The concept of the Latvian pension system reform was worked out in 1995 based on the advanced innovations in the pension systems throughout the world. According to this concept a three-tier pension system was developed:
The law "On state pensions" was adopted on November 2, 1995 and came into effect from January 1, 1996. It regulates the operation of the state mandatory non-funded pension scheme (the first tier), forms the basis of state pension system and is developed as self-financing and financially stable long-term scheme based on the principle of generations solidarity which can theoretically function irrespective of the economic and demographic situation in the country. The above mentioned law regulates and stipulates the following types of state pensions: old-age pension, disability pension, survivor`s pension, service pension and pension under specific regulations.
One of the essential parts of pension system reform is raising the retirement age caused by the population ageing andproportional increase of old age population. Before the reform the compulsory retirement age for men was 60 years but for women 55 years, now it is gradually increased each year by half a year until it reaches 62 years. By 2007 the retirement age for men has already reached 62 years but for women it is 61,5 years.
In early 2007 there were 576.1 thousand pensioners in Latvia. Old age pensioners made up the greatest part of pensioners - 472.1 thousand people and disability pensioners accounted for 66.7 thousand people. The proportion of pensioners is very high - 25.3% to total population. Although from 2001 to 2007 the number of pensioners decreased by almost 65 thousand people it did not have any significant impact on their proportion to total population.
In 2006 state expenditure for pensions accounted for 5,9% from GDP. High proportion of pensioners and legal requirement to provide pensioners with guarantees stipulated by the law, low income of working population which leads to low social insurance contributions are the main causes of relatively low state pensions. In 2001 the amount of average old age pension was 95.95 lats and disability pension - 73.63 lats. These amounts were considerably below the official subsistence level and slightly under the official minimal monthly wages - 60 lats in 2001.
The average old age pension amounts to approximately 45% of the average salary in the country from which social insurance contributions are made, which in general corresponds to the average level in European countries. From 1998 the amount of pensions has been regularly indexed. Indexation refers only to those pensions which do not exceed three minimal wages.
While working out a new pension scheme the anticipated economic problems were taken into account. So the guaranteed amount of pension minimum was determined as well as different advantages to individuals with a considerable length of service and repressed people, fixed maximum amount of the income from which social insurance contributions could be made. One of the main tasks of the new pension scheme is to facilitate funds increase in the social insurance budget and reduce black economy. This aim has been achieved only partially because still a lot of employers do not make social insurance contributions for their employees or make them from minimal wages.