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Uldis Osis, Pensions, and Capital 31

Uldis Osis, “doctor of economics, professor, member-correspondent of Latvian Academy of Sciences”, joined the discussion on pensions with an article on Delfi.

Iesaki citiem:

What does he have to say? He argues that proponents of reduced pensions “confuse two principally different things, cash flow and cash savings”. “In truth pensions are savings”, says Mr. Osis. “[Pensions] have no connection to the state [social] budget. These are payments from a pensioner’s individual account, which content is ... capital”. Thus, Mr. Osis argues that attempts to reduce pensions amount to taking what rightfully belongs to the pensioners, their “accumulated capital”. According to Mr. Osis, this makes those who argue for some accommodation in the social budget “bolsheviks”. Mr. Osis also argues that “the personal income tax, that pensioners pay on their accrued pensions, is also requisition of savings, because earlier incomes, from which social tax was paid, were also subject to the personal income tax”.

“Sounds absurd?” - asks Mr. Osis at one point in his article.
Well, yes.

Lets start with a relatively minor thing. There is no double taxation of pensions with a personal income tax (PIT). A tax base for the PIT does NOT include the social security contributions. In this country there is a concept of “gross wage”, which (at least before recent changes) is subject both to employer’s social tax contribution (about 24%),and also employee’s social tax (9%). PIT is levied on gross salary less employee’s social security contribution. Every accountant knows this.

Next, savings. In economics as I know it, savings is defined as “income not spent, a deferred consumption”. Usually, but not always, savings are accompanied by investment, the result of which is an increase in capital, which is used to produce goods and services. Is social tax a saving, which is then invested into capital, so that a pension is some return on this accumulated capital? As far as today’s pensioners are concerned, the answer is no, no, and no.

Today’s pensioners get their pensions from the social security contributions of today’s workers. When they were workers themselves, their social security contributions (if they made any) were transferred to those who were pensioners back then. Pensioners then largely spend this income. This is known as an unfunded, or a “pay-as-you-go” pension system. Perhaps, the source of Mr. Osis’ confusion is that a 2nd pillar of the Latvian pension system is a funded one, in which a certain share of a worker’s social security contributions is accumulated in his individual account and invested. But this does not apply to pensions of most of the existing pensioners. Once more, what today’s pensioners paid in taxes when they were younger was not saved but spent by people who are long gone.

Moreover, I think Mr Osis is not just wrong but also hypocritical. Here is a question. If Mr Osis really does believe in what he is saying, where was he when the Kalvitis government pumped the funds out of the social budget in 2007 to cover the deficit in the state budget? Did he write an article calling Mr. Kalvitis a Bolshevik and a thief? Did he rise up in protest? If I somehow missed it, please let me know.

But since we started talking about pensions, lets think about their nature some more. As I understand them, participation in a pay-as-you-go (PAYG) pension system amounts to an intergenerational contract, the value of which depends on certain demographic and economic outcomes. What a pensioner has is a claim on a share of income from today’s workers. Naturally, the value of each individual claim depends on (i) the number of other claimants (pensioners) and their expected life span; (ii) number of contributing workers; and (iii) the workers’ incomes. Note that PAYG pension system has all the features of a financial pyramid. All the participants are doing great as long as new participants join (i.e. population grows) and there is a reasonable economic growth. The biggest problem with that contract is that it is not fully spelled out to its participants, i.e. the letters in fine print are not even there. In a world of growing population this does not present a big problem. Unfortunately, we live on a different planet.

If demographics works against you, you’re in trouble, as the base of a pyramid start shrinking and you’re on your way to end up with the pyramid that’s turned upside down. Clearly, such a pyramid will collapse. So your pension ‘claim’ is clearly worth less if this happens. If, on top of this, the economy dips nearly 25 percent, with the accompanying unemployment and emigration? I think any sensible person would agree that this implies lower pensions, one way or the other.

The worst is that the pensioners have different expectations about what they’ve got. This is because no-one ever bothered to fully spell out the (implicit) nature of this intergenerational contract. There was no need when the pyramid was doing well. But now many pensioners seem to think they’ve “earned” some “capital”, or that they have a “right” to a pension of the size they’re comfortable with. With expectations like this, we’re heading for a disaster. What is happening with the budget consolidation now, and all these red lines, is peanuts compared to what will happen in the not too distant future, when a demographic tsunami will properly hit us.

