The Constitutional Court recognized actual social insurance payments as constitutional
On 19 December 2011, the Constitutional Court adopted a judgment in the case No. 2011-03-01 “On Compliance of Section 5 (4) and Section 21 (2.1) of the Law “On State Social Insurance” with Article 1 and Article 109 of the Satversme of the Republic of Latvia”.
On equal responsibility of a person and the State for sustainability of the pension system
Contested Norms
Section 5 (4) of the Law “On State Social Insurance” provides: “A person is socially insured according to the following types of insurance: occupational accident insurance, unemployment insurance, disability insurance, maternity and sickness insurance, and parents’ insurance, and he or she must make mandatory contributions (regarding thereof) from the day when such person has acquired the status referred to in Paragraph one of this Section, except for the status of a self-employed person. A person is socially insured in respect to pension system if mandatory payments have actually been made.”
Section 21 21 (2.1) of the Law “On State Social Insurance” provides: “If the employer has failed to make social insurance payments referred to in the present Law, a person, for whom the employee had to mate the respective payments and who has reached the age entitled the person to receive State pension shall have the right to make insurance payments in respect to pension insurance. The Cabinet of Ministers shall regulate provisions, terms and procedure, according to which a person would make social insurance payments in respect to pension insurance.”
The Facts
Pursuant to Section 21 (2) of the Law “On State Social Insurance”, an employee shall make mandatory contributions through his or her employer, namely, the employer calculates and makes payments into the special budget on behalf of the employer and the employee.
The Law “On Social Tax” that was effective up to 31 December 1997 provided granting of services pursuant to actual payments (the principle was repealed by the decision of the Constitutional Court in the case No. 2000-08-0109).
Section 1 (1) of the Law “On Taxes and Fees” provides that mandatory payment of State social insurance shall be a tax.
Section 71 of the Labour Law commits an employee to notify employees on social insurance payments made by the first. 16 December 2003 Cabinet of Ministers Regulation No. 722 “Statues of the State Social Insurance Agency” provides that the Agency shall register social insurance payments and notify on them natural persons, too.
The applicants – twenty members of the 10th Saeima hold that the Contested Norms fail to comply with Article 1 and Article 109 of the Satversme.
The Applicants indicated that several legal principles follow from Article 1 of the Satversme, namely, the principle of legitimate expectations, the principle of a socially responsible state and that of social solidarity. When adopting the Contested Norms establishing the righto social security in the old age only in case if actual social insurance payments have been made, the legislator has breached the above mentioned principles.
According to the Applicants, the rights of persons subject to social insurance cannot be related with the fact whether another person, an employer in this case has or has not duly fulfilled duties commission by the law. This is the State rather than an employee that has the duty to assure that an employer would make mandatory social insurance payments. Likewise, the Applicants indicate that a person has the right to trust into the fact that public institution would observe laws, namely, public institutions would assure collection of social insurance payments. According to the Applicants, when adopting the Contested Norms, the legislator has already admitted that an employer has the right not to fulfil the duty to pay taxes.
The Applicants emphasized that, when assessing the Contested Norms in the light of Article 109 of the Satversme, it is necessary to take into account the fact that the Latvian pensions system is based on the principle of insurance, i.e. social insurance payments make pension capital of each person. Consequently, the Contested Norms deny a certain group of persons the right to social security.
Findings and Ruling
On the amount and extent, at which the Constitutional Court assessed the Contested Norms
Taking into account the fact that, in the present case, there were no doubts regarding the fact whether application of the procedure of social insurance payments to pension insurance complies with legal norms of a higher legal force, and the fact that case participants have provided legal substantiation only in respect to compliance of the second sentence of Section 5 (4) of the Law “On State Social Insurance” with Article 1 and Article 109 of the Satversme, the Constitutional Court assessed only compliance of the second sentence of Section 5 (4) of the Law “On State Social Insurance” with Article 1 and Article 109 of the Satversme [13].
Since implementation of the right of person to social security is closely related with effective functioning of the social protection system, the Constitutional Court first investigated whether application of the procedure of social insurance payments to pension insurance complies with legal norms of a higher legal force [13.2].
