, and social assistance to the homeless. Local governments are responsible for municipal social assistance benefits, home care, rehabilitation of people from risk groups (drug addicts), day care centres for elderly people and disabled children, and institutional care for elderly and children age 3 to 18.

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Material assistance

Most of the state’s social assistance benefits are universal, and include social insurance, child care, family benefits, allowance for guardians and foster families duties and transportation expenses to disabled.

Local government benefits are tested against personal needs and given to those who do not generate sufficient income to cover expenses for housing, disabled or families with a disabled child. The municipality can pay benefits in cash or in kind, and can grant additional benefits provided that the municipality has fulfilled the requirements set by the state.

Social care and rehabilitation

Social care provides an alternative to institutions, but centrally financed institutions are still widely used for the mentally challenged, people with special needs, infant orphanages and specialised childcare centres. Local governments are responsible for retirement homes and orphanages for older children and teenagers.

The municipalities have to pay for services its inhabitants receive in institutions in other municipalities (principle; “the Money Follows the Client»). In an attempt to create incentives for development of alternative care, the same principle is also planned for the state institutions. Alternative care is still in its infant phase, with home care, guardianship, foster families, adoption, and day care centres only recently developed.

Social rehabilitation is the responsibility of the municipalities, with recommendations developed by the Ministry of Welfare.

Family support

Lately, more attention has been devoted to families with children, and the Ministry of Welfare has developed recommendations for support to families at the municipal level. Here the focus is not only on income maintenance, but also family functions.It is not yet determined in what way the state and municipalities should provide the support – directly or indirectly, fully or partially financed.

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Discussion of Latvian social policy in relation to four dimensions

Division of roles and responsibility

The general privatisation process has lead to basic changes in the division of responsibility for social benefits and services. In the following we will analyse the role and responsibility of different sectors of the Latvian society, in providing social services and benefits. The chapter concentrates on the state and the municipalities in the public sector. In the private sector the focus will be on the market, the employers, communities, families and the individual. The role of non-governmental organisations (NGOs) in the civil society is also included in the analysis.

The general picture of the system shows that the state is responsible for legislation, overall policy-making and managing of the social insurance and family support systems. The municipalities are in general responsible for social assistance benefits and services. In the private sector the market, communities, families or individuals are responsible for more limited parts of the benefits and services.

State responsibility

The Latvian income maintenance system is dominated by public services. If we look at the division of labour between the state and the municipalities, the Latvian system is in some respects more dominated by the state than is the case in the Scandinavian countries,. They can be described as representing a municipal model. Another aspect that is linked to the strong role of the state is the fact that the so-called second pillar of the pension system is publicly managed. The role of the state seems to become even stronger as the system develops. A new system of guaranteed minimum income (GMI) that was adopted by the Saei- ma in March 2000 and tested in some municipalities from the summer 2000 will increase the influence of the state even further, even if the responsibility for subsistence minimum benefits still will remain with the municipalities. Estonia has also chosen a system where the state plays the dominant role. On the system level the Baltic countries have chosen to give the public sector a very central role. Within the public sector the state dominance ap- pears to be strong. (Kangas 1999a, Grønningsæter 1999)

The public pension system that was adopted in 1996 is basically the same as the new Swedish system. The first pillar is universalistic and pay-as-you-go. The second pillar is a state driven fund based system.

The State Social Insurance Agency (SSIA) is responsible for the different pension schemes.

They have departments in every region in the country. There are all together 33 offices, six local offices in Riga and one in each of the other six major cities, and the rest in Latvia’s other districts. In the process of implementing the pension reform the control and

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development of the local offices seems to be one of the challenges of the SSIA. SSIA gets money from three sources:

1. social insurance contributions (from employer and employees)

2. state contributions (for unemployed, receivers of disability pension, persons in special situations)

3. the employers pay for the accident at work insurance

The social insurance agency is responsible for all benefits that are not means-tested and not administered by the municipalities. There are approximately 12.000 pensioners in Latvia;

consisting of old-age pensioners, disabled persons who cannot work and people who have lost the breadwinner (parents). The minimum pension is legally under the Law of Social Assistance, but it is the responsibility of the state. This minimum pension has no income test, no means test and no regional difference. It is universalistic and gives LVL30 per month.

