Pension Reform in the Baltics: Issues and Prospects

Occasional Papers, January 3, 2001

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Bibliographic details

• Authors: Jerald A Schiff, Axel Schimmelpfennig, Niko A Hobdari, Roman Zytek
• Published: January 3, 2001
• Series: Occasional Papers
• DOI: https://doi.org/10.5089/9781557759689.084

Summary findings

• Early reforms targeted flaws of the inherited Soviet system, with particular focus on shoring up the finances of the pension systems and reducing their distortionary impact.
• The Baltic countries have been in the forefront of transition economies in pursuing pension reform.
• Important steps were taken to shore up the long-run financial health of existing pension funds and to prepare for implementation of a three-pillar scheme.
• A move toward a fully funded pension system can potentially make an important contribution to the objectives of pension reform, but such a change is neither necessary nor sufficient to meet these goals.
• The existing PAYG pension system can, at least in theory, be made sustainable by an appropriate adjustment of payroll tax rates and expected lifetime pension benefits.
• The average replacement rate implied by such adjustments may well be fairly low, reflecting expected demographic developments.

Policy options and implications

• Consideration of fully funded pension components as one avenue to advance reform objectives, recognizing limits: a funded system is neither necessary nor sufficient on its own.
• Adjustment of payroll tax rates and of expected lifetime pension benefits as a feasible route to restore sustainability in PAYG systems.
• Policy design must account for demographic trends that imply lower average replacement rates if sustainability is achieved through tax and benefit adjustments.