The Lithuanian government has proposed reforms to the accumulation of second-pillar pension capital, and if the Lithuanian Seimas approves the proposals, that may lead to a massive exit from pension funds by people who withdraw a share of their savings, primarily for consumption purposes. This, according to analysts at the Bank of Lithuania, would lead to short-term, but significant fluctuations in the national economy, because the real GDP, inflation and imports of goods would increase rapidly during the first year after the changes.
Later, as consumption normalises, the indicators would drop below the baseline forecast level and eventually return to previous trends within three years. This is according to a preliminary assessment of the government’s second-pillar pension proposals that was conducted by the aforementioned analysts.
The central bank’s economists also say that the long-term future of adequate pension capital is a bigger concern, given that the replacement rate (i.e., the ration between the pension and the former wage) is lower than the European average. It is expected that it will continue to drop even further due to major demographic problems in Lithuania.
The Bank of Lithuania says that if 60% of participants were to withdraw from the accumulation system, the country’s economy would see an inflow of around EUR 3.39 million, of which EUR 2.37 billion would be spent on consumer goods.
The withdrawal of 40% of participants would result in an inflow of EUR 2.26 billion (EUR 1.58 billion), while a withdrawal of 20% would lead to EUR 1.13 billion (EUR 0.79 billion).
“The GDP increase would be driven by increased demand as the withdrawal of funds from the second pillar leads to a temporary increase in the disposal income of households,” the central bank report states. “The domestic economy cannot fully satisfy consumption needs because of short-term capacity constraints. This means that imports will also increase. It is important to note that the increase in consumption will have both a direct and an indirect impact on inflation.”
It is estimated that the withdrawal of 60% of participants in the scheme would raise GDP by 1% and inflation by 0.8 points as against projections for the first year. For a 40% withdrawal it would be 0.7% and 0.5%, and with 20% it would be 0.4 and 0.2 points respectively.
The central bank suggests that the government must significantly increase the employment rate, or pension insurance contributions that are made to Sodra, the State Social Insurance Fund, the aim being to offset the decline in the income replacement rate.
“The increase would have to be particularly large if a replacement rate of 50% were to be the long term target, and then the [pension] insurance rate would have to be raised even further to satisfy OECD standards that say that an appropriate replacement rate is 70% of pre-retirement earnings,” according to the assessment report.
Amendments to the Law on the Accumulation of Pensions have been drawn up by the Ministry for Social Security and Labour. The proposal is to allow Lithuanians to stop their accumulation and withdraw all of their capitals in three cases in which accumulation is no longer possible – when the individual loses 70-100% of his or her work capacity, when a serious illness is diagnosed, or when palliative care is prescribed.
The Bank of Lithuania said earlier this year that pensions in Lithuania are equal to 45-50% of former salaries, which is below the EU average of 60%.
Source: BNS
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