The Lithuanian Parliament rejected the president’s proposal to allow people to withdraw a quarter of their pension savings. However, a similar proposal will be considered in return. Politicians are, of course, inspired only by good motives – the desire for freedom and goodness. But freedom goes hand in hand with responsibility, which is valid every day and even more so in the long run.
Elena Leontjeva is the President of the Lithuanian Free Market Institute
Therefore, it is worth exploring the link between freedom and the human capacity to pursue a distant future goal, forgoing instant gratification. Are freedom and instant gratification the same thing? Tensions exist here, and they play a decisive role in the history of civilisation.
It is a human tendency to value goods more today than in the future, a tendency that economic science has observed and called ‘a time preference’. It has even become a fundamental economic concept. The higher the time preference, the more a person or society tends to consume today, not worrying about tomorrow. It can be figuratively called “a moment preference” – I want everything “here and now”. However, if we all lived in “here and now” and everything was consumed immediately, progress would be impossible.
The history of civilisation is a development from instant gratification to the ability to postpone consumption, persistence, saving, and willingness to invest in progress. Progress begins when a person gives up some of his current consumption and invests his time and resources in making a spade, a ladder or some other tool. From living in the present day, when our ancestors immediately ate the berries they picked and the mammoth they hunted, humankind has gradually moved to a level of awareness where it has begun to care about tomorrow.
The concept of “time preference” is fundamental to explaining the emergence of interest: historically, interest has emerged as a reward and motivation for a man to refrain from consumption. But when financial literacy teachers educate people about interest rates, investing, and the need to save and save for retirement, few people think that it is not only about the management of the contents of our pockets.
The primary fruit of financial literacy is a gradual change in people’s tendency to live for the day. As we learn to control the urgeto be instantly satisfied, our preference for time (or the moment) decreases. Most interestingly, when the priority of the moment falls, a person’s worldview is fundamentally changed, and with it, even the actions and habits that, at first glance, have nothing to do with financial literacy.
Research shows that the ability to postpone instant gratification leads to greater trust and community in society and lower crime rates. Unfortunately, when time preference is peaking, the tendency to self-harm and alcohol and drug use increases. Yes, even such a topical subject is a part of this context. People with a long-term perspective are more concerned about their reputation and can take responsibility for the consequences of their choices.
All our development and culture are inseparable from a long-term perspective in life, and investing and caring for old age are natural and necessary parts of it. External circumstances such as the depreciation of money, taxes, environmental instability, and the uncertainty of the future – which is heightened in our time exacerbate the tendency to be content with today and to live only for today.
So, the question of future pension accumulation is about more than pensions. Just as public policy, which favours life today is not just about who a free man will be dependent on in old age. It is much broader than that – whether our country fosters people’s ability to take the long-view perspective, save and invest, and build resilience.
Suppose the pension system today seems expensive and unattractive, limiting people’s freedom and responsibility for their old age. In that case, the first thing that needs to be examined is what systemic complications have made it so. Here is the introduction of annuities, the reduction of tax-free contributions, the introduction of subsidies and other changes, and the risk of permanent alternation created by politicians. After all, given the demographic trends, everyone recognises that the principle of a funded pension system is a good and targeted – inviting to invest in the future, to take care of our old age.
Thoughtless changes have only made the system more complex and discouraging savings. Recognising the mistakes that have been made can revitalise private old-age provision and make it more attractive to society.
It is time to broaden, not narrow, the methods of saving for old age introduced twenty years ago so that people can choose the best way to provide for their future. Breaking up the existing system would leave people with no alternative but government pensions. Given the broader implications of time preference for our destinies, is such a step the right one?
Originally was published at 4liberty.eu
