In 1995, Latvia became the first country in Central and Eastern Europe to implement parametric reform of the Soviet-style PAYGO pension system, and the first in the world to implement the"notional defined contribution (NDC) system"originally designed for Sweden. The Government's intention was to follow the overhaul of the PAYGO system with the creation of a funded second tier by 1998, but the reform has lagged. Public acceptance of the new system has been poor, and pressures for rollback of the reforms have grown. After such a splashy beginning why did the Latvian reform stall? What has been the net effect of the reforms after the roll backs? How did Latvia balance the difficult issues of system incentives, fairness, and affordability? What are the lessons of the Latvian experience with the NDC system for other reforming countries? These questions are the subject of this paper. It includes a description of pre-reform situation, describes the key provisions of the original reform, and discusses the subsequent amendments. The impact of the reform is assessed on the basis of macroeconomic and microeconomic simulations. On the basis of those, the reforms are evaluated and conclusions for other countries are drawn.