Let us present statement of one of our interviewees:

The possibilities of the state are much smaller than the needs. Developments are slower than what could be desired. Pension reform has been well thought through, but there are substantial financial problems. There are great deficits in financing of the pensions.

The discussion about the subsistence minimum is an illustration of this problem. In 1996 the Central Statistical Bureau set a crisis subsistence minimum to LVL83. Although this was never an official figure, this amount of money has commonly been used as a point of reference in the political discussions. However, also other poverty lines have been used in political debates (the minimum income, the minimum pension, the crisis subsistence bas- ket, guaranteed minimum income and more) with very different levels and serving very different purposes. The problem for the general public is what should be defined as a sufficient income for upholding an acceptable living standard.

In February 2000 the level of the future Guaranted Minimum Income (GMI) was set to LVL21. The discussions about the level of the GMI is an example of a principle debate on what the state’s responsibility is towards the individual. We will come back to this discussion in the section on changes and perspectives.

The role and responsibilities of the state in Latvia can be summed up as follows:

• makes the laws

• collects taxes

• collects social contributions

• is responsible for the pensions

• is responsible for setting the GMI

• controls the local level

This list is not very different from a description of the role of the state in most Western

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discussions about the state’s responsibility, the division of labour and the distribution of resources between the state and other sectors of the Latvian society resemble discussions going in many other European countries.

Municipal responsibility

The law on social assistance gives a detailed account of the responsibilities of the municipalities, but to implement the policies seems to be a general problem for the municipalities.

One of the interviewed politicians from the opposition in the Saeima said the following:

The social assistance system was developed in 1994. At the time the state was sup- posed to play a significant role to ensure that all needy people receive the appropriate benefits. However, as a result of amendments in 1995–96, municipalities became responsible for all means-tested benefits. Not all local governments had the required resources. So, the state policies should be to increase the crisis subsistence minimum The state should also have a role in the provision of social assistance, for example through paying for rent and services.

This quote is a good illustration of the discussion on the municipal development in Latvia.

The responsibility of municipalities is by law vital in the implementation of social policy in the country. On a primary level the last safety net in the social assistance system must be seen together with primary services as well as basic institutions. This level is in our view one of the weakest points of the system, mainly due to the following shortcomings:

• lack of economic resources

• lack of staff and infrastructure

• lack of professional staff

There seems to be an increased emphasis on community-based services and local responsibility. Primary services are the responsibility of the municipalities and the decentralisation movement influences the division of labour between the state and the municipalities. Some critical voices point to the miserable financial conditions wherein the state leaves the municipalities. A question is whether the voluntary sector – as a result of lack of resources in the municipalities – has taken over some of the municipal responsibility. Several of the interviewees maintained that the state pushes too much responsibility on the municipalities, and questioned whether they would be capable of fulfilling their obligations.

A typical quote goes as follows:

The state hands the problems over to the municipalities. The municipalities have very limited resources, and cannot provide the range of social services that they are expected to.

The economic differences between the Latvian regions also create problems. The municipalities have very different economical premises, and the poorest municipalities also have the poorest population. The so-called equalisation fund is aimed at equalising income differences between municipalities. There are four criteria that are used in classifying the municipalities:

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• the proportion of children below school age

• the proportion of children in school age

• the proportion of population of working age

• the proportion of population above working age

Thus, it turns out that only demographic criteria influence the transfers that go through the equalisation fund. Unemployment levels and the economic structure of the municipalities might have a strong impact on the municipal economy, but do not have an influence on the distribution of funds from the equalisation fund.

There is limited interference from the side of the government with how the municipalities spend their money. It is up to each municipality to decide the amount of money spent on social assistance and services. The municipal councils are elected locally, and the representatives are responsible towards their constituency. The Ministries can only supervise and see to that basic rules are adhered to. There have, however, been discussions on changes in the law on municipalities. Voices in the public debate have argued for a strengthening of the state monitoring of the municipalities.