On liabilities with pervious jurisdiction
The Constitutional Court indicated that, conclusions made in the judgment of the Constitutional Court in the case No. 2000-08-0109, wherein a norm similar to the norm under consideration was assessed are applicable to the present case insofar as social reality and context of legal relations has remained unchanged [14].
On assurance of essence of the social rights in the existing pension system
When establishing whether the effective pension system is able to ensure the core of the social rights and whether the legislator fulfils its duty to apply respective measures to persons failing to make social insurance payments into the system, the Constitutional Court established that Article 109 of the Satversme does not regulate pension system provisions; therefore principles of content and functioning of the pension system is an issue to be decided in legislation, namely, the legislator is entitled to concretize content of the social rights in laws [15.3].
The Court indicated that the second sentence of Section 5 (4) of the Law “On State Social Insurance”, in fact, provides that the amount of old age pension of a person depends on actual social insurance payments. By means of the Contested Norms, the legislator has changed the procedure of registration of social insurance payments in respect to pension insurance [15.3].
The Constitutional Court concluded that, when adopting the Contested Norms, the legislator has not restricted the fundamental right of persons to social security in the old age because the right to disbursement of pension at the amount, at which a person has participated in formation of pension capital, is preserved disregarding the procedure of registration of social insurance payments made. Consequently, the Contested Norms shall not be regarded as restriction of the right to social security. The Contested Norms do not apply the positive duty of the State to form and maintain a system aimed social and economic protection of persons at the retirement age because such system already exists disregarding the procedure for registration of social insurance payments [15.3].
Likewise, the Constitutional Court indicated that, in the field of social rights, the core of the positive duties of the State contains assurance of such social assistance only that is guaranteed even if the persons has not made any social insurance payments. The right of persons to social insurance at the minimum amount are guaranteed in Para 34 of Transitional Provisions of the Pension Law that establishes the minimum pension amount depending on the length of period of insurance of a person and the amount of state social security benefit. Consequently, in the present case, the right to social insurance at least at the minimum level is not infringed [15.3].
On margin of appreciation of the legislator
The Constitutional Court indicated that the legislator has the right to change provisions of functioning of the pensions system, it having objective grounds and appropriate justification [15.4].
In order to establish whether the margin of appreciation of the legislator, when adopting decision in the field of social rights, comply with norms and principles of the Satversme, the Constitutional Court investigated whether, when applying its margin of appreciation, the legislator has acted lawfully, namely, in accordance with norms and principles of the Satversme, and whether provisions regarding functioning of the pension system have been amended on adequate basis, namely, whether a particular regulatory framework is aimed at implementation of material interests of the society and protection of constitutional values, as well as whether the principle of legitimate expectations and that of a socially state have been observed [15.4].
On functioning principles of the pension system
When assessing principles, according to which the effective Latvian pension system functions, the Constitutional Court concluded the following: since the second and the third pension level require participation of the person in accumulation of the pension capital, then responsibility for appropriate pension amount shall be undertook by the person [16].
The Constitutional Court has already concluded that, as a result of the pension reform, Latvian social insurance system can ensure availability of pensions and other social services in the long term at the amount, at which a person has contributed into it. Sustainability of Latvian pensions system is ensured by the following three elements: adequacy, financial sustainability and ability to adapt to changes. Consequently, successful functioning of the pensions system is possible only in case if the principle of solidarity, that of justice and individual contribution are observed and interaction between them is assured [16.2].
When considering the fundamental principles of functioning of Latvian pension system, the Constitutional Court concluded that the system include, among the rest, social responsibility of the person for his or her own future and pension amount. Consequently, the pension system is based on the fact that social insurance payments are long-term investments of a person ensuring social security in the future. Moreover, the pension system is characterized by the aspect that a person takes part in funding it during the entire employment period. Consequently, it follows from the fundamental principles of the pensions system that the legislator has the right to demand participation of persons in formation and constitution of pension capital [16.2].
Consequently, the Court indicated that the right of person established in Article 109 of the Satversme can be fully exercised only if the person has participated in the pension system. In such a case, the amount of old age pensions is proportional to the amount of social insurance payments [16.2].
