Pension Privatisation in the Baltic States: Expectations and Early Experiences
| Author | Elaine Fultz |
| DOI | 10.1177/138826270600800202 |
| Published date | 01 June 2006 |
| Date | 01 June 2006 |
| Subject Matter | Article |
PENSION PRIVATISATION IN THE BALTIC
STATES: EXPECTATIONS AND EARLY
EXPERIENCES
ELAINE FULTZ*
Abstract
Just after the turn of the 20
th
century, the three Baltic governments acted in close
sequence to partially privatise their national pension schemes – Latvia adopted this
change in 2000, Estonia, in 2001, and Lithuania in 2002. These reforms may be
considered a ‘second generation’ of pension privatisation in Central Europe, following
similar actions by the regional leaders, Hungary (1998) and Poland (1999). This
article examines the Baltic countries’ early experience with privatisation, by comparing
them with each other and with the Hungarian and Polish experience. In doing so, it
pays particular attention to the challenges of establishing the new second pillars, to the
impact of the new privately-managed individual savings schemes on the pre-existing
public pay-as-you-go pension systems, and to updated projections of the effect of the
reforms on future benefit adequacy. The final section situates the Baltic reforms in the
context of an evolving general understanding of the economic impacts of pension
privatisation, especially on aging populations, and offers recommendations for
ensuring that pension levels in the Baltic states meet a basic minimum level of
adequacy, as set out in the social security standards of the ILO and Council of Europe.
1. INTRODUCTION
Just after the turn of the 20
th
century, the three Baltic governments acted in close
sequence to partially privatise their national pension schemes – Latvia in 2000,
Estonia, in 2001, and Lithuania in 2002. These reforms may be considered a ‘second
European Journal of Social Security, Volume 8 (2006), No. 2 127
* Senior Specialist in Social Security at the ILO Sub-Regional Office for Central and Eastern Europe in
Budapest. Address: ILO SRO Budapest Office, 1066 Budapest, Mozsa
´r u. 14, Hungary; e-mail:
fultz@ilo-ceet.hu.
128 Intersentia
generation’ of pension privatisation in Central Europe, following similar reforms by
the regional leaders, Hungary in 1998 and Poland 1999. The Baltic reformers thus had
the opportunity to observe the early experience of their neighbours and to take this
into account in formulating and implementing their own laws. This means it is
interesting to examine how the Baltic countries’ actual early experience compares with
that of Hungary and Poland, as well as with their own expectations of the reforms, as
reflected in official documents, pensions literature and statements by reformers. This
article provides such comparisons.
This analysis draws heavily on a set of studies commissioned by the International
Labour Organization’s Sub-Regional Office for Central Europe in Budapest.
1
These
studies form one of the outputs of a technical co-operation project being executed by
ILO Budapest with financial support from the French Government. This component
of the project is aimed at developing, gathering, and disseminating information on the
early performance of different types of social security reforms undertaken in Central
Europe since 1989. This, we believe, will help to create a common information base
and contribute to progressive refinements in the design of reforms based on regional
experience.
The Baltic pension studies are modelled closely on earlier ILO analyses of pension
privatisation in Hungary and Poland,
2
thus facilitating regional comparisons.
Following these case studies, they pay particular attention to the impact of the new
private pension tier on the pre-existing pay-as-you-go system, the early performance
of the new privately-managed individual savings account that make up the private tier,
and the impact of the reforms on future pension financing and benefit adequacy.
Drawing on these two case studies and other sources, this paper presents four broad
comparisons of the Baltic countries’ early experiences with privatisation consisting of:
(1) workers’ preference for the new privately managed individual savings options; (2)
early investment patterns and rates of return; (3) the role of international actors in the
introduction of reforms; and finally (4) the authors’ updated projections of benefit
levels and pension financing costs in the post reform period. The final sectio n of the
paper considers the Baltic reforms in a broader context and makes recommendations
for revisiting certain of their elements in light of early implementation experience and
the authors’