Changing the Financing of the Lithuanian Pensions System

After the first pension reform in Lithuania, in 1995, the reforming process must continue. Important changes are needed, based on principles of old age security financing. A three‐tier system has been drafted and approved by the government as a Concept of the reform. The main change proposed as a first tier is the introduction of a national pension based on the residence principle, instead of the existing basic pension based on the insurance principle. It is expected that in this way the problem will be solved of providing protection against poverty for the increasing number of people who do not have the necessary insurance record. The second tier should be a compulsory funded system based on privately managed pension funds. Several important goals would thus be achieved: diversifying the old age security risk between pay‐as‐you‐go and funded schemes; boosting investment opportunities and encouraging financial markets to develop; offering improved incentives for the working population to contribute; and so on. The main obstacle to the introduction of the second tier is the high transition cost. The third tier would comprise voluntary pension funds: their activities should be liberated and the severe constraints on investment return removed.