Change the calculation of pensions: not only mothers or the unemployed will receive more, but also those who carry “envelopes”

“People receive the lowest pensions today due to a wide variety of circumstances,” he told Delfi.

New system

The old-age pension in Lithuania consists of two parts: general and individual. The new indexation mechanism for social security pensions, introduced in early July, foresees changes in both parts.

Currently, the total depends on the person’s pensionable social security history and the amount of the basic pension in the year the person retires. This part is indexed annually.

This year, the required seniority is 32 years, but it increases every year by half a year and in 2027 it will reach 35 years. In general, a person acquires the right to a pension after having accumulated at least 15 years (minimum) of service.

A year of service is acquired if the employer or the person independently pays the contributions to the social security pension per year of the value of the salary or income, which is not less than 12 minimum monthly salaries set in that year (this year 642 euros ).

At that time, the individual part of the pension depends on the number of pension units (points) acquired by the person and the value of the unit (points) in the year the person retires. This part is also indexed.

A point is earned if the employer or the person independently pays the pension insurance contributions per year based on the value of the salary or income, which is 12 of the average salary determined in that year (this year 1,352.70 EUR ).

First, the Ministry proposes to increase the value of the pension accounting unit with the surplus funds from the Sodra budget. As a result, the share of individual pensions in 2022 is estimated to be 7.93 percent. it could increase by 12.15 percent.

It is also proposed that the full amount of the basic pension be received not only for the required seniority (32 years this year) but also for the minimum seniority (15 years) of service, and those with a longer seniority of service should continue to receive a higher total pension.

It is tentatively estimated that implementation of this proposal would require an additional allocation of approximately $ 67 million from the state budget. euros.

It is also estimated that due to these proposals and the indexation already provided, the average old-age pension could increase to € 461.9 in 2022 and € 534.1 in 2024.

In May of this year, the average old-age pension amounted to 413.8 euros (440.9 euros for those with the required seniority).

Criticism of economists

Both proposals from the ministry received critical comments. R. Kuodis doubted that it was fair for everyone, regardless of the length of service, to pay a full basic pension (198.29 euros this year).

“In silence, calmly, in the middle of an immigration crisis, the ‘cattle’ and other shadows can receive a multimillion dollar gift from the government. Basically everyone will receive a basic pension, no matter how many years they have paid.

Consequently, those who have honestly paid Sodra will remain in the place of an even greater fool than they have been until now. So it seems that Sodra was finally translated from something more like an insurance system to another personal income tax. With all the consequences for labor taxation, tax evasion, etc. and the joy of private foundations ”, he wrote on the social network, recalling how he himself had proposed to change the system.

At the time, financial economist Tautvydas Marčiulaitis criticized the proposal to use reserve funds to increase pension accounting units.

“We are taking money from the accumulated reserve and we expect the double digit wage growth in Lithuania to continue indefinitely, so the reserve will continue to grow as fast as it has in the last 5 years, so everything will be fine.”

The current Sodra reserve will suffice for such “approaches”, if all goes well, for about 15 years. If there is going to be a crisis and things are not going so well, maybe 5 years.

It is possible to discuss what the size of the maximum reserve should be and when that reserve becomes too large, the excess, how much it is worth accumulating in it every year. But this is a completely separate discussion, which cannot be connected to the momentary increase in pensions, ”wrote T. Marčiulaitis, Milvas’ partner.

Various circumstances

Responding to the criticism, Ms Navickienė said that the proposals put forward by the Ministry were aimed at reducing poverty. “Low pensions are one of the most serious problems in the country that needs to be addressed,” he said.

The interviewee said: “I think it is wrong to ‘discard’ all the people who today receive extremely low pensions and say that they all worked only in the shade. The image of a person who has a minimum duration of service, but not the required one, is diverse. Different reasons determine why the population has accumulated a short duration of pension insurance.

“2/3 of all people without the required seniority are women, about 1/3 are men.” Minimum pensions and shorter time of service are a more common trend among women living in the regions, “he said.

According to Sodra representatives, according to Delfi, at present the average length of service acquired by old-age pension beneficiaries is 37.2 years. Upon retirement, women have an average of 35.39 years of service and men 39 years.

