Optimal Individual Choice of Contribution to Second Pillar Pension System in Lithuania

TitleOptimal Individual Choice of Contribution to Second Pillar Pension System in Lithuania
Publication TypeWorking Paper
Year of Publication2014
AuthorsA. Fiori Maccioni, T. Gudaitis
Number2014_02
ISBN Number978 88 84 67 866 9
KeywordsLithuanian pension system, private pension funds, rational choice, second pillar
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 to 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 the 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.

Citation Key6428
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