The index of replaceability of pensions is twice lower than the EU average
SEB Life and Pension Baltic SE’s Lithuanian branch manager Iveta Pagagienė assures that, celebrating Lithuania’s 20th anniversary in the EU, we can be proud of the achieved progress – our standard of living, consumption, and GDP per capita have almost caught up with the EU average. However, according to the interviewee, looking at the index of replaceability of pensions in Lithuania, there is still a lot of homework to be done here:
“Unfortunately, as of today, the index of replaceability of pensions in Lithuania is twice lower than the EU average. In Lithuania, the index of replaceability of pensions is 40%, and in the EU – 70%. This means that if 40 percent replacement rate, at retirement age, when I stop working, I get 40%. former income, which really affects the quality of life, reduced by needs. One more thing – according to OECD data, conducted surveys and their analysis, the resident who entered the labor market today, after starting work, will reach only 30%. index of pension replaceability, if no action is taken, and here Lithuania, unfortunately, looks the saddest, it is the last in the EU according to these forecasts”, says I. Pagagienė.
Employers contribute slowly
According to the interlocutor, those receiving a lower than average pension are already on the poverty line and every third senior is unfortunately poor today. According to I. Pagagiene, in order to avoid this, we have to do our homework ourselves, because the state will only be a small part of the future pension.
“We have to realize that we have to save for retirement ourselves. <...> create a habit of saving, because time is very important here, not because it takes longer to accumulate, but because there is a compound interest investment effect. Let’s take a simple example: if I want to accumulate 100 thousand EUR to my pension account and if I start doing this at the age of 45, when I have 20 years left until retirement age, I will need to put away about EUR 200 every month. If I enter the labor market at the age of 25 and put aside my first salary for my pension, when I have 40 years left, it is enough to put away 40 EUR each to accumulate 100 thousand EUR”, the specialist presents the comparison and notes that the accumulation period will differ only twice, but the deferred amount is even four.
In addition, according to the expert, it is very important to assess the role of employers. Today in Lithuania only 15-20 percent. of employers save for their employees’ pensions, while in the EU and Scandinavian countries this indicator reaches 80-90 percent. Although this method is becoming more popular in Lithuania, according to I. Pagagienė, here we are still significantly behind many other countries.
For those who want to take care of their future themselves, the simplest way is the second tier of pensions, says I. Pagagienė: “Three percent is automatically deducted from the salary, the state contributes another one and a half percent, this is a life cycle fund, where you don’t need to know much about investing, the risks are selected according to age groups and the most important discipline and to have decided to participate in the second tier of pensions.” The third tier of pensions is already accumulated independently, here the employer can also contribute. There are other investment methods and platforms that help you save for a dignified old age.
As for the security of the second and third tier of pensions, I. Pagagienė says that it is important to understand that this is my future money:
“Of course, there is an investment risk, which you also need to choose according to your age in the third tier of pensions according to the investment funds, and if the retirement period is approaching – to take more conservative, less risky investment instruments.”
