When studying economics, we often come across the concept of time preference. On the surface, it seems to tell the same drama Hamlet experiences in the tragedy of English poet and playwright William Shakespeare. Hamlet is in a struggle between life and death, and here, instant gratification competes with the greater good of the future.
Reda Simonaitytė-Mikulė is an expert at the Lithuanian Free Market Institute
People tend to postpone investing in the future for the sake of today’s consumption – after all, it is not at all clear what the few euros I will spend today on my favourite coffee will turn out to be in a few decades’ time. Nonetheless, the quality of a person’s future and, more generally, the sustainability of a country’s long-term savings system and the economy’s viability depend on which option is preferred. Today, both people themselves and the politicians involved in decision-making tend to look past this.
To facilitate the choice between saving and spending, automatic enrolment in the second-pillar pension scheme and tax incentives to save independently in higher-pillar pension funds have been introduced.
The State implements the principle of subsidiarity and thus shares the burden of providing for old age between itself and the individual. In other words, public services are complemented by the responsibility of individuals and the private sector, their functions, and the accumulation of necessary funds. This creates a tax regime that, if it fulfils its purpose, contributes to the pension system’s sustainability.
However, it is one thing to implement the principle. In order to achieve the objective, it is also important to stick to the principle. The pension system has been in the political spotlight several times recently, with proposals to abolish automatic enrolment and to allow people to withdraw at any time from second-pillar pension schemes, taking together the fund accumulated, and to eliminate the personal income tax regime for contributions to -third-pillar pension and life insurance investment funds. In the struggle to be or not to be, people seem to be encouraged to choose the latter option – to live for today and “enjoy” a life close to the poverty line instead of a dignified old age. Obviously, this is relevant for politicians preparing for elections, but people themselves should be concerned.
We do not realise how politicians are changing our future by questioning the principles of fairness and proportionality in the pension system and trying to give us more freedom to manage our accumulated wealth. Freedom goes hand in hand with responsibility, and the unrestricted use of our savings before retirement means shirking responsibility and accepting the state as the main provider in old age. In Shakespeare’s drama, the collapsing authorities tell Hamlet: “Trust and rely only on yourself”. And what do the government’s recent proposals to change the pension system say? – That no one will take care of you like you can take care of yourself.
The only way to make the pension system sustainable is for us to consciously take responsibility and postpone some of today’s consumption for tomorrow. To avoid exchanging a dignified old age for instant gratification, we need to move in the opposite direction to the current ambitions of politicians.
Since 2004, the contribution rate to the second-pillar pension schemes in Lithuania has changed more than ten times. World Bank analysts argue that the second pillar is an essential complement to the pensions accumulated in the first pillar but stress that its role is only significant if the contribution rate is increased continuously. This makes the system more attractive to the population and incentivises them to stay in it. There have been efforts to establish this in Lithuania. However, after peaking at 5.5% in 2007, today, the contribution rate to second-pillar pension funds in Lithuania is stuck at 3%, far below the minimum 10% recommended worldwide.
Pensions in Lithuania are among the lowest in the European Union, and as many as 41% of the country’s population feel insecure that they will have enough savings to maintain their desired standard of living in retirement. Frequent and inconsistent changes to the pension model undoubtedly contribute to this, with uncertainty about the future leading to low public confidence in the system’s sustainability.
The current system only exacerbates persistent demographic problems and makes the choice between saving or not saving for the future even more painful. Frequent changes to the system, even if deep in our hearts we know that we can only take care of a decent pension by ourselves, our minds end up telling us that it is simply impossible. This is, by the way, how Hamlet felt.
So, just as the protagonist of Shakespeare’s drama gains the courage to take on justice in the course of the play, too must human agency and responsibility win in each of our inner struggles. This is the only way to ensure the sustainability of the pension system by reducing upward pressure on state benefits and allowing people themselves to recover a larger share of their incomes at a time when there will be no active sources of income at all.
Originally published at 4liberty.eu
