IMF sees ‘step in the right direction’ in Lithuanian pension reform

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The proposed reform of the second-pillar system in Lithuania will “help to diversify risks and reduce fees”, the International Monetary Fund (IMF) has said in a recent assessment. 

The IMF’s staff said that, together with plans for first-pillar reform, the country was making “steps in the right direction”. 

As reported last month, Lithuania’s government has drafted a reform proposal that includes the introduction of auto-enrolment to the second pillar and a shift away from budget-financed contributions. 

Today, this reform proposal was passed and sent to parliament, which will now discuss it and is scheduled to decide on it before the summer.

As per the initial proposal, all employed people under the age of 40 will be auto-enrolled with the right to opt out before March 1 of the first three years.

Once this period has passed, people will only be able to take a 12-month break from making contributions.

Gross salaries will be increased and employees will have to pay into the second pillar from this increased wage.

The IMF said: “Reforms to the funded pillar of the pension system seek to increase the replacement rate by increasing the number of participants and their contributions.”

It added that high participation was “crucial to the reform”, as was obtaining a broad consensus.

“Importantly, to be successful, pension reform should seek broad political and social consensus to ensure long-term stability and predictability, and maximize participation,” the fund’s staff said.

However, after the government had presented the pension reform proposal along with amendments to the tax system in April, economists and unions were cautious. They agreed that the reforms would lead to higher wages and pension income, but argued that they would not significantly help the problem of emigration from Lithuania.

Along with the second-pillar changes, the government also wants to reform the first pillar to ease old-age poverty. The IMF said a proposed increase in the minimum pension could help achieve this aim.

However, the analysts warned of “significant risks that need to be addressed for pension reform to be successful in delivering higher pensions while preserving fiscal sustainability”.

The fund’s staff added: “To ensure fiscal soundness while improving the redistributive aspect of the system, the government could consider linking the retirement age to life expectancy.”

However, at the presentation of its initial reform proposal the government said raising the retirement age had been dismissed as an option.

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  • Kaunas, Lithuania

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