2022-07-12
The National Audit Office of Lithuania: the pension substitutes a smaller part of wages for the people that pay more contributions
The changes in the Lithuanian pension system are more focused on poverty reduction, rather than on the substitution of the former higher wages in old age to ensure living conditions that are close to the ones before retirement. The population is not being motivated to pay more social insurance contributions in anticipation to receive a higher pension and the additional accumulation of funds in the second and third pillars is not sufficient. This was revealed by the assessment of changes in the pension system performed by the National Audit Office of Lithuania.
Last year, 615.6 thousand people received social insurance retirement pensions. In total, EUR 3,067.6 million has been spent on these pensions. According to the data of the Organisation for Economic Co operation and Development, retired Lithuanian residents receive approximately one third of the net wages earned before retirement – this is one of the poorest indicators among the countries of the organisation. One in every four senior citizens faces the risk of poverty and Lithuania is among the four most vulnerable countries in the EU (only above Estonia, Latvia, and Bulgaria).
Auditors that have assessed the Pension System state that social insurance lacks a stronger link between contributions and benefits; therefore, participation in it is more mandatory and it becomes unappealing to people paying more contributions. In 2021, the general part of the pension, independent of paid contributions, on average accounted for 63% of the pension, while the individual part constituted only 37%. The individual part of the pension should account for a bigger part of the pension structure (the target is no less than 50%), as the more contributions the person pays, the bigger the pension should be.
“The wage change rates in old age are lower for individuals paying more social insurance contributions when compared to those that pay fewer contributions. Last year, the rate of the pension wage change of 36.1 percentage points was lower for the people earning more than EUR 3 thousand, than individuals making up to EUR 500. Seeking to motivate people to pay more social insurance contributions, it is important to ensure the greater weight of the individual pension part and an even modification of wages in all wage groups,” says Eivida Šlamė, Chief Auditor of the National Audit Office of Lithuania and Audit Team Leader.
Auditors have found that the information about the real benefits of accumulation for retired people and causes that have affected the value of the accumulated assets is not being assessed and published. In 2021, nearly half of the participants stopped the payment of contributions in the second pillar and nearly 60% of participants ceased the accumulation before their retirement in the third pillar.
According to the auditors, employers do not make full use of the opportunity to contribute to the additional accumulation of the employees’ future pension: in 2021, only 1.2% of the employer’s paid contributions. To accumulate a bigger amount in the pension fund, get higher income in old age, and maintain close living conditions to the ones before retirement, it is important to pay the contributions steadily, which may be encouraged by public information on the real benefits to the retired participants and a greater contribution of the employers.