The municipalities are small, amounting to 590 in a country of 2.4 million people. A regional reform with the aim of reducing the number of municipalities is said to be under- way. This could be a step in the direction of professionalisation of the social services. How- ever, the pace of the reform is slow and there is much opposition from many local municipalities. Some said they were afraid of being made redundant if local municipalities are merged. Others are unsatisfied with the prospects of being merged with a municipality with deeper economic problems. Representatives from the Ministry of Regional Development claim that they emphasised that the clients of the social services should be given professional help. They also say, however, that while the level of professionalism is quite good in some municipalities, in many cases it is rather low. The cities and central areas seem to be better off in this respect than rural areas and the periphery.

The social assistance benefits are often given in-kind rather than in cash. The argument for benefits in kind is that it helps in providing aid to the most needy. Social workers also describe distrust in the clients’ ability to handle the benefits. The GMI is meant to be in cash and this reform will probably reduce benefits in kind. It is possible that this reflects a difference in perspectives between the municipal and the state level. Some of the basic benefits are given by the NGOs, especially benefits in kind. Some municipalities seem to include NGOs as service providers.

Many questions and dilemmas can be raised concerning the role of the municipalities in the Latvian income maintenance system. We are currently analysing the local implementation and development of social policy, and publications are due to appear shortly.

The market and the employers

The main role of the market in the social insurance system is linked to the third tier. The

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for individual pensions or life insurance is limited and not very developed. According to statistics from the Balta Insurance Company, employers buy more than 60% of the contracts as group contracts. The market for life insurance is only 10% of the total insurance market. This is very low compared with e.g. the Scandinavian countries, one of the reasons being that there are no individual tax advantages. In principle this means that the private life insurance and pension insurance markets are totally dominated by collective workplace based insurance.

One company manager described the following system of social insurance for the employees, which was presented as representative for many of the better-off companies in Latvia:

In this company the staff is divided in groups and are offered insurance according to their status. They offer life insurance for 30% of the employees. All employees are covered by work accident and work disease insurance.

The publicly managed sickness benefit and maternity leave benefit are the responsibility of the employer the first 14 days. Although the second tier is a state managed system, in the future there will be a market component. The individual will get some choices on the question of where his/her account of the fund should be invested. It is still difficult to eval- uate how important this element of the system will be.

Another aspect of the role of the market and private companies is linked to the differ- entiation of the roles of purchaser and provider. The municipalities are responsible for the services, but in some cases they buy the provision and implementation of the actual work from private companies. This kind of market orientation in service provision is not very developed in Latvia. Several of the interviewees believe that private companies will be more involved in the long run, but as the situation is now, there are few private companies that see how they could make a profit from social services.

The problem with paying the contribution

One of the difficulties of developing a modern welfare state in a transitional country is linked to the problems of collection of social contribution. In the grey economy many employers do not register. One informant estimated the size of the Latvian black economy to 15–16

% of GDP, but estimations vary and some believed it to be considerably higher. In the grey or black economy the employers do not pay the social contribution, and the employees lose their right to social insurance. Some employers register, but they only pay the contribution that they have to according to the minimum wage. For several years this has been critically low, and how to motivate people to pay has been an important issue. The pension system gives incentives to make employers pay the contribution. After the reform that linked pensions to contributions the problem seems to be decreasing gradually. From 1996 there has been an increase in the number of people who pay. Employees have started to demand that the employers pay. This way the pension system also contributes to a better organisation of the economy of the country.

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The family and the individual

In our opinion the income maintenance system is in principle well developed. However, a well-developed structure is not enough, as the benefits also have to be sufficient. If they are insufficient, the first alternative support system will be the family. If the first pillar is too low, the role of the individual and the family is particularly important. Data from the 1999 Norbalt survey indicate that this is the case.³

