Great job, ST!

28. decembris, 2009


Vjačeslavs Dombrovskis

A few days ago, the Constitutional Court (Satversmes Tiesa, or ST) ruled that the pensioners were exempt from the budget cuts, reversing the government's decision that pensions would have to be reduced by 10%. Naturally, the decision was met with elation by the pensioners, opposition politicians and the crowd in general. "…The ruling is just. Simply a feeling of a real holiday came", said Aina Verze of the Latvian Pensioners' Federation. Interestingly, People's Party, which, as a member of the ruling coalition, effected the pension cut in the first place, seemed pretty joyful as well. A happy end, then? But wait a second… Doesn't that mean that the government now has to find something in the order of 180 million LVL? That means more tax increases or budget cuts. I wonder about those who, as a result of this ruling, would have to pay higher taxes, have their salaries cut, or simply lose their jobs. Would they think it "just"?

What is “justice”, anyway? I am not a judge of any sort, but let me give it a try. I think one way to think of justice is whether the parties involved stick to the terms of the contract. Unfortunately, there is no clear explicit inter-generational contract between the pensioners and the working generation. However, I believe that the implicit agreement goes like this. Workers pay their social tax as a percent of their wages, and large share of revenue goes to pay the pensions of the current generation. When wages increase (and so do prices, usually), there is more social tax revenue and, therefore, higher pensions can be paid. Call it “indexation”, whatever. But what happens when wages are decreasing, as they do now? When there is massive unemployment? When workers migrate to other countries? Naturally, social tax revenue would decrease making previous pension levels unaffordable. If it was “just” to raise pensions when wages were growing, why is it not “just” to reduce pensions when wages are falling and people are losing jobs?

I may even go further than this, actually. It is not a great exaggeration to say that pensions are a bit of a taboo topic here in Latvia. There is a lot of guilty (sub)consciousness here. For example, there is all this hidden redistribution at the expense of predominantly Russian-speaking pensioners, who are paid truly meager, often below-subsistence, pensions because the present system subtracts years worked outside Latvia. The most striking, however, is this. Latvia has one of the highest social taxes in the world(!!!), but very small pensions, even by Latvian standards. The reason is widespread tax evasion among small businesses that pay “envelope wages”, bypassing any social or personal income taxes. Naturally, most of the work force is employed in small firms. This implies that nearly everyone is complicit in social tax evasion. If the pensioners think there is injustice, maybe they should call their son/daughter and ask: “Honey, have you paid your social taxes?”

Finally, there is a more general problem with how lawyers think about “justice”. The Constitutional Court decision cites the pensioners’ “right to social security”, etc. I always had a hard time understanding the reasoning behind all these “rights”. Say, everybody has a “right to a job”. But where do jobs come from? Does an entrepreneur have a “right” to decline a job to someone who is making unreasonable demands, or is not doing the actual job? I couldn’t find anything like this in the Constitution. And here in lies the real problem with lawyers in general and Constitutional Court’s judgment in particular. Lawyers tend to see “justice” as purely a matter of distribution of income, without even trying to think where “income” comes from. They think they can give some group (e.g. pensioners) a larger slice of the pie without affecting the size of this pie. I am afraid that’s not how it works.

This pension ruling, for example, would have pretty nasty effects on all of us, including the pensioners. Most obviously, it put the budget process into disarray. Thanks to Constitutional Court, the ruling coalition faces the task of reducing budget deficit by 180 million LVL. I am sure financial markets would be thrilled to see how these guys are going to implement such budget cuts within a few days. With elections less than a year away… With what happened the last two times they tried to do it… But seriously, what were ST judges thinking? How do they think financial markets would react to this? International rating agencies? Aren’t there some financial analysts who, at this very moment, think something like: “Wow, these guys also have a populist Constitutional Court….” Great job there, ST!!!

What’s the bottom line to all this? First, the ST ruling is purely about distribution. So pensioners won’t be immediately worse off. But someone will be! Some other people will lose part of their incomes or their jobs. Sorry, I just don’t see how this is “justice”. Second, ST ruling has the effect of increasing the overall uncertainty about the economy – about whether the government would be able to implement further fiscal reductions and, therefore, about whether this whole internal devaluation experiment can succeed. The longer it takes place, the more businesses go bankrupt, and the more people lose their jobs. The more people lose their jobs, and the longer they stay unemployed, the more of them migrate to other countries. And many of them would probably leave for ever. With fewer workers and entrepreneurs there would be a smaller economic pie. And smaller pie means smaller pensions. That would be justice served by forces far more powerful than those of the Constitutional Court. That would be a real kind of justice, dare I say.

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