Question 2 of 8

Will pensions still keep people out of poverty in twenty years?

About 17 min read

The short answer

Not without change. The share of pensioners at risk of poverty rises from 42 % today to 53 % in 2040. Pensions follow contributions, the poverty line follows wages, and fewer people are paying in. A balanced policy holds the risk at 43 % in 2040, close to today's level. It combines a retirement age of 67, more generous indexation, a larger minimum pension and the end of envelope wages.

It need not cost the budget. The retirement age and the end of envelope wages earn what indexation and the minimum pension spend. Over 2028–2045 the balanced policy's own effect on the budget is about zero. The retirement age alone lowers the risk, raises employment and costs nothing.

Why it matters

Latvia's pension system is built so that it can never run out of money. Each person's pension is calculated from their own contributions, and the total of all pensions follows what everyone in work pays in. That is fair to the budget, but not to the pensioner when the number of people in work falls. Between 2005 and 2025 the share of pensioners at risk of poverty rose from 21 % to 42 %. The pension as a share of the average wage, the so-called replacement rate, fell from 39 % to 33 %.

Over the next fifteen years this continues. The number of people in work falls on the base path from about 865 thousand to 756 thousand, so total contributions grow more slowly than wages, and with them pensions. At the same time people live longer. The same accumulated sum has to be spread over more years, so each new pension is smaller relative to the wage than the one before it. The base path, that is, what happens if none of the policies on this page is adopted, leads to 53 % of pensioners at risk of poverty in 2040. The uncertainty band on the chart runs from 51 to 55 %. It shows how far the path moves if the two most important assumptions are varied across their plausible ranges: how fast firms fill the posts that retirements leave, which sets how fast wages rise, and how fast productivity grows.

Why it matters beyond pensioners themselves. People aged 65 and over will be a much larger share of the population in 2040 than today. If more than half of them are below the poverty line, that is a question about what kind of country Latvia is. It is also a question for the budget: the state's top-ups to small pensions grow exactly when pensions fall behind wages.

Pensioners at risk of poverty

Share of people aged 65 and over whose income is below 60 % of the national median.

Recorded data
Base path
Uncertainty band

The grey band shows how far the base path moves when the two most important assumptions are varied across their plausible ranges.

The band is calculated to 2041; after that the line runs on without it.

Show the dataDownload CSV

Year	Recorded data	Base path	Uncertainty band – low	Uncertainty band – high
2005	21.1	51.2
2006	30.4	58.6
2007	35.6	59.5
2008	52.0	45.2
2009	47.6	31.3
2010	17.2	34.5
2011	9.1	43.8
2012	13.9	44.6
2013	17.6	47.8
2014	27.6	48.5
2015	34.6	46.7
2016	38.1	43.1
2017	39.9	46.3
2018	45.7	46.2
2019	47.9	44.3
2020	40.9	43.6
2021	44.6	44.4
2022	40.5	45.1
2023	40.1	46.1
2024	41.4	43.6
2025	41.7	42.2	42.2	42.2
2026		42.9	42.9	42.9
2027		43.4	43.3	43.4
2028		44.1	43.6	44.8
2029		45.7	45.0	46.0
2030		46.9	46.6	47.4
2031		47.6	44.4	51.5
2032		51.3	47.3	52.5
2033		50.0	48.4	51.1
2034		49.1	47.9	50.2
2035		48.3	47.5	49.3
2036		48.5	47.6	51.4
2037		50.2	48.2	51.1
2038		50.9	48.8	52.5
2039		51.5	49.3	52.7
2040		53.0	50.9	54.8
2041		54.3	52.8	55.6
2042		55.2	55.2	55.2
2043		57.1	57.1	57.1
2044		57.5	57.5	57.5
2045		57.9	57.9	57.9

On the chart the dots are the recorded data and the line is the model's base path. From 2017 they agree to within a fraction of a point: the model gives 42.2 % for the start of 2025, the recorded figure was 41.7 %. Before that the line and the dots part company, and the section "What to keep in mind" explains why.

What drives it

The pension system has one principle and two chains, and both chains run downhill at the moment.