Table 1 Individuals living in households that have received material help or assistance from relatives or friends in the past 12 months, by type of settlement, ethnic composition of the household and age

d l o h e s u o h f o e p y

T Percentagethatreceivedhelp(%)

l l

A 19

l a r u

R 17

n a b r

U 20

s n a i v t a L c i n h t

E 20

s n a i s s u

R 16

s r e h t

O 17

e g a g n i k r o w w o l e

B 25

e g a g n i k r o w f

O 20

e g a g n i k r o w e v o b

A 11

On average a little less that 1/5 of the respondents live in households that have received this kind of help. It is worth noting that the likelihood of receiving help and assistance from relatives and friends decreases with the respondents’ age, even though some of the age effect is reduced since we measure help for the household as a whole, where there will nor- mally be several age groups living together. The main reason for the age differences is probably that poverty levels are higher among children than among other age group, and the need for help is therefore more acute. In addition to help from outside is the fact that some people move together with other relatives when times are hard. The Norbalt survey does not contain data about this phenomenon, however. But help from family members within the household is also likely to be an important element for Latvian income maintenance, for example in cases where a person is excluded from the labour market. Thus, although in principle the Latvian system is individually based, in reality the family is given a relatively prominent role in income maintenance in Latvia.

Civil society; Non-governmental organisations

If the Norbalt data shows that many people get support from relatives and friends, at the same time it shows that support from churches and charity organisations is relatively un- common and more so than what could have been expected.

Less than 2% of the Norbalt respondents have received this kind of help. This can be taken as an indication that the over-all importance of the churches and NGOs in social services and social work is relatively small. This seems to contradict the way in which these

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organisations describe themselves. The following is a quote from a representative of a Latvian NGO :

The different organisations play very different roles in social services. Some specialis- es e.g. on specific risk groups like the crisis centres. More than half of the social services are organised through NGO/volunteer organisations. Many of them provide food.

The target groups can be both people who get social assistance and those who do not.

There are around 1,000 working organisations in Latvia. They co-operate with the municipalities, especially those organisations that provide food. The importance of the NGOs is recognised by state policies. The ministries have started to give some money, but it is still marginal. The municipalities are taking over many projects and that reduces the role of the organisations. The NGOs sometimes play an innovative role. The NGOs should be used in a more systematic way.

The question is whether there is a misleading myth about the role of the NGOs, or if there are problems not covered by the Norbalt survey. One possible explanation is that the survey does not reach those without an address. In other words the very poorest who rely the most on help from the outside. Another explanation can be that the question only relates to benefits in cash, not in kind, and that help from NGOs mainly is in kind, e.g. food. It is quite plausible that even if the role of the NGO sector is limited in scope it is important in helping the very poorest.

Another aspect of the role of NGOs is described in the following quote from an NGO representative:

In the beginning the NGOs were channels for humanitarian aid from abroad. The international organisations can be credited for the co-operation. When the international support decreases, we have to co-operate both with public and private sector funders. It helps to have a good record for international co-operation, but we lack professionals. We need resources for being effective. Some organisations will have to close.

Most likely NGOs were at one stage important as channels of international support. A huge number of organisations, often consisting of a single person, came as a result of this. Many of these organisations have currently problems with surviving as the international support is decreasing.

Labour market connection

The social insurance system is financed through contributions from three sources. The first is social insurance contributions from employer and employees. The second is a state contribution paid to the insurance system for unemployed, receivers of disability pension and persons in special situations. The third source is the contribution employers pay for the accident at work insurance. The sickness and maternity leave benefits are the responsibility of the employer the first 14 days. Means tested social assistance benefits are paid by taxes

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and are therefore not financially dependent on the labour market. The benefits are therefore not dependent of work records either.

The ”Swedish/Latvian” system

Latvian experts are proud to say that Latvia was the first country in the world to implement a pension schemes based on the principle of “pension capital”. This system has internation- ally become famous as the Swedish system. Not surprisingly the Latvian system has been developed in cooperation with Swedish experts. The principle of the new system is that a percentage of the individual’s wages, as well as a contribution from the employer, are paid as social contribution to the pension system. The first tier is a pay-as-you-go system, but every individual also gets a statement of what has been paid in to his or her account. The output of this system is paid to the individual based on contributions, indexed and divided on average life expectancy. The maximum for indexation is currently three times the minimum wage. From 2002 both wage and price indexes will be used. Annually every individual receives a statement of the accumulated capital. A person needs to participate in the insurance scheme for 10 years to receive a pension. Periods of unemployment, childcare (up to 1 1/2 years) and service in the army are included in those ten years.