What we need is to do a lot of explaining to people on the street, to the pensioners. We need to explain them where their pensions really come from, and that it is in their best interests not to squeeze the working with higher taxes and encouraging them to leave. Mr. Osis is really not helping.

Iesaki citiem:
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Komentāri (31) secība: augoša / dilstoša

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Edis 22.03.2011 11:11
Latvenergo, Latvijas Gāzi, Latvijas Mežus,Ventspils un citas ostas, infrastruktūru kopumā radīja patreizējie pensionāri, lielu daļu šo vērtību nokampa dažādi kampēji,daļa vēl pieder valstij - sabiedrībai kopumā. Stokholmas vasaļskolas "gudrajam" derētu pārtraukt demagoģiju un kārtīgi iemācīties arī savas mītnes zemes valodu.

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LAStyle 22.03.2011 09:45
Osis/Reader:

As Shakespeare written:
"Methinks you doth protest too much..."

It is OK to be defend yourself on here - but just admit is you.

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Reader 21.03.2011 22:46
LAStyle, wrong guess and I am not familiar with U.Osis privatly. U.Osis has written a good article, I really enjoyed it.

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LAStyle 21.03.2011 09:38
"Reader" (16.03.2011 21:41)

Uldis Osis? Is that you? I think so...

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Nav svarigi 19.03.2011 14:52
Tapat pensijas bus jagriez, bet nevar nepiekrist, ka situacija, kad algu deflacija sen vairs nedarbojas emigracijas spiediena del, ir visai negudri turpinat griezt pensijas un ceret, ka tas tomer nesis to konkuretspejas palielinajumu. Bet valsts bankrota noversanas vajadzibai gan vajadzes griezt pensijas, visas atvainosanas, taisnosanas utt. te galigi liekas, jo, lai gan, protams, samazinas labklajibu, tacu citadi ir saura bezizeja. Ja velas konkuretspeju pie pasreizejas situacijas, tad vajadzeja taisit devalvaciju, izvelejas par labu emigracijai.

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Reader 16.03.2011 21:41
First, on the style. V.Dombrovskis looks like a very arrogant person. Good luck. Second, it is not really true. The author could read one more time Art 12 of the state pensions. Pension is calculated according to pension capital. It is the law that confuses capital and cash flow. Third, pension is subject to PIT, just opposite as V.Dombrovskis says.

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Jaņdžs 16.03.2011 12:11
Perhaps Vjačeslavs Dombrovskis can try the question of how laws can improve the economy in some other blog. I do not believe that allowing laws that allow "killing me softly" of pensioners is what I have in mind.

I mean radical laws, laws that permit, for example, cloning, laws that permit all kinds of things "laws" do not allow in other places.

So far, Latvians and Latvia leave the impression that it is a country of saintly governors ready to sacrifice the population to assure themselves holyness.

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grr > Jandžs 15.03.2011 22:54
What are the laws that Latvia can or could ease to invite investment here?

===

Foreign investment, i.e. foreign capital inflows, is only part of the story. We already have quite a lot in relative terms. Another important factor of growth (and an essential one if we don't want to stay a cheap labour country forever) is human capital - skilled workers. Currently, they are dying out or leaving the country - in part because nobody is sure that they won't be denied their pension as some are suggesting. New ones are not "produced" either as the higher education system is totally commercialised.

So here may be some space for improvement: ensure that decent standard of living for pensioners so that people would see some future for themselves if they stay, and provide funding for education and research rather than forcing universities to survive by giving diplomas to anyone who pays. Basically, forget the "market knows best" mantra and reallocate some of the resources (through taxation) from the rich to pensioners (and other poor) and from consumption to human capital production. Just an idea on top of my head.

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Jandžs>grr 15.03.2011 21:35
Latvia's laissez-faire policies (flat income and social tax, no attempt to halt the industrial collapse of early 90s, no attempt to limit consumer spending of early 2000s)...........

Laissez-faire in reverse gear? I repeat my question posted earlier: What are the laws that Latvia can or could ease to invite investment here? I believe that some would call such laws "retrograde", however such laws have in the past successfully pulled many a country away from the brink. If Latvia has no quealified economists to think of the possibilities, it might be worth while to invite a foreign think tank to help us out.