The principle: pensions follow contributions. In Latvia's system pension spending cannot run away from contributions. If there are fewer people in work, total contributions grow more slowly, pensions are indexed more slowly, and pension spending relative to the economy stays almost flat: 8.4 % of gross domestic product (GDP, that is, everything the country produces in a year) in 2025 and 8.2 % in 2040. The system balances its money, not people's incomes. Since 2025 pensions above a monthly allowance are taxed like wages; the model carries that, with the allowance rising with prices as an assumption.

The first chain: fewer workers, slower-growing pensions. What a pensioner receives grows as fast as the total contributions of everyone in work. When the number of workers falls by a per cent a year, total contributions grow a per cent more slowly than the average wage. Over fifteen years that is a large hole: the replacement rate falls on the base path from 33 % to 29 % in 2040.

The second chain: the poverty line follows wages. The at-risk-of-poverty line is 60 % of the national median income, and the median grows with wages and productivity. A pensioner whose pension in today's money is a sixth larger than now can still be below the line in 2040, because the line has moved further. That is what happens on the base path: the average pension at 2025 prices grows from 616 to 730 euro a month, and the poverty risk rises all the same. In the early 2030s the line moves faster than usual, because the labour market tightens and wages rise before pensions follow.

Pensioners' incomes are part of demand, which creates jobs and contributions, but over the next fifteen years that feedback is weak. The path is set by one principle and two chains running the same way. The thing that matters most is not a circle but an assumption about how fast wages grow: the faster they grow, the further pensions fall behind.

Over the next fifteen years the first chain dominates, and it is set by the number of people alive today. Policy can change how long people work, how much of their wage is declared and by what rule pensions are indexed. It cannot change how many people there are.

What can be done

Four policies that parliament can actually adopt. For each, the page says what it delivers in 2040 compared with the base path, what it costs the public budget, and how fast it acts. The cost to the budget is the policy's own effect on the budget balance, added up over 2028–2045 in points of GDP, before the EU fiscal rule responds. The difference in government debt in 2040 is shown beside it. Under the EU fiscal rules a package that spends is mostly paid for by cuts the rule forces elsewhere, and a package that earns lets the rule cut less, so the debt figure is smaller than the cost.

Retirement age 67

What it is
the statutory retirement age rises from 2028 by three months a year until it reaches 67 in 2036.

What it delivers
the pensioner poverty risk in 2040 is 4.9 points lower. The largest difference, 6.0 points, comes in 2037, while the age is still rising. The average pension is 4.0 % higher, because people contribute two years longer. Employment is 1.4 % higher and the economy per head 0.6 % larger.

What it costs
nothing over the period. Pension spending is 0.4 points of GDP lower, and the policy's own effect on the budget over 2028–2045 is about zero (+0.2 points of GDP). Government debt in 2040 is 0.9 points higher, because the extra workers are taken on slowly in the 2030s; by the mid-2040s it is lower than on the base path. The price is paid by those who work two years longer, and most of all by those whose health does not allow it.

How fast it acts
visible in the poverty risk from 2030; in full in employment only after 2036, once the age is reached.
More generous indexation

What it is
pensions in payment are indexed each year a quarter more generously than the current rule prescribes.

What it delivers
the poverty risk in 2040 is 4.4 points lower; the average pension 5.9 % higher. The only one of the four that reaches the average pensioner, not just those at the minimum.

What it costs
pension spending 0.5 points of GDP higher; about 4.4 points of GDP over 2028–2045 before the rule responds. Government debt in 2040 is 0.7 points higher; the rule absorbs the rest. Per point of poverty risk, about as dear as the minimum pension.

How fast it acts
visible from 2030 and growing every year, because the difference accumulates.
A larger minimum pension

What it is
the minimum pension, received by people with small accumulated rights, is raised by half.

What it delivers
the poverty risk in 2040 is 9.0 points lower, the most of the four; the average pension 12 % higher. It reaches the poorest directly, but with a side effect: by 2040 a large share of pensioners receive exactly the minimum, and the pension no longer reflects contributions.

