Lithuania considers pension reform

  • 1998-11-26
  • Paul Beckman
VILNIUS - As the Lithuanian government polishes up a draft law on pension funds, some final words and suggestions on the subject were tossed around by economic experts and government officials. In a conference organized by the Lithuanian Free Market Institute, the World Bank, UNDP and USAID, many angles and the possible effects of the future law were investigated.

A number of foreign institutions who, according to World Bank representative Vilija Kostelnickiene, have the expertise and experience, participated in drafting the law on pension funds.

"This seminar is the last, finishing touch of what has been a period of very long work," said Kostelnickiene.

David Lindeman, a World Bank pension specialist, shed some light on the direction the pension reform in Lithuania is going. According to the specialist, many countries in the area are currently debating the same issues.

"The first and primary question that has to be asked by any country when developing pension reform is whether the reform is going to have a mandatory or voluntary funded component," said Lindeman. "In Lithuania a decision was taken fairly early on to have a relatively modest solidarity pillar financed on a pay-as-you -go basis."

Lindeman said the plan that Lithuania has selected also features a substantial redistribution element from relatively high income people to relatively low income people.

The plan, in principle, opens up a significant amount of "space" for a voluntary pension system, which is similar to the solidarity pension scheme found in the United States.

Lindeman said there were still several areas in connection to pension funds that are still being debated.

The subjects of whether to allow "defined benefit pensions" (which completely depend upon financing by employers out of current and future income) and how the taxation of pensions should be calculated were two areas Lindeman mentioned.

"I know that in Lithuania, there is a debate about the revisions in the tax code. As these revisions are thought about, it is also important to think about how pensions will be taxed relative to other kinds of savings," said Lindeman.

Rafaelo Rofman of the Argentinian Pension Funds Supervision Institution, has worked on pension reforms in Argentina and central European countries. In respect to Lithuania, he said the path on which the country is embarking is an "interesting" one.

"This approach is relatively different from what several European and Latin American countries have been doing in the last few years," said Rofman. "And that opens new possibilities for the future."

According to Lithuanian Vice Minister of Finance Laima Urbsiene, the draft law on pension funds is meant to establish a legal framework for the voluntary pension scheme. The pension fund system is viewed by the government as a "supplementary" system which is not called to act instead of the state pension scheme.

"People will be able to accumulate supplementary pensions by participating and will be able to retire five years earlier than the official retirement age," said Urbsiene.

Whether the favorable arguments for the pension draft law are technical or practical, it remains unclear how enthusiastic the Lithuanian people will be. Some citizens, who have seen their savings disappear before, are sure to be sceptical of new pension fund schemes.

Eugenija Martinaityte, director of the Lithuanian Banking, Insurance and Finance Institute, spoke favorably about the law itself, but was concerned about its implementation.

"All laws are more or less good," said Martinaityte. "But they are more difficult to implement. With such a law, it is important for it to have a very general framework. without very specific details and figures."

Martinaityte also referred to the new insurance and pension funds as part of a "new lifestyle" in which people will show their trust somewhat apprehensively. She suggested that people will need to be educated in how these new financial projects work before they will willingly participate in them.