State Participation in Funded Pension Systems in Selected Central and Eastern European Countries

ABSTRACT

CEE countries introduced funded pensions in the early 2000s. The stated objectives of funded pensions were to diversify old age pension income, to attract additional financing sources to pension systems, to assure adequate income for future retirees, and to balance future state obligations in aging societies. The state in CEE countries encouraged participation in funded pensions with the help of several incentives. The aim of this paper is to evaluate the costs and benefits for public finance of state participation in the funded schemes in Estonia, Latvia, and Lithuania. The results show that the fiscal costs of state participation do not exceed future benefits.

KEYWORDS:

• Funded pensions
• state participation
• CEE countries
• pension reforms

JEL CLASSIFICATION:

• H55
• J26
• J32
• D61

Acknowledgments

The research was funded by the Research Council of Lithuania (grant no. S-MIP-20-3.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. The term “participants” in this article is used inter-changeably with the term “contributors,” as the term “participants” is used in some legal documents of the countries that are analyzed in the article.

2. Average value of Euro yield curve (10 years) stood at 1.9% for period 2005M01-2021M12. However, for period after financial crisis (2010M01-2021M12) average stood at 1.1%. Based on these values, authors assumed 1.5% for the modeling.

3. https://www.sodra.lt/uploads/documents/files/ataskaita(7).pdf

4. In the case of the purchase of annuity or inheritance, the total accumulated assets are reduced proportionally to the previous year’s structure of assets by source of contributions.

5. 77% of accumulated assets in the second pension pillar in 2020 in Lithuania were determined by state contributions and 65% in Estonia.

Additional information

Funding

This work was supported by the Research was funded by the Research Council of Lithuania [Grant S-MIP-20-3].

Notes on contributors

Jaroslav Mečkovski

Jaroslav Mečkovski has a Master of Economics from Vilnius University, Lithuania. He is currently working as a research assistant at Vilnius University. His main research interests are pension reforms, pension funds, and investment strategies. In parallel with academia, he works as a principal economist in the National Audit Office of Lithuania which serves functions of the independent fiscal institution. Previously, Jaroslav worked as a statistician in Statistics Lithuania.

Tadas Gudaitis

Dr. Tadas Gudaitis defended his doctoral thesis in 2010 in Vilnius University (Lithuania). During more than 10 years of scientific activity, he has published more than20 scientific articles. He aims to constantly publicize the results of his research in mass media and to acquaint the public with the results of his research. T. Gudaitis has more than 5 years of international management experience in the field of finance and banking. He has more than 15 years of international project management experience. T. Gudaitis acquired scientific knowledge and interned at Lund University (Sweden), Copenhagen Business School (Denmark), World Bank Old Age Pension Research Center (USA), Pension Institute Cass Business School (Great Britain), University of Sassari (Italy) and other institutions.

Teodoras Medaiskis

Dr. Teodoras Medaiskis is an economist, professor of Vilnius University, for many years teaching economics of social protection. His main research interest is pension economics and policy. Teodoras leaded working groups responsible for drafting first Lithuanian laws on social insurance and pensions after regaining the independence. He performed as an expert in the World Bank, UNDP and European Commission social policy analysis projects on social protection.

Virginija Poškutė

Dr. Virginija Poškutė is an economist and social policy analyst. Virginija has extensive international job experience (UNDP/Lithuania; International Master’s Programme “European Social Policy Analysis” by CEPS/INSTEAD, Luxembourg and Leuven University, Belgium; various projects for the World Bank, OECD, UN, UNDP, UNICEF, European Commission) as well as experience in projects with national institutions (various ministries and NGOs in Lithuania) on economic and social issues. She was Fulbright scholar at Darden School of Business at the University of Virginia, USA and a visiting scholar at Berkeley University, USA. Virginija’s main research interests are within social policy, welfare economics, competitiveness, public and private sector collaboration, business ethics and corporate social responsibility.