What it costs
pension spending 0.9 points of GDP higher; about 10 points of GDP over 2028–2045 before the rule responds, the most expensive of the four. Government debt in 2040 is 0.8 points higher; the rest is paid for by cuts the rule forces elsewhere.

How fast it acts
visible from 2030; most of the gain is there by 2035.
Ending envelope wages

What it is
the tax authority's ability to detect undeclared wages is one and a half times stronger, so a larger part of each wage reaches the payslip and the pension contributions.

What it delivers
almost nothing for the poverty risk before 2040, 0.9 points, because larger contributions today become larger pensions only when today's workers retire. The average pension is 1.3 % higher.

What it costs
it earns rather than costs. Declared wages carry taxes, so the policy earns the budget about 7.2 points of GDP over 2028–2045 before the rule responds. Most of that lets the rule cut less, and government debt in 2040 is 1.9 points lower. The price is paid by those who receive part of their wage in an envelope today, and by the firms that pay it.

How fast it acts
in the budget at once, in pensions after 2040. How strongly declaration responds to enforcement has not been measured in Latvia; the section "What to keep in mind" says what that means.

What the packages do

Five packages, all introduced from 2028 with a three-year phase-in. Four are single policies at full strength. The fifth is a balanced policy: retirement age 67, indexation a sixth more generous, the minimum pension a third higher, envelope wages tackled at full strength, and second-tier savings added to the state pension at retirement. Seven more packages were calculated. They concern the second and third pension tiers, and they are not shown; "What to keep in mind" says why.

Retirement age 67. the age rises from 2028 by three months a year to 67 in 2036.
More generous indexation. pensions indexed a quarter more generously than today.
Larger minimum pension. the minimum pension one and a half times today's.
Ending envelope wages. enforcement against undeclared wages one and a half times stronger.
Balanced policy. all four at moderate strength, and second-tier savings added to the state pension.

The poverty risk. The balanced policy gives 43 % in 2040 against 53 % on the base path, 9.6 points less, and until the mid-2030s it holds the risk at today's level. A larger minimum pension alone gives almost as much, 9.0 points. The effect of the retirement age is largest around 2037 and then fades. While the age is rising, fewer people retire each year; once it is reached the flow resumes, and what remains is the gain from two more years of contributions.

Pensioners at risk of poverty

Share of people aged 65 and over whose income is below 60 % of the national median.

Recorded data
Base path
Retirement age 67
More generous indexation
Larger minimum pension
Ending envelope wages
Balanced policy

Show the dataDownload CSV

Year	Recorded data	Base path	Retirement age 67	More generous indexation	Larger minimum pension	Ending envelope wages	Balanced policy
2015	34.6	46.7
2016	38.1	43.1
2017	39.9	46.3
2018	45.7	46.2
2019	47.9	44.3
2020	40.9	43.6
2021	44.6	44.4
2022	40.5	45.1
2023	40.1	46.1
2024	41.4	43.6
2025	41.7	42.2	42.2	42.2	42.2	42.2	42.2
2026		42.9	42.9	42.9	42.9	42.9	42.9
2027		43.4	43.4	43.4	43.4	43.4	43.4
2028		44.1	44.1	44.1	44.1	44.1	44.1
2029		45.7	45.7	45.7	45.7	45.7	45.7
2030		46.9	45.9	46.8	46.3	46.9	45.5
2031		47.6	45.8	47.2	46.2	47.6	44.8
2032		51.3	48.8	50.3	45.6	51.1	46.8
2033		50.0	46.9	48.2	42.1	49.8	44.3
2034		49.1	45.2	46.6	41.2	48.7	42.1
2035		48.3	43.7	45.5	40.6	47.9	40.1
2036		48.5	43.3	45.4	40.8	48.2	39.8
2037		50.2	44.2	46.7	42.3	49.5	40.5
2038		50.9	45.3	47.1	42.6	50.1	41.1
2039		51.5	46.3	47.3	42.7	50.6	41.6
2040		53.0	48.1	48.6	44.0	52.0	43.3
2041		54.3	49.7	49.5	45.0	53.3	44.7
2042		55.2	51.0	50.1	45.7	54.4	45.8
2043		57.1	52.5	51.6	47.3	56.3	46.8
2044		57.5	54.1	51.6	47.8	57.0	48.6
2045		57.9	54.7	51.9	48.0	57.4	48.8

The level of pensions. The average pension in today's money grows on the base path from 616 euro in 2025 to 730 euro in 2040. The balanced policy lifts it to 834 euro, the larger minimum pension alone to 816 euro. The replacement rate, that is, the pension against the average wage, falls under every package. The balanced policy gives 34 % in 2040 against 29 % on the base path, but in 2025 it was 33 %. None of the packages returns pensions to the ratio to wages they have now; they only slow the fall.