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grr > Armands Strazds / RTFL 15.03.2011 21:28
It's good to see that Latvia's economic discourse is not completely monopolised by free market fundamentalists (to quote Joseph Stiglitz).

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grr > Kalvis 15.03.2011 21:24
Japāna, starp citu, ir labs piemērs - tur stagnācija turpinās jau apmēram 20 gadus un ir spēkā tā pati sabiedrības novecošanās kas pie mums. Viņi to ir visādi centušies risināt (t.sk. ar klasisku keinsiānismu), bet rezultāta ta nav!

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grr > Nauris Ozols 15.03.2011 21:15
It's funny how people dismiss the opinion of others simply because they don't have academic qualifications in economics. As if Latvia was full of brilliant academics working in the field. As far as I know, there is only a handful of people in Latvia who have publications in peer-reviewed econ journals.

Taking a few undergrad courses at the University of Latvia or SSE Riga (which is I suppose what most people in this blog have done) does not make one much more qualified to discuss economics than an MA from "Lībekas Mūzikas akadēmija". So maybe we should discuss arguments and not personalities.

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Jandžs 15.03.2011 21:06
One of the tools the government has, but is not using is creating laws that invite investment and/or talent to come to Latvia, not scare it away from here. At this time, Latvia is a Lil' Abner shack (anyone remember him?) at the edge of a flat world.

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grr 15.03.2011 21:03
Proponents of pension reduction tell us that there is no alternative to it, short of printing money. This, of course, is complete nonsense. The alternative is to tax the rich more, like most countries are doing through progressive income taxation.

Yes, it would mean that the pensioners are helped by hurting some others, but so what? Many pensions are already below the subsistence level, so redistribution is the right thing to do.

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jumors 14.03.2011 23:36
Jā, un kur nu ir valodas likums?

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Andris_2 14.03.2011 23:25
Nauris Ozols 14.03.2011 20:43 ...Dear Mr Strazds...
Armands Strazds -> Nauris Ozols 14.03.2011 22:16 ...Dear Nauris...
---------------------------------
Nepagāja ne daži desmiti gadu, kad atkal - nu jau nākamajā vēstures spirālē - jaunizcepts "Avgust Eduardovič" sarakstās ar "Arvid Janovič" tagadējās "Maskavas" ne suņu valodā.

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Armands Strazds -> Nauris Ozols 14.03.2011 22:16
Dear Nauris,

I'd suggest to continue this conversation over email since we have drifted pretty far away from the subject of the Uldis Osis' article. My personal email address is strazds@gmail.com.

Re your point on possibility of a discussion: I always have seen my mission at RTFL as a one of a moderator/coordinator. As a politician I was naturally interested in joining the discussion and asking lots of questions in order to better understand what went wrong in Latvian economy. That helped me to construct a pretty complete and coherent picture, which is best presented in the book I already mentioned, "Latvia Renewed", of which I was the editor.

On econometrics. Well, you are right, I don't do it myself. I rely on statistical calculations done by of others. And I always enjoy comparing the interpretation ambiguity of diverse economic data when done by competing political stakeholder groups :)

Best regards,
Armands

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Nauris Ozols 14.03.2011 20:43
Dear Mr Strazds,

Many trhanks for quick and honest reply. But can you really be having a "permanent discussion" with economists if you have no knowledge of statistics or econometrics? I think that you must have at least basic knowledge in order to have informed discussions with people.

Nauris

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Armands Strazds / RTFL -> Nauris Ozols 14.03.2011 17:58
Dear Mr. Ozols,

your research is correct: I have a degree in classical music. Additionaly, last year I completed my doctoral studies on education technologies at RTU. I actually never meant to study economics, but it happened nevertheless, albeit in an informal way. In June 2009 I started the RTFL, a progressive left-wing economic think tank. Since then I have a privilege to be in a permanent discussion with leading heterodox economists, and I cannot imagine a better way for me to most efficiently acquire necessary knowledge and skills than in "problem based" manner, e.g. by developing the "Latvia Renewed" program, which RTFL produced 2010 (available on www.rtfl.lv).

