Challenges of Timeless Ageing

Albert Anker: The village tailor // Public domain

Today, the most worrisome problem is the pandemic and its management. The second problem is the effects of the pandemic on the economy and people. Other issues that seemed fundamental until recently, have been moved to the bottom of the agenda. But they did not disappear.

One of those problems is population ageing. It continues, as it did before the pandemic, in Lithuania and all the Western world. During the pandemic, we saw more older people on television – they were the first ones to be vaccinated.

Moreover, the problems of the ageing population cannot be solved by technology or investment in production processes, which are offered as solutions to other important problems, such as reducing pollution. Social processes need to be re-evaluated, specifically social policy and how it fits in the changed human life cycle.

Extending Retirement Age Is Not Panacea

The “Ageing Europe” report has showed that people over the age of 55 will make up around 40,6% of the European Union population (33,6% in the year 2019). In Italy, the figure will reach almost 46%, in Lithuania, Portugal, Greece and Latvia – just over 45%.

Thus, it is projected that in the year 2050, the Lithuanian population will be one of the four eldest in Europe. The median age of the population will be almost seven years higher than now and it will reach 51 years. If health protection challenges will be handled successfully, the life expectancy of the very oldest, those aged 85 and over, will increase.

As life expectancy in developed countries is rising, there is a growing perception that no one will suffer greatly from the tendency of the ageing population because we will simply work longer. Since we will work longer, we will retire later. The retirement age is gradually being increased everywhere.

In Italy, Norway, and Iceland the standard retirement age is already 67, and in most European Union countries it is 65. In Lithuania, the retirement age of 65 (for both men and women) has not yet been reached: it is gradually approaching by the year 2026.

Raising the retirement age temporarily eases the pressure on public finances but raises the pressure on older people. For a person, changing the conditions for receiving The State Social Insurance Fund Board’s (“Sodra”) pension and paying fees is not a lesser risk than the devaluation of his or her savings or investments – it changes his or her life plans and financial situation.

We hear a lot about the second risk – that people cannot take care of funds for the old age by themselves because buying investment products in the market is risky. However, the risk that a person might not reach the retirement age simply because it will be postponed by a political decision is not being addressed.

In Lithuania, the average life expectancy of a healthy (able to work) person is far behind other European Union countries. The strategic documents set the goal for the year 2025 for men to reach 61 (56,3 in the year 2018) and for women to reach 64,3 (59,1) years of age. Is it likely that it will be possible to extend the retirement age again soon? Not so much.

It Is Never Too Late to Learn

Another question is – how will older people get jobs? Nowadays, it is a known fact that it is difficult for older people to be employed. Employers can be blamed for the lack of understanding. But they need workers which means that there is a reason for this lack of understanding. The shortage of workers will only increase but only for the qualified ones – as the cost of labor rises rapidly, so do the demands on the workforce.

Understandably, it is difficult to acquire a qualification in an older age, especially when you have not done something towards that goal during your life. Lifelong learning is still seen as a future plan in Lithuania but not as a self-evident approach to education. The success of this plan does not only depend on restructured labor office and retraining system but on the whole education system as well. It will only be possible when we start thinking of our qualifications and education as a continuous process during life.

Therefore, the issue of the size of pensions remains very relevant and open. If we cannot work much longer due to deteriorating health or the lack of qualifications, how will we live? Even though “Sodra’s” pensions are growing faster than rapidly rising wages, they are considered low.

All Eggs Should Not Be Put Into One Basket

When comparing the size of pensions between countries, we must keep in mind that a pension is acquired through different instruments, a large part of which is private accumulation – both mandatory and voluntary. As countries around the world and even in the European Union have very different pension systems, it is not easy to compare them correctly.

However, a conclusion can be drawn that in countries where pension systems are based on the redistribution of public finances financed by social security contributions or taxes (in Lithuania – “Sodra”), the ageing trend is fundamentally undermining public finances. I believe that no one would want to suggest that Lithuania should adopt the combination of the Italian, Portuguese, or Spanish budget and a pension policy. Even though pensions in these countries are the highest in the EU compared to previously earned wages.

Countries that diversify pensions achieve greater security for people with less redistribution and risk to the country’s public finances. Diversification manifests itself as compulsory but private accumulation (in Lithuania it would correspond to the second pension stage) or (and) favorable conditions for people to accumulate privately on a voluntary basis (the third pension stage).

Wealthy countries, such as Austria, Denmark, the United Kingdom and Luxembourg, have tax incentives for self-employment or pension insurance, as it is more effective to encourage people to save for the state than to commit to a higher old-age pension. Even Singapore, with perhaps the most sophisticated social and health care system, and a rich population, has tax incentives for people to accumulate funds voluntarily.

In Lithuania, pension accumulation was introduced with the first pension reform in the year 2000. However, this was done on a very small scale, which was gradually reduced. In Western countries, pension funds and savings insurance have been in place for decades. During the implementation of the first pension reform, there were virtually no financial accumulation instruments in Lithuania. There is a wide selection of them today.

However, the population savings rate in Lithuania is still one of the lowest among the European Union countries: it reached 0.6% of the income, while in the other European Union countries the average was 6.2%. In the year 2021, the amounts held in household deposits rose a lot, but they are held in accounts where they continue to depreciate or, at best, are invested in real estate.

Need of Understanding

The fact that people are in no hurry to accumulate for the old age is not strange. Firstly, saving for the old age is a long-term commitment. People do not dare to commit when they consider the fact that their money may be needed sooner. Secondly, the recent rise in the price of financial assets and the emergence of high-yield short-term and affordable products have raised people’s expectations for returns.

Nevertheless, it is important that the return is balanced with the risk when investing, otherwise we will participate in a lottery instead of having savings. Thirdly, the financial literacy of the Lithuanian citizens is considerably low. Therefore, the knowledge of how to accumulate, what instruments to choose, what realistic expectations one should have is necessary for many.

It is gratifying that the financial literacy of Lithuanian students is improving. However, even mature people would be able to understand the possibilities of caring about old age income if they realized that there is simply no other rational choice.

Recently, private pension funds and funded insurance instruments have become the central topic of discussion system in Lithuania while forgetting what small part of the funds they manage compared to the country’s social insurance. The scope of the voluntary accumulation stage is so small that we do not even find it in the comparative Organization for Economic Co-operation and Development tables of countries’ pension systems. Meanwhile, the debate on realistic alternatives to the current pension system is lacking.

With such rapidly ageing society and no less rapid pace of the economy’s transition into the digital space, it is both factually and morally obsolete to believe that people cannot, in principle, take care of their old age. They will not do it as long as they know that they do not need it; they are not interested, and they have not tried. And they will not know or be interested as long as they are systematically convinced that they are best taken care of by “Sodra” while others are only trying to make a profit from them.

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