On lawfulness of actions of the legislator when amending functioning provisions of the pensions system
The Constitutional Court recognized that the Contested Norms have been adopted and proclaimed pursuant to a proper procedure. However, it draws attention of the Saeima to the fact that failure to reflect material conclusions in minutes of the Commission meeting prohibits having a deeper insight into the course of the meeting and decisions adopted [18].
Likewise, the Court assessed the fact that, even if the regulatory framework of the Contested Norms exceeded the limits of one economic year, the situation in the special budget required immediate actions and elaboration of regulatory frameworks aimed at assurance of financial sustainability of the budget [18].
On compliance of the Contested Norms with the principle of legitimate expectations
Since the Contested Norms were adopted on 20 December 2010 and came into force on 1 January 2011, the procedure of actual social insurance payments was applied to future social insurance payments. Consequently, the Constitutional Court concluded that the Contested Norms do not influence those social insurance payments made pursuant to the declared procedure of social insurance payments and therefore the amendments to the normative regulatory framework do not lead to deterioration of legal status of private persons [21].
Likewise, the Court indicated that the Contested Norms do not commit a person to any new duties. A person does not have the duty to regularly require information on the fact whether the employer duly makes social insurance payments since this is a right of a person. Consequently, in the present case, the legislator did not have to establish a transitional period for persons to be able to get adapted to the new procedure [21].
The Constitutional Court held that the Contested Norms do not infringe the principle of legitimate expectations and therefore it is not necessary to assess compliance thereof with the above mentioned principle [21].
On the duty of the legislator to ensure financial sustainability of the special budget
The Constitutional Court concluded that financial sustainability of the special budget is threatened by several problems that are not yet properly solved and drew attention of the legislator to the necessity to find them. According to the Court, overdue hesitation of the legislator to decide on the way of ensuring financial sustainability of the special budget causes risk of breach of rights and interests of the society. Measures assuring short-term rescue measures of the State social insurance system do not prevent causes of financial problems of the special budget. Lack of well-considered and balanced sustainable policy, as well as lack of adequate and economically substantiated measures shows that existence of the pensions system and the social budget can be threatened [22].
The Constitutional Court indicated that, to ensure functioning of the pension system, it is necessary to draw attention of the society to the fact that the amount of pension is determined based on social insurance payments in accordance with the calculation scheme established in normative acts. Only then a person would be able to adopt balanced and reasonable decisions to assure one’s pension. Pursuant to the principle of good administration, the State is committed to ensure that every person and the entire society in general is timely notified on the basic principles of functioning of eh pensions system [22].
On compliance of the Contested Norms with the principle of a socially responsible state
The Constitutional Court concluded that the procedure of actual social insurance payments complies with the principles that follow from the Satversme, namely, it ensures a fair amount of pension to persons, i.e. it is proportional to social insurance payments made, and depends on participation of a person into formation of pension capital. Sustainability of the pensions system is also assured because the following generations have the right to pension pursuant to actual social insurance payments made. When introducing the procedure of actual social insurance payments, the legislator has observed all principles that follow from the Satversme and observed in the frameworks of its margin of appreciation [24].
Consequently, the Constitutional Court concluded that the procedure of actual social insurance payments does comply with the principle of a socially responsible state and therefore the second sentence of Section 5 (4) of the Law “On State Social Insurance” complies with Article 1 and Article 109 of the Satversme [24].
On responsibility to ensure sustainability of the pension system
The Constitutional Court indicated that, on the one hand, the legislator is committed to maintain the pension system at the administrative level, namely to assure that normative acts establish a person a real possibility to accumulate pension capital. However, on the other hand, the legislator has the duty to create compulsory mechanisms for collecting taxes to reduce ungrounded reduction of social protection level of employees and to make employers observe normative acts. Consequently, responsibility for a sustainable pensions system is divided between the State, employers and employees [25].
The Constitutional Court concluded that the Contested Norms do not cancel the constitutional city of employers to make stipulated social insurance payments; neither release they the legislator from the constitutional duty to establish such mechanism that would allow the executive power to collect social security payments. Consequently, a person has the right to require that the employer makes and the State duty collects social insurance payments [25].
