Transcript Transition cost Lithuania

Transition costs and their impact
on adequacy
Vidija Pastukiene
Seminar on Private Pension Provision
Transition costs and decumulation phase
Tallinn, 6-7 September 2007
Ministry of Social Security and Labour of Lithuania
Outline of the presentation








Lithuanian pensions: main features
II pillar pension reform: main features
Key components of transition costs
Transition costs evolution
Sources for covering transition deficit
Social insurance fund prognoses
Replacement rates
Issues under discussion
Lithuanian pensions: main features





Old age dependency ratio: 22% in
2004, 45% in 2050.
85% of labour force are insured
Average pension to average wage
(gross) – 32%, net – 44%
Total social insurance contribution rate
34%
CR for pension insurance – 26%
II pillar pension reform: main
features






Contribution rate to funded individual DC account:
2004 – 2.5%, 2005 – 3.5%, 2006 – 4.5%, 2007 –
5.5% out of existing social security contribution rate
for old age pension insurance (21%)
Participation voluntary for everybody insured under
retirement age but no switching back
Benefits available from legal retirement age,
compulsory annuity with floor and ceiling
Heritage of pension assets
Benefits non taxed
No central guarantee fund nor explicit state
guarantees
Key components of transition costs
Each year the size of the transitional deficit
is calculated by the following equation:
Transitional deficit (year) = A – B
 A = flow of contributions into the second
pillar
 B = reduction in PAYG expenditures as the
result of introduction of the second pillar
Key components of transition costs
1. Flow of contributions into the second pillar
depends on:




Contribution rate to funded pillar (2.5%-5.5%)
Participation rate evolution (from 55% in 2005 to
75% in 2050)
Income level of participants
Economy real wage growth (sharp changes up
to 20% recently)
Key components of transition costs
2. Reduction in PAYG expenditures as the
result of introduction of the second pillar
depends on:



difference in CR diverted to supplementary part
of PAYG pension (10.5 in 2006) and CR diverted
to II pillar (5.5 from 2007)
fraction of pensioners getting benefits from
funded component (8% in 2008, 58% in 2030
and 75% in 2050)
RR of PAYG component (32.5%, constant due to
pension indexation to wages)
Transition costs evolution
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
20
05
20
08
20
11
20
14
20
17
20
20
20
23
20
26
20
29
20
32
20
35
20
38
20
41
20
44
20
47
20
50
0.0%
Contributions into the II pillar
Reduction in PAYG expenditures
Transition costs
Sources for covering transition deficit




Social insurance fund surplus
(available until 2020)
Privatization fund assets
Transfers from state budget
Parametric reforms of current pension
system (increase in retirement age to
65 from 2012 to 2026 is under
consideration )
Social pension insurance fund
surplus (available until 2020)
20
05
20
08
20
11
20
14
20
17
20
20
20
23
20
26
20
29
20
32
20
35
20
38
20
41
20
44
20
47
20
50
2.00%
1.50%
1.00%
0.50%
0.00%
-0.50%
-1.00%
-1.50%
-2.00%
-2.50%
SSI Fund Budget without transfers from state budget
SSI Fund Budget with transfers from state budget (50%)
SSI Fund Budget without reform
SSI Fund Budget RA(65,65)
Past trend and nearest prognosis
of transition costs
1.2
1
0.8
0.6
0.4
0.2
0
2004
(2.5%)
2006
(4.5%)
2008
(5.5%)
prognosis
2010
(5.5%)
prognosis
Contributions to second pillar as % of GDP
Transfers from State Reserve (Stabilization fund)
Replacement rates
40%
35%
30%
25%
20%
15%
10%
5%
Mono-pillar system
Two-pillar system: total
Two-pillar system: first pillar
Two-pillar system: second pillar
49
20
47
20
45
20
43
20
41
20
39
20
37
20
35
20
33
20
31
20
29
20
27
20
25
20
23
20
21
20
19
20
17
20
15
13
20
20
11
20
09
20
07
20
20
05
0%
Replacement rates



RR in PAYG mono-pillar system (32.5%) is constant
all projection period due to assumed pension
indexation to wages (there is no automatic
indexation rules in the Law)
The diversification of pension sources and
reduction of PAYG program (8.8 % lower
replacement rate) will reduce the expenditures of
social insurance fund by 0.6% GDP in the end of
transition period in 2050.
Due to projected higher real rate of return of funded
part switchers of two pillar system are projected to
get higher replacement rate by 2 percentage points
Issues under discussion


Financing of transition costs is agreed
annually while composing social
insurance and state budgets. So far it
is shared 50/50 by both.
There are proposals to increase
contribution rate up to 10% by 2010.
This could lead to enlarging of
transition burden to 1.8 % GDP
Social insurance fund expenditure
projections
6%
5%
4%
3%
2%
1%
CR=10%
Without reform
49
20
47
20
45
20
43
20
41
20
39
20
37
20
35
20
33
20
31
20
29
27
20
20
25
20
23
21
20
19
20
17
CR=5.5%
20
15
20
13
20
11
20
09
20
07
20
20
20
05
0%
RA (65,65)
Thank you for your attention!