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Mr. Jerald A Schiff, Mr. Axel Schimmelpfennig, Mr. Niko A Hobdari, and Mr. Roman Zytek

Abstract

In recent years, the issue of pension reform has been high on the agenda of many countries. To a large extent, this reflects common concerns regarding demographic trends of declining birthrates and increasing life expectancies that have shed serious doubt on the sustainability of current pension systems. Most countries have attempted to shore up their pay-as-you-go (PAYG) systems through some combination of reduced lifetime benefits and higher social taxes.

Mr. Jerald A Schiff, Mr. Axel Schimmelpfennig, Mr. Niko A Hobdari, and Mr. Roman Zytek

Abstract

The Baltic states inherited a PAYG pension system from the Soviet Union (Box 2.1). Economic developments of the early 1990s had a tremendous impact on the pension systems in ail transition economies, including the Baltic countries. Economic depression accompanied by growing unemployment (open and hidden) undercut the pension system’s financing while adding large numbers of new beneficiaries.1 At the same time, high inflation rates that were not immediately fully matched by nominal pension increases contributed to a sharp decline in the real value of pensions and flattening of benefits across different groups of beneficiaries.2

Mr. Jerald A Schiff, Mr. Axel Schimmelpfennig, Mr. Niko A Hobdari, and Mr. Roman Zytek

Abstract

While the early reforms of the Baltic PAYG systems were oriented at preserving the financial solvency of these systems, demographic trends led policymakers in the Baltics, as elsewhere, to look for alternatives to their pensions systems. A PAYG system remains solvent as long as the working generation is able and willing to share sufficient income with the retired generation. However, given expected population trends, it was viewed as unrealistic to expect future working generations, dwindling in absolute numbers, to continue to support an ever larger population of retirees to the same extent as at present. To ensure sustainability via a PAYG system would require further increases in the already high payroll tax rates—which would overburden the working generation, complicate social tax collection, and have an increasingly negative impact on work incentives 21—or reductions in lifetime retirement benefits. As indicated in Table 3.1, maintaining a 40 percent replacement rate and a retirement age of 60 in the Baltics would eventually require that a payroll tax collect about 40 percent of gross wages, which would imply a tax rate well in excess of 40 percent.

International Monetary Fund
Lithuania’s catch-up toward the European average has been impressive. This success has been coupled with the emergence of macroeconomic imbalances. The dominance of foreign-owned banks in the banking system constitutes both a source of strength and risk. Although stress tests indicate that the banking system is reasonably resilient to macroeconomic shocks, existing capital buffers might not be sufficient to cope with low probability extreme events, and strengthening the capital would be advisable. The government implemented a regulatory framework for Nonbank Financial Institution (NBFI) and a pension reform.
International Monetary Fund
Selected issues of Poland are studied in this paper. The global projection model used to prepare the baseline inflation forecast and risk assessment for Poland is also explained. Baseline forecast, risk assessment, and policy communication are discussed. The pension reform has been a cornerstone of fiscal policies in Central and Eastern Europe (CEE). Problems with the Stability and Growth Pact (SGP) rules, a brief discussion of reform reversals, and policy options for both individual countries and those at the EU level are also discussed. Fiscal implications of pre-funding future liabilities are also studied.
International Monetary Fund
Lithuania showed strong economic growth with low inflation owing to its sound economic policies. Executive Directors commended this development, and appreciated Lithuania for signing the European Union Accession Treaty. They encouraged the authorities to maintain macroeconomic stability and accelerate structural reforms. They welcomed the efforts of the Bank of Lithuania to implement Financial Sector Assessment Program recommendations. They emphasized the need for energy and transport privatization, the modernization of the agriculture sector, and streamlining of the legal framework to enhance transparency, governance, and the overall business environment.
International Monetary Fund. European Dept.
This Selected Issues paper analyzes the fiscal challenges in Lithuania. Lithuania’s fiscal position has strengthened in recent years. However, medium term challenges are significant given the severe demographic pressures from population aging and net emigration. Lithuania’s net financial worth of the general government is relatively strong compared with other countries in the region although contingent liabilities from the pension system are sizable. The recent reform of the pension system will help make the system more fiscally sustainable. Upcoming reforms should be carefully designed, considering their trade-offs, to ensure social sustainability; reduce old-age poverty; and limit adverse impact on labor supply and informality.
International Monetary Fund
Lithuania showed progress in macroeconomic stability and structural reforms, under the Stand-By Arrangement. Executive Directors welcomed this development, and endorsed the authorities' intention to switch the peg of the litas to the euro, with a view to move toward greater economic integration with the European Union area, while preserving the credibility of the currency board. They welcomed the comprehensive medium-term fiscal framework, which aimed to determine the priorities, address future expenditure pressures, and achieve the medium-term goal of a cyclically balanced budget.
International Monetary Fund. European Dept.
This 2018 Article IV Consultation highlights that the economy of Lithuania picked up steam in 2017, following two years of sluggish growth. Real GDP expanded by 3.9 percent largely because of the acceleration of investment, which benefited from credit growth and high capacity utilization. Private consumption remained the main engine of growth, though it was held back by decelerating real wages. The external current account swung to a modest surplus with exports benefiting from past investments in export capacity and improved external demand. Growth in 2018 is projected at 3.2 percent, mainly because of weaker exports after a very strong performance in 2017 and a slowdown of consumption driven by negative employment growth.
Mr. Jerald A Schiff, Mr. Axel Schimmelpfennig, Mr. Niko A Hobdari, and Mr. Roman Zytek

Abstract

A pension reform that introduces an FF pillar or increases the importance of an existing FF pillar will affect the macroeconomic savings-investment balance in three basic ways. First, a tax-financed pension reform strengthens savings by substituting an FF pillar based on capital accumulation for a PAYG pillar based on intergenerational redistribution. Second, a pension reform involves transition costs that need to be financed; other things equal, this reduces national savings. Third, a pension reform can affect private savings outside the pension system.