And — when the destiny of nations is at issue, the debates over economic doctrine are not merely academic matters (M. Hudson, Trade, Development and Foreign Debt).

Best regards,
Armands Strazds

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liberāls 14.03.2011 17:58
Ieklausīties Strazda kunga vārdos ir ļoti vērtīgi - uzreiz var saprast, kas notiks ar LV gadījumā, ja SC būs pie varas. Iespaidīga naudas drukāšana, milzīgs budzeta deficīts, divciparu inflācija, devalvācija un defolts.
Secinājums katram cilvēkam ar veselo saprātu - tikko SC būs valdībā, vajag vispirms likvidēt aktīvus un pēc tam braukt prom, kamēr esam EU un robeža vaļā. Neesmu pārliecināts, ka tam būs atvēlēts ilgs laiks... Tātad vajag gatavoties jau šodien, neskatoties uz S&P viedokļi - viņi maz ko zin par biedra Strazda esamību.

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Kalvis to Nauris 14.03.2011 17:39
Akadēmiskie grādi automātiski nenozīmē kvalifikāciju. Bet A.Strazda polemikas stils ir jokains - viņš (neatkarīgi no tā, ko Vjačeslavs ir uzrakstījis) atbild ar vienu un to pašu - valdībai esot jātērē vēl vairāk naudas. (Tas nekas, ka mums jau tāpat ir strauji augošs valsts ārējais parāds, kurš tiek uzkrauts arvien sarūkošam iedzīvotāju skaitam, un kurš drīz vien būs jāpārfinansē - no SVF pārejot uz finansu tirgiem.)

Esot bijis viens romietis, kurš katru diskusiju visvienalga par ko ir beidzis ar izteicienu "Kartāga ir jānoposta". Tāpat arī Armands Strazds - tikai Kartāgas vietā viņam ir Latvijas budžets. Japāna, starp citu, ir labs piemērs - tur stagnācija turpinās jau apmēram 20 gadus un ir spēkā tā pati sabiedrības novecošanās kas pie mums. Viņi to ir visādi centušies risināt (t.sk. ar klasisku keinsiānismu), bet rezultāta ta nav!

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Nauris Ozols 14.03.2011 16:50
Dear Mister Armands Strazds,

On the CVK portal, the information about your education reads as follows: "Pabeigtas šādas mācību iestādes: Lībekas Mūzikas akadēmija, VFR, 1996, komponists, maģistra grāds (M.A.)".

So why do you present you ideas as if you are qualified to speak on economic issues? For sure, it is good for everyone to talk. But you present yourself as economical guru, which is clearly far from truth.

I know that you read the blog, so please give answer to mine question.

Yours faithfully,
Nauris Ozols

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Boldrix 14.03.2011 16:24
I've got this!

Armands Strazds plan is devaluation (nothing new there);

Osis plan: let us wait for 2012. budget consolidation, then the goverment will certainly fall. Then the devaluation fans will be setting up a new goverment - why not SC, PLL and ZZS (Pensions are most important. Although inflation in fact will reduce them any way)

Some questions that i have: How sustainable it is from import-export balance point of view? What about IMF (right, their money isn't real any way) and credit rating?

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r->Boldrix 14.03.2011 15:32
Right on the point, the Delfi article is not a piece of thought worth discussing among professionals but a drop of BSh** designed for a specific audience. Every practicing economist, including Osis, if he indeed has contributed much to it, should be able see that. Shame on Osis and the Academy of Sciences for having such korespondētājloceklis. The problem then is that the message will stick, and it will be very difficult to counter this by "explaining to pensioners on the streets".

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Kyla 14.03.2011 15:20
If what Dombrovsky says is true how can that be? How can Osis make such a huge, elementary mistake? Is it lack of education? Or is he being deliberately disinegenuous.

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A Doctor of economics, professor, member-correspondent of Latvian Academy of Sciences 14.03.2011 14:13
I am very, very qualified to speak on these temas. I have PhD from Dundaga All-Soviet Agricultural College Academy. It was best higher education college in all of Dundaga (in 1982). Armands Strazds was my student...

But in all seriousness - I don't see how this can be communicated effectively to pensioners in Latvia. After all, this is about fundamental economic survival. People don't tend to be rational about these issues.

