The key elements of a stable and sustainable pension system are long-term sustainability and the shared responsibility between the citizens and the state for a dignified and well-funded old age. However, the political parties that entered the elections in Lithuania have little regard for the worsening demographic trends. They focus more on abstract, short-term solutions which, despite meeting the needs of today’s voters, will not guarantee a rich and peaceful old age in the future. Moreover, such solutions may lead to a higher tax burden and reduce the state’s ability to care for those who need help the most.
There are three pillars that support the Lithuanian pension system. The first is a state-guaranteed social security pension, while the other two are based on individual responsibility and voluntary savings. As society ages rapidly, the weakening of Pillars 2 and 3, more commonly referred to as tiers, could have irreversible consequences for the contributory system. Yet, if properly developed, these pillars can guarantee a sustainable and stable future for the pension system.
It Is Advisable to Strengthen Voluntary Saving
Among the Lithuanian political parties that advocate the strengthening of voluntary saving, the center-right political forces dominate. Naturally, they tend to focus more on personal responsibility for one’s own actions and the future and limited government. The Liberal Movement’s electoral program emphasizes the main objective of the pension system – to encourage people to save independently and to make additional savings for old age. The measures to achieve this, according to the program, include strengthening the second and third pillar pension systems and trust in them and actively increasing the public’s financial literacy and individual responsibility. The objectives and the measures to achieve them are welcome, but the actual outcome requires concrete action. This is what is missing from the party’s program.
The steady development of the contributory system can be achieved by increasing the scope of private pension insurance schemes. Since 2004, the contribution rate to the second pillar of pensions in Lithuania has changed more than ten times: after rising steadily and reaching a peak of 5.5%, it was reduced to 1.5% in 2008, then started rising in 2012 and has now settled at 3%.
The contribution rate needs to be continuously increased to ensure that the second pillar of the pension scheme provides a significant top-up to the pensions accrued in the lower pillars, which is what analysts at the World Bank emphasize as well. This, they argue, makes the system more attractive to the population and increases the motivation to stay in it, as people know they will accumulate enough income to ensure a dignified old age. A similar, but not entirely clear, ambition – again, neither in terms of the targeted measures nor in terms of its full implications – can be found in the program of the Freedom Party: “We will develop the pension contribution scheme up to 6%.”
The programs of both of the above parties also highlight the objective – vital for the sustainability of the pension system – to “depoliticize the pension system” and to “defend it against repeated political attacks.”
Rejecting the Principle of Time Priority
The programs of the other parties analyzed include a rejection of personal responsibility and acceptance of the view that the state is the main provider in old age. The Lithuanian Social Democratic Party (LSDP), Nemuno aušra (Dawn of Nemunas), and the Democratic Union ‘In the Name of Lithuania’ promise to seek a free withdrawal from contributing to the second pillar of the pension scheme and offer a more flexible withdrawal of the funds before the retirement age. Interestingly enough, the Liberal Movement is also advocating the possibility of free and voluntary withdrawal from the pension scheme, thus contradicting their aim of encouraging people to save independently.
Optional participation in the pension scheme and a voluntary one is supported only by the LSDP, the People and Justice Union, and Nemuno Ausra. They ignore the preference encoded in human nature for immediate gratification at the expense of the future and the state’s role in helping to change it. The current automatic enrolment is the tool that helps overcome this tendency and consistently accrue earnings for future consumption.
It is worth noting that public spending on pensions has increased by 42% over the last three years, and the growth rate is increasing year on year. Inflation has had an impact, but this does little to change the trend. Nonetheless, both the Homeland Union – Lithuanian Christian Democrats and the Social Democrats, as well as the National Alliance, the Peace Coalition, the Union of Peasants and Greens and the Freedom and Justice Party are proposing to continue to increase pensions.
To this end, these parties have come up with a source, i.e. economic growth, since it raises more revenue for the budget as the economy grows. However, the pool of pension beneficiaries is only growing, and we never know whether the economy will grow the following year. Such a proposal is, therefore, temporary and postpones the solution to the problem in the future, as there will always be a threshold where tax revenues will start to fall short.
We Will Also See the Twenty-Fifth Amendment
Having reviewed the electoral programs of the political parties, one can conclude that the pension system, which has been changed 24 times since independence, is more than likely to face another change or two. The only question that remains is in which direction.
While most parties advocate greater personal freedom, it is important not to overlook a key principle in further shaping Lithuania’s pension saving system: freedom is inseparable from responsibility. The model of saving for retirement introduced two decades ago, which complemented the state’s role with an autonomous contribution, introduces the necessary contractual limits and responsibilities into the free management of a citizen’s income. Given the country’s demographic trends, the responsibility of each of us for our own future will become increasingly important. Freedom today should not compromise freedom in old age.