The Swedes have decided on a transition period of 20 years before the new system is fully implemented. In Latvia there is no transitional period, and to calculate contribution from before 1996 average wage is used as the basis. Older pensioners still receive pensions according to the old law.

The law on the 2^nd tier will be implemented in the year 2001. In the beginning the contribution will be low – 2% of the wage – and it will gradually increase. The 2^nd tier will be administered by the SSIA. At a later date each individual will have the right to choose where to invest a part of the money.

This system clearly links the pension to both wage levels and years working the labour force. There is also a universal benefit – state social assistance that is administered through the pension system. These benefits add a universalistic minimum pension to the basic principle of the pension reform from 1996.

Universalism as the basic principle (de-commodification)

Universalism is the dominating principle in the Latvian social insurance system. In principle it means the system represents a de-commodified approach. Access to social security is not dependent on the labour record of the person in need of social benefits. There are however several aspects of the system that impart nuances to this statement. The first is the level of the universal benefits. In the chapters on distribution and accountability we point to that the general level of the pensions is good compared with the level of the wages. In spite of this one might say that the level of the minimum pension is on a very low level – LVL30 per month. The consequence is that a supplement is needed for keeping a sufficient living standard.

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linked to work record and wage history, and the second tier will give these two an even stronger importance. The third tier will be market based, but also here the dominating system will be linked to the place of work, since collective and bargained pension schemes domi- nate in the third tier.

This balance between the different schemes influences the role of the labour market connection. In the Latvian system the person’s relation to the labour market will influence the level of the basic pension, as well as the possibilities of benefiting from the second and third tier. However, the general right to benefits, whether they are universal or means tested, is not dependant on work record. In this respect the systems can be characterised as de-commodified.

Active measures (re-commodification)

The concept re-commodification describes a development where benefits increasingly are linked to contributions from receivers. This can be in several forms, whether it is active labour market measures in the social security system or conditioning social assistance benefits to a work contribution from the receiver. These kinds of measures seem to be of limited use in the Latvian case, although there is public work for receivers of social assistance and also a limited number of offers of qualifying courses for unemployed.

The European Union has in the last years actively promoted active labour market measures, e.g. in the programmes for increased employment.

There might be several reasons for the limited use of workfare or active measures. First of all workfare and active labour market measures demand a professional and developed standard of social workers and bureaucrats. There are few educated social workers and limited resources in the social service offices, which these measures demand. If these measures shall be more than punishment for receiving social benefits, they should be a part of qualified social work. They should aim at bringing the user into a more independent situation.

Education of professional social workers started in 1993 in Latvia. There are more educated social workers in the cities than in the rural areas and the capacity of the social services much better developed in the larger cities than elsewhere in the country.

The Latvian labour market is faced with a discrepancy between the qualifications of the labour force and the needs of the labour market. Workfare and active labour market measures could be used to qualify workers for the real needs in the more dynamic and service- based labour market. We met critical voices arguing that the actual courses do not qualify the users for the real needs in the labour market, and that it makes some of those activities meaningless. One interviewee was of the opinion that the money used on public works rather than on job creation.

There are legal possibilities for using work as a contribution by clients. «Public work” is used. This can be done in two different ways. The first works in the following way; «we will pay your housing, if you clean the hospital», the other is like «you will get a minimum wage for doing so or so». According to survey data, 6% of those who receive social assistance are doing public work. The statistics also show that there is a definite ethnic division in the use of public work. As much as 12–13% of the ethnic minorities receiving social assistance are doing public work, while it concerns only 4% of the ethnic Latvians The regional differences

“We all agree, but noone is grateful”

Fafo

Arne Grønningsæter, Aadne Aasland and Zane Loza

“We all agree,

but noone is grateful”

Developments of the

Income Maintenance System in Latvia

Arne Grønningsæter, Aadne Aasland and Zane Loza

“We all agree, but noone is grateful”

Developments of the Income Maintenance System in Latvia

Contents

Preface

Introduction

Background

Theoretical framework

The Soviet income maintenance system

Brief description of the present income maintenance system in Latvia

Discussion of Latvian social policy in relation to four dimensions

Division of roles and responsibility

Labour market connection