Bank of Lithuania
2018-09-16
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Demographic trends in Lithuania are alarming: over the next two decades,  the country may witness a twofold increase in the share of the retirement-age population per working-age person. However, only less than half of the workforce is adequately preparing for retirement. Gathered today at the Bank of Lithuania Economics Conference, foreign and local experts are to discuss concrete measures to ensure socially-just and sustainable old-age pensions.

“The recent pension system reform was a step in the right direction in terms of easing the impact of demographic shocks. Yet without consistency the whole system might still flop. Hence we must first and foremost focus on successfully implementing the changes that have been approved. On top, additional measures are needed to provide adequate income levels for the retirees, while at the same time enhancing system sustainability,” said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania. He stressed that in order to ensure the credibility and sustainability of the system in the long run, the link between pension contributions and benefits must be strengthened and made more direct. This, in turn, would encourage more active participation in the system.

According to the governor of Lithuania’s central bank, the State must ensure that the pension system is transparent, stable and immune to political cycles, while the general public should be more involved and take proactive steps as regards their savings for retirement.

Given the current demographic trends (high emigration and population ageing), making no improvements in the system would imply that each generation would receive progressively smaller pensions, pushing retirees further into the risk-of-poverty zone. Such a situation also poses a considerable challenge for both public finances and macroeconomic stability of the country – with personal tax payments to the state budget decreasing, social spending needs will only grow stronger.

Against this background, it becomes crucial to create the right conditions and incentives for the working-population to accumulate personal financial buffers for retirement. However, data shows that roughly 800 thousand residents – or more than half of those working – rely only on minimum accumulation or refrain from accumulating altogether. Furthermore, around two-thirds of 2nd pillar participants accumulate in pension funds which are inappropriate given their age. This issue, however, should be addressed next year, when the life-cycle pension model starts being applied.

Discussing further improvements within the system, Mr Vasiliauskas underlined that establishing a close link between pension contributions and benefits is crucial in order to ensure greater justice and motivate residents to plan for retirement well in advance. He believes that the 1st pillar of the pension system should be based on individual accounts (notional defined contribution scheme), which are currently utilised in European countries such as Norway, Sweden and Poland.

For two decades now the amount of deaths has outnumbered births in Lithuania by roughly 10 thousand each year. Population losses have been also spurred by emigration, which has stripped Lithuania of a third of its youth over the last 15 years.

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This is the second Economics Conference organised by the Bank of Lithuania. The first one was held in 2017 and focused on income inequality. This year’s conference on pension-related issues hosts professors from Uppsala University (Sweden) and Vilnius University, as well as representatives from local and foreign institutions (Bank of Lithuania, Ministry of Social Security and Labour, SoDra, OECD, European Commission, EIOPA).