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AgneseBee 14.03.2011 13:59
Raksta pamatidejai pilnīgi piekrītu, šī brīža situācijā šāda tipa populistiski bļāvieni ir nevietā.
Tomēr par šo varētu diskutēt:
"In economics as I know it, savings is defined as “income not spent, a deferred consumption”. Usually, but not always, savings are accompanied by investment, the result of which is an increase in capital, which is used to produce goods and services. Is social tax a saving, which is then invested into capital, so that a pension is some return on this accumulated capital? As far as today’s pensioners are concerned, the answer is no, no, and no."

Tiktāl cik mēs vadāmies pēc formulas S-I=CA, tā varētu domāt, tomēr, manuprāt, jāskatās plašāk par Kapitāla kontu. Proti, S-I=CA=>CA+neto kapitāta pārvedumi=neto aizņēmumi/aizdevumi. Savukārt Finanšu kontā neto aizņēmumiem/aizdevumiem jābalansējas ar Finanšu aktīvi-pasīvi. Ietaupījumi (S=DI-C) faktiski var tikt ieguldīti ne tikai nefinanšu investīcijās, bet arī finanšu aktīvos, un te atsevišķi ir arī pensiju fondi. EKS rādītājs gross saving (B.8g)iekļauj pārmaiņas pensiju fondu rezervēs, bet ir iespēja atskaitīt šo pozīciju (D.8). Ekonomisti strīdas, kā būtu labāk pensiju fondu rezerves iekļaut uzkrājumos, jo tādu nākotnes pensiju pieskaitīšana, ko iedzīvotājs nevar izmantot šī brīža vajadzībām, var maldināt politikas veidotājus. Var veidoties situācija, kad mājsaimniecībām it kā iepriekš ir pozitīvi net savings, bet tie nav izmantojami krīzes situācijai patēriņa izlīdzināšanai. Tomēr tas ir interpretējams kā atliktais patēriņš ilgtermiņā no dzīves cikla viedokļa. Tomēr te atkal ir jautājums par sistēmu ilgtspēju&valsts iekārtu maiņu, kas šo konceptu sagrauj. Tā ka te var viedokļi būt atšķirīgi, bet tik viennozīmīga situācija nav.

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Armands Strazds / RTFL 14.03.2011 13:30
Mr. Dombrovskis represents the current demographic crisis as something completely out of control of the current government. That is wrong. Governments can (and will) be hold RESPONSIBLE for causing or not preventing the demographic crisis. Governments have all the necessary instruments to stimulate the economy to compensate the losses caused by a crisis. The currently evolving example is the Bank of Japan, injecting into the countries economy USD 182bn (the SAME DAY the catastrophe happened! – a simple and clear decision of the BoJ monetary board), and additional 82bn two days later. If the Bank of Latvia in November 2008 had followed this pattern of demand creation, Latvia's suffering stage were short and followed by a RAPID recovery, instead of long and followed by a 10 to 15 years of recession.

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Boldrix 14.03.2011 13:19
This time Osis talks as a politician from PLL again. Obviously he wouldn't be criticizing own colleagues (Kalvitis and Godmanis). But rarely, when he talks as an economist, his oppinion are considerable (if its not related with digging the Daugava).

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Pēteris Krišjānis 14.03.2011 13:16
Thanks for another insightful article. I don't always agree with author, but this time I fully side with him.

Uldis always have been Latvijas Ceļš satellite and supporter of individualism, so of course he will bash any such proposals as attack on individuals. Seemingly he is also supporting PLL in this opinion "battle", so I read his article more as political manifest, which, as in Latvia, has no real implications whatsoever.

PLL tries to revive itself on this 'social responsibility' platform. Unfortunately for us, there are lot of people (including pensioners) who will respond to their claims about their pensions as well earned 'capital'. The same as with Lembergs, they like to be lied to, because unfortunate truth is very unpleasant and hard to bear. Selective opinion making is very popular as in nation, as in politicians.

What is most important in this discussion that we, who acknowledge problem should start looking for answers. If some of solutions will be acceptable for people, they will start to listen. Because no one wants to hear that country is in huge mess, everyone wants to hear - how to get out of it.

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fzss 14.03.2011 12:18
Osis der tikai par putnubiedēkli ekonomikas lauciņā :p

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