Average old-age pension

The average monthly old-age pension before tax, with price rises taken out.

Recorded data
Base path
Retirement age 67
More generous indexation
Larger minimum pension
Ending envelope wages
Balanced policy

Show the dataDownload CSV

Year	Recorded data	Base path	Retirement age 67	More generous indexation	Larger minimum pension	Ending envelope wages	Balanced policy
2015	419	430
2016	425	446
2017	428	461
2018	448	478
2019	465	499
2020	491	510
2021	507	510
2022	531	538
2023	547	591
2024	570	613
2025	616	627	627	627	627	627	627
2026		635	635	635	635	635	635
2027		641	641	641	641	641	641
2028		647	647	647	647	647	647
2029		657	665	658	670	657	673
2030		668	683	671	702	668	703
2031		677	698	685	739	678	734
2032		696	723	712	767	699	770
2033		705	738	726	777	710	790
2034		710	747	735	782	716	803
2035		711	752	739	783	718	810
2036		712	758	743	785	720	818
2037		718	757	752	796	726	823
2038		722	757	759	803	731	826
2039		725	757	765	808	734	828
2040		730	759	773	816	740	834
2041		736	764	783	826	746	842
2042		742	769	792	836	752	852
2043		753	777	805	853	763	863
2044		760	787	815	866	772	881
2045		765	795	823	877	779	894

Pension relative to wages

The average pension as a share of the average gross wage.

Recorded data
Base path
Retirement age 67
More generous indexation
Larger minimum pension
Ending envelope wages
Balanced policy

Show the dataDownload CSV

Year	Recorded data	Base path	Retirement age 67	More generous indexation	Larger minimum pension	Ending envelope wages	Balanced policy
2015	33.5	36.8
2016	32.6	36.0
2017	31.3	35.4
2018	31.2	34.1
2019	31.6	33.4
2020	32.2	34.0
2021	30.7	33.3
2022	32.8	32.8
2023	33.4	34.2
2024	32.0	34.4
2025	33.2	34.0	34.0	34.0	34.0	34.0	34.0
2026		33.7	33.7	33.7	33.7	33.7	33.7
2027		33.6	33.6	33.6	33.6	33.6	33.6
2028		33.3	33.3	33.3	33.3	33.3	33.3
2029		32.5	32.9	32.5	33.2	32.5	33.3
2030		31.9	32.6	32.0	33.5	31.9	33.5
2031		31.5	32.5	31.9	34.4	31.6	34.2
2032		30.4	31.6	31.1	33.5	30.5	33.6
2033		30.4	31.9	31.4	33.6	30.6	34.1
2034		30.5	32.2	31.6	33.6	30.7	34.5
2035		30.5	32.6	31.8	33.6	30.8	35.0
2036		30.4	32.7	31.7	33.5	30.6	35.1
2037		29.9	32.0	31.3	33.1	30.1	34.6
2038		29.6	31.6	31.1	32.8	29.8	34.3
2039		29.3	31.3	30.9	32.7	29.6	34.1
2040		28.8	30.8	30.5	32.3	29.2	33.7
2041		28.4	30.3	30.2	32.0	28.7	33.4
2042		28.1	29.9	30.0	31.7	28.4	33.0
2043		27.5	29.5	29.5	31.3	27.8	32.7
2044		27.3	29.0	29.3	31.0	27.5	32.2
2045		27.1	28.7	29.1	30.8	27.3	32.0

The gain for the economy. The retirement age is the only policy that changes the number of people in work: 1.4 % more in 2040, about 11 thousand people, and the same number under the balanced policy. That is why the economy per head under the balanced policy is 1.0 % larger in 2040. Indexation and the minimum pension do not change the number in work: they redistribute, they do not create. People aged 65 to 67 who work rather than draw a pension are also a sizeable part of the fall in the poverty risk.

