Which choice of participation level is the rational one for second-pillar pension funds in Lithuania?

Fiori Maccioni, Alessandro;Gudaitis,Tadas

2015-01-01

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Abstract

In 2013, new rules for participants in second-pillar pension funds were introduced in Lithuania. Participants of private second-pillar pension funds had to make a choice regarding their further level of participation. Three options were given: a lower contribution rate, a higher contribution rate with a governmental subsidy, or stopping further contributions to the second-pillar system. The aim of this research is to evaluate the best rational choice for individuals of different gender and age, depending on the expected financial return to their second-pillar accounts. The results reveal that participating in the second-pillar system is always more convenient than abandoning participation in it, even under the conservative hypothesis of a zero real rate of return. A higher contribution rate can be the best choice for young and middle-aged working persons due to a governmental subsidy, moreover, it is more convenient because of higher expected returns.