On effectiveness of mechanism of exercise of the rights of a person
Normative acts establish several ways of receiving information of social payments made by the employer – directly from the employer, from the State Social Insurance Agency, as well as online www.latvija.lv.
Consequently, the Constitutional Court concluded that, since a person can verify all information on the fact whether actually makes social insurance payments and draw attention of the employer and state institutions to the undue execution of the stipulated duty, the person has the possibility to receive information on the fact whether the employer has duly made social insurance payments [27].
However, the Court indicated in this respect that a person has the right rather than the duty to follow accumulation of his or her pension capital. However, a person should be aware that failure to exercise such right may impact the amount of State old age pension to be granted [27].
The Constitutional Court recognized that the right of a person to initiate insolvency procedure against the employer is not effective because no simplified procedure has been established in this respect; neither the employer is released from payment of deposit when submitting a claim. Moreover, initiation of insolvency procedure in case if the employer has failed to make social payments within two months from the date of payment established might considerably threaten functioning of national economy [30].
On State compulsory mechanism for collection of stipulated social payments
Taking into account information furnished by the State Revenue Service regarding results of recovery of respective debts in 10 months of 2011 in the field of social insurance payments, as well as statistical data include into the informative report “On Impact of Actual Social Insurance Payments in Respect to Pension Insurance on Social Security of Persons”, the Court concluded that the State has established an appropriate mechanism to ensure that employers make stipulated social insurance payments [28].
On the right of persons to make social insurance payments after reaching of the retirement age
Section 21 (2.1) of the Law “On State Social Insurances” provides that a person having reached the retirement age shall have the right to make social insurance payments in respect to pension insurance in case if the employer has failed to do so. The Constitutional Court recognized it as bias. Namely, a person may choose either to make or not social insurance payments that the employer has failed to make. Consequently, this is the person itself who, after having considered all circumstances, adopts an economically grounded decision regarding the necessity to increase pension capital by means of social insurance payments that the employer has failed to make and public institutions have failed to collect. This norm does not commit a person to make social insurance payments because the person also has the right to wait until public institutions recover unmade social insurance payments from the employer [31].
According to the Constitutional Court, Section 21 (2.1) of the Law “On State Social Insurances” is advantageous to persons because it establishes the possibility to influence the amount of pension capital in case if the employer has failed to make social insurance payments at the established amount [31].
The Constitutional Court indicated that Section 21 (2.1) of the Law “On State Social Insurances” shall be regarded as one of the elements ensuring the possibility to persons to effectively participate in accumulation of pension capital. Moreover, all above mentioned mechanisms shall be regarded as complex ones, namely, a person can follow the course of accumulation of pension capital and thus verify whether the employee duly makes stipulated payments. Should the person establish that social insurance payments have not been made, it has the right to address public institutions that are committed to prevent non-observance of normative acts. Consequently, the regulatory framework included in Section 21 (2.1) of the Law “On State Social Insurances” shall be regarded as the least measure for ensuring of an appropriate pension amount. Moreover, it is a temporary measure because all social insurance payments made by persons are disbursed as soon as the State Revenue Service recovers the respective debt from the employer. However, the Court indicates that a person is not committed to apply legal regulatory framework of Section 21 (2.1) of the Law “On State Social Insurances” [31].
According to the Court, the second sentence of Section 5 (4) and Section 21 (2.1) of the Law “On State Social Insurances” do not, in fact, deal with the issue regarding constitutional duty of the legislator to duly collect social insurance payments.
The Constitutional Court indicated that, when introducing the procedure or actual social insurance payments, the legislator has stabilized the pensions system and created an appropriate mechanism for implementation of the procedure; moreover, persons are established the possibility to participate in formation and accumulation of one’s pension capital.
The Constitutional Court recognized the second sentence of Section 5 (4) and Section 21 (2.1) of the Law “On State Social Insurances” as compliant with Article 1 and Article 109 of the Satversme.
The judgment of the Constitutional Court is final and not subject to appeal. It shall come into force on the date of publishing.
Linked case: 2011-03-01