Ms Navickienė recalled that until 2020, state-funded social insurance for the care of a disabled person belonged only to the care of people with a total disability (or a permanent need for care), when a guardian / caregiver was appointed in the court.

“In practice, however, family members often leave work to care for disabled or elderly people with mild disabilities (parents, children, spouses) or do not apply to court for formal custody. As a result, these people don’t get enough service time.

A similar situation with mothers who raise their children. They are prohibited in the state until the child is 3 years old. However, the lack of kindergartens, the lack of childcare facilities encourage mothers to leave work. This is especially true for large families.

After the restoration of independence, some people lost their jobs and others who participated in certain activities were exempted by law from paying Sodra contributions, such as self-employed and copyrighted farmers. In some cases, people lost their jobs due to the change in the system and new jobs did not appear, in other cases, due to the legal regulation established by the state, they did not have to take out social security. Only later was the social security system expanded.

Today these people receive the lowest pensions due to various circumstances in their lives, ”said the Minister.

“Envelope”: an MMA accessory

M. Navickienė drew attention to the most recent data from the Department of Statistics, which shows that the highest level of risk of poverty is found among the elderly. In 2020, it accounted for 36 percent. and increased 4.4 percent compared to 2019. point.

“A slightly different situation with people who worked illegally without paying social security contributions. The most common case is that these people are officially employed and pay MMA contributions and taxes, and in an “envelope” they get what is above MMA. In other words, while they work, they meet the legal requirements to acquire seniority.

The main objective of the change in the calculation of the general part is that the general part of the pension financed with general taxes (not social security contributions) and performing the support function can ensure at least a minimum subsistence income for the elderly and disabled. That is the purpose of this part of the general pension ”, said the Minister.

Ms Navickienė also emphasized that the proposed model provides for a faster indexation of pensions for those who have accumulated seniority: their book value would increase and the benefits would be received by those who have paid more insurance premiums.

Worth the payment

Ms. Navickienė disagreed that paying the basic pension to those who did not have the required time of service would send a bad signal to those who honestly paid Sodra’s contributions.

“The contributions are worth paying, and paying them will increase the pension more than now, this is the main message of the proposed changes,” the minister told Delfi.

“Now we see that the pensions of both the highest contributors and the lowest contributors are very similar. Therefore, we have a plan to gradually increase individual participation at an ever-increasing rate.

For example, a person who has worked for MMA for 15 years has acquired 8 to 9 pension account units, and a person who has worked for VMU for 3 years has retired with 120 units of account. The individual part of the pension for the first person is now about 38 euros, the second – 503 euros.

Due to the proposed faster growth of the pension unit (12.15% instead of 7.93% in 2022, 8.68% instead of 7.09% in 2023, 7.67% instead of 6.28 % in 2024) will increase the individual part of the pension of the first person to almost 43 euros in 3 years (+5 euros in 3 years), and to about 660 euros (+157 euros in 3 years).

As you can see in the example provided, this change is more beneficial for those who have paid more insurance premiums (that is, they acquired more units of account) and paid them for a longer time ”, the Minister gave the example.

Commenting on the extent of the shadow economy in Lithuania (15–23% of GDP), M. Navickienė drew attention to the already operational “floor” of Sodra and the entry into force of the “Builder Identification Code”.

It is not proposed to cancel the “floor” of “Sodra”, which means that all employers will continue to have to pay contributions for people at least MMA, that is, people will continue to gain seniority.

By the way, it is estimated that a fifth of the shadow – in the construction sector. Among the most common abuses in the construction industry are unaccounted for, misreported whereabouts, illegal work, unaccounted income, undeclared objects, undeclared income under business licenses. According to the State Tax Inspection, the construction sector does not represent between 500 and 700 million LTL per year. euros.

As of January 1, 2022, the modifications to the Construction Law will take effect, according to which only those people who have a builder identification code (identification code) will be able to work on construction sites. The builder identification code will make it easier to identify the natural person working on the construction site and the employer, and will ensure that only legal workers work on the construction site. This will combat the shadow, illegal work and exploitation of workers, ”said M. Navickienė.