Employment

People aged 15 to 74 in work.

Recorded data
Base path
Retirement age 67
More generous indexation
Larger minimum pension
Ending envelope wages
Balanced policy

Show the dataDownload CSV

Year	Recorded data	Base path	Retirement age 67	More generous indexation	Larger minimum pension	Ending envelope wages	Balanced policy
2015	969	967
2016	962	959
2017	947	946
2018	942	939
2019	933	931
2020	897	900
2021	878	876
2022	872	868
2023	878	872
2024	872	869
2025	865	862	862	862	862	862	862
2026		858	858	858	858	858	858
2027		851	851	851	851	851	851
2028		840	840	840	840	840	840
2029		829	829	829	829	829	829
2030		822	822	822	822	822	822
2031		814	814	814	814	814	814
2032		805	806	805	805	806	806
2033		798	798	798	798	798	798
2034		791	792	791	791	791	792
2035		785	787	785	785	785	787
2036		779	782	779	779	779	782
2037		772	777	772	772	772	777
2038		767	774	767	766	767	774
2039		761	770	761	761	762	770
2040		756	767	756	756	756	767
2041		752	763	752	751	752	763
2042		747	760	747	747	748	761
2043		742	756	742	742	743	757
2044		737	753	737	737	738	753
2045		733	749	733	733	734	750

The price. Pension spending relative to GDP is almost flat on the base path, 8.2 % in 2040. The larger minimum pension raises it by 0.9 points, indexation by 0.5, the balanced policy by 0.4; the retirement age lowers it by 0.4. Government debt rises on the base path from 47 % of GDP in 2025 to 61 % in 2040; why it rises is explained on the public finances page. Before the EU rule responds, the larger minimum pension costs the budget about 10 points of GDP over 2028–2045 and indexation about 4.4. Ending envelope wages earns about 7.2 points, and the retirement age about 0.2. That is why the balanced policy is about neutral overall, +0.2 points: what two policies earn, the other two spend. In the debt of 2040 the rule has absorbed most of this. The minimum pension leaves debt 0.8 points higher, indexation 0.7, ending envelope wages 1.9 points lower, and the balanced policy 0.5 points higher. The rest of the cost has become cuts elsewhere, and the rest of the earning less cutting.

Public pension spending

What the state pays out in pensions, as a share of GDP.

Recorded data
Base path
Retirement age 67
More generous indexation
Larger minimum pension
Ending envelope wages
Balanced policy

Recorded series covers old-age benefits only.

Show the dataDownload CSV

Year	Recorded data	Base path	Retirement age 67	More generous indexation	Larger minimum pension	Ending envelope wages	Balanced policy
2015	7.2	7.6
2016	7.1	7.7
2017	7.0	7.7
2018	7.2	7.7
2019	7.7	7.7
2020	7.5	8.0
2021	7.7	7.9
2022	7.8	7.9
2023	8.1	8.1
2024	8.2	8.3
2025	8.4	8.4	8.4	8.4	8.4	8.4	8.4
2026		8.5	8.5	8.5	8.5	8.5	8.5
2027		8.6	8.6	8.6	8.6	8.6	8.6
2028		8.6	8.6	8.6	8.6	8.6	8.6
2029		8.6	8.6	8.6	8.8	8.6	8.7
2030		8.6	8.6	8.7	9.0	8.6	8.8
2031		8.6	8.6	8.7	9.3	8.6	9.0
2032		8.7	8.7	8.9	9.6	8.8	9.2
2033		8.8	8.7	9.1	9.6	8.8	9.3
2034		8.7	8.6	9.1	9.5	8.8	9.2
2035		8.7	8.5	9.0	9.5	8.7	9.1
2036		8.6	8.4	9.0	9.4	8.7	9.1
2037		8.6	8.3	9.0	9.5	8.7	9.0
2038		8.5	8.2	8.9	9.4	8.6	8.9
2039		8.3	8.0	8.8	9.3	8.4	8.7
2040		8.2	7.8	8.7	9.2	8.3	8.6

Government debt

What the state owes, as a share of what the country produces in a year.

Recorded data
Base path
Retirement age 67
More generous indexation
Larger minimum pension
Ending envelope wages
Balanced policy

Show the dataDownload CSV

Year	Recorded data	Base path	Retirement age 67	More generous indexation	Larger minimum pension	Ending envelope wages	Balanced policy
2015	38.3	40.9
2016	41.7	39.9
2017	40.3	40.0
2018	38.3	38.4
2019	37.9	36.8
2020	44.0	39.2
2021	45.9	41.9
2022	44.4	43.5
2023	44.4	42.3
2024	46.2	43.5
2025	46.9	44.5	44.5	44.5	44.5	44.5	44.5
2026		45.4	45.4	45.4	45.4	45.4	45.4
2027		47.7	47.7	47.7	47.7	47.7	47.7
2028		49.8	49.8	49.8	49.8	49.8	49.8
2029		50.9	50.9	50.9	50.9	50.9	50.9
2030		52.0	52.0	52.0	52.1	52.0	52.1
2031		53.4	53.4	53.4	53.8	53.3	53.6
2032		54.1	54.1	54.2	55.1	53.8	54.3
2033		54.9	54.8	55.1	56.4	54.3	55.1
2034		55.8	55.8	56.2	57.6	54.9	55.9
2035		57.2	57.4	57.8	58.9	56.0	57.3
2036		58.7	59.1	59.4	60.0	57.2	58.7
2037		60.3	60.9	61.0	61.3	58.4	60.3
2038		61.1	61.9	61.9	62.0	59.1	61.3
2039		61.7	62.6	62.5	62.5	59.6	62.0
2040		61.2	62.1	61.9	62.0	59.3	61.7

All packages that were run

Package	Description	Pensioners at risk of poverty 2040, points	Government debt 2040, points
Funded tier abolished	All contributions go to the first, pay-as-you-go tier; the second, funded tier stops receiving contributions.	−0.4	+0.3
Funded tier back to 8 %	The second tier's contribution share returns to its 2008 level, 8 % of the wage.	+0.1	−0.1
Contribution rate a tenth higher	Social contributions 10 % higher; the money reaches the budget and is credited to pension capital.	+0.7	−0.5
Third-tier tax relief doubled	The tax relief on voluntary pension savings is doubled.	0.0	+0.3
Second-tier capital paid out by insurers	Every retiree buys a lifetime annuity from an insurer with their second-tier capital.	+0.6	+0.3
Second-tier capital added to the state pension	Every retiree transfers their second-tier capital into the first tier, and it is paid out with the state pension.	−0.1	−0.1
Early retirement closed	The option to retire two years before the statutory age is removed.	−0.5	+0.1

Assessment

Package	Poverty risk 2040, points	Average pension 2040	Employment 2040	Pension spending 2040, points of GDP	Budget cost 2028–2045, points of GDP	Government debt 2040, points	Who gains, who pays	Confidence
Retirement age 67	−4.9	+4.0 %	+1.4 %	−0.4	+0.2	+0.9	future pensioners and the budget gain; those who work two years longer pay, most of all people in poor health	medium
More generous indexation	−4.4	+5.9 %	0.0 %	+0.5	−4.4	+0.7	all pensioners gain, the average ones too; the budget pays	high
Larger minimum pension	−9.0	+11.8 %	−0.1 %	+0.9	−10.0	+0.8	the poorest pensioners gain; the budget pays the most; the link between contributions and pension weakens	medium
Ending envelope wages	−0.9	+1.3 %	0.0 %	+0.1	+7.2	−1.9	the budget and, after 2040, future pensioners gain; those who receive and pay envelope wages pay	low
Balanced policy	−9.6	+14.2 %	+1.4 %	+0.4	+0.2	+0.5	pensioners and the budget gain; those who work longer and those on envelope wages pay	medium

Poverty risk, pension spending and debt: difference from the base path in percentage points. Average pension and employment: difference in per cent. Budget cost: the package's own effect on the budget balance, added up over 2028–2045, before the EU rule's response; a negative figure is a cost, a positive one an earning. Confidence: how sure the direction and size of the result are, given the assumptions it rests on.

The table says three things. First, the poverty risk can be held, but not with one policy. The minimum pension reaches the poorest, indexation the middle, the retirement age the next generation of pensioners, and only together do they hold the risk near today's level. Second, the price is clearly ordered. The retirement age costs nothing over the period, indexation costs moderately, the minimum pension costs the most, and ending envelope wages earns in the budget but delivers in pensions only after 2040. In the debt of 2040 the differences are smaller, because the EU rule turns most of each cost into cuts elsewhere. Third, no package returns pensions to the ratio to wages they have today. What can be achieved is fewer pensioners below the line, not pensions that keep pace with wages.

For a decision-maker that gives a sequence. The retirement age and envelope wages first, because they work and cost nothing over the period. Then the indexation rule, because it is the route to the average pensioner. The minimum pension as a targeted tool for the poorest, knowing that at one and a half times today's level it turns a large share of pensions into one flat basic pension.

What to keep in mind

The poverty risk is a relative measure. It measures distance from the median income, not whether a pensioner can pay the bills. A pension that is a sixth larger in today's money than now counts as "at risk of poverty" in 2040 if wages have grown faster. That is why the page shows the average pension at 2025 prices next to the poverty risk: the two numbers together say more than either alone.

After 2040 the rise continues. On the base path the poverty risk is 58 % in 2045 and the balanced policy holds it at 49 %. The retirement age's gain fades to 3.1 points by then, while indexation's grows to 6.0; government debt is 1.1 points lower with the retirement age and 1.3 lower with the balanced policy. Those years rest on more assumptions than the years before, which is why the page prints 2040.

The recorded series before 2016 does not match the model. In the crisis years median incomes fell sharply and the poverty line with them, while pensions stayed, so the recorded rate dropped below 20 % in 2010–2013. The model does not replay the crisis, and its line runs well above the dots in those years. From 2017 they agree, and the calculation starts from 2025, where the fit is good.

The step from the average pension to the number of people below the line rests on how pensions are spread. The model knows how many pensioners receive small, middling and large pensions from the registry data to 2025, and assumes how that spread changes as new pensions replace old ones. The calculation of the average pension and of pension spending is firmer than the calculation of the poverty risk.

The budget effect of ending envelope wages rests on an assumption that has not been measured in Latvia. How strongly declared wages respond to stronger enforcement is taken from other countries' experience. If the real response is half as strong, the earning is half as large, and the balanced policy costs the budget a little instead of nothing. That is why this policy's confidence in the table is low.

How many people will work to 67 is an assumption. The model takes it from how employment at ages 60 to 64 responded when the retirement age was raised to 65. For people in heavy work and poor health a higher age means not work but a disability pension or unemployment, and the model sees that only on average. The extra workers are also taken on slowly in the 2030s, which is why the retirement age leaves debt a little higher in 2040 before it lowers it.

The uncertainty band covers two assumptions, not all of them. They are how fast firms open the posts the retirements leave, which sets the wage path of the 2030s and with it the median the pension is measured against, and how fast productivity grows on its own. Faster growth means higher wages, a higher poverty line and therefore a higher pensioner poverty risk; that irony is worth keeping in mind on this page. Assumptions about mortality, births and migration are not in the band.

The second and third tiers are not on this page. Abolishing, restoring or changing the payout of the funded tier moves the poverty risk by fractions of a point before 2040, because funded payouts are still a small part of pensions then. How the model spreads funded payouts across pensioners is under review, so those seven packages were calculated but are not shown. They are questions about the years after 2040 and about people who are under 45 today.

The 2028 start is an assumption. Every package starts in 2028 and reaches full strength in 2030, the retirement age in 2036. A later start shifts everything to the right; the relations between the policies stay the same.

Will pensions still keep people out of poverty in twenty years?

The short answer

Why it matters

What drives it

What can be done

Retirement age 67

More generous indexation

A larger minimum pension

Ending envelope wages

What the packages do

Assessment

What to keep in mind