Estonia and Latvia May Be Next to Privatize Social Security

August 6, 1999

Former Soviet Block countries in Eastern Europe continue to move forward with plans to privatize their Social Security systems. Earlier this year, Poland adopted a Chilean-style retirement system based on individually-owned, privately invested accounts. Hungary has also substantially privatized its retirement program, as has Kazakhstan. Now, Latvia and Estonia are beginning the privatization process.

In Latvia, a new coalition government has called for strengthening a privatization bill now making its way through parliament. That bill would allow workers to divert 2 percent of payroll into individually-owned, privately invested accounts. The new government will amend the bill to increase that amount by one percent per year to a maximum of 10 percent. For the first two years of the program, the government would manage the accounts, but thereafter private sector managers would be allowed.

Meanwhile, in Estonia, the new government's coalition agreement specifically pledges support for privatizing the nation's pension system. The government has appointed a Social Security Reform Commission, headed by the Minister of Social Affairs to develop a specific proposal, but the government has said it will include individual accounts.

A number of other Eastern European countries, including Bulgaria, Romania, Albania, Ukraine and Belarus are also reportedly considering Social Security privatization. Eastern Europe follows nearly all of Latin America, as well as Great Britain and Australia in recognizing the benefits of an investment-based pension system. Even Sweden has partially privatized its Social Security system and communist China is developing a system of individually-owned, privately-invested accounts. It seems as though only the United States is clinging stubbornly to its outmoded pay-as-you-go system.

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