Contribution options and individual returns after the second pillar pension reform in Lithuania

Fiori Maccioni, Alessandro;Gudaitis, Tadas

2014-01-01

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Abstract

The 2013 pension reform in Lithuania forced workers to choose their level of participation to the second pillar system. Three options were given: a lower contribution rate, a higher contribution rate with governmental subsidy, and the exit from the second pillar system. The aim of this article is to evaluate the best rational choice for individuals of different gender and age, depending on the expected financial returns of their second pillar accounts. Results reveal that participation in the second pillar system is always more convenient than the abandonment, even under the conservative hypothesis of zero real rate of return. Because of the governmental subsidy, the higher contribution rate can be the best choice for young and middle-aged workers, and its convenience increases with higher expected returns. The higher contribution seems to offer favourable returns to Lithuanian workers, also when compared with similar estimates for pension systems in other countries