The Effect of Second Pillar Pension to Old Age Pension: Lithuanian Case

Abstract

This paper evaluates the Lithuanian second pillar pension system from the point of view of individual participant. The goal of the paper is to evaluate whether the participants who joined second pillar pension system in 2004 and retire at the beginning of the year 2019 made the beneficial decision and increase their retirement income. Three different methods are used by comparing the accumulated values of a second pillar pension based on the fully funded principle with the reduced values in the first pillar pension based on the pay-as-you-go principle. The analysis is based on the historical results and data of pension accumulation of an 12 years period from 2004 until the end of 2015 with forecasted continuation of participation for the 2016-2018 period based on the methodology prepared by the authors. The results demonstrate that participation in the fully funded second pillar pension system, compared with non-participation, may in general be assessed as positive and effective. However, the benefits of participation directly depend not only on investment returns and life expectancy, but also on the long-run indexation of the first pillar old-age pension, which is a highly politically reliant variable. Various presumptions concerning this issue are also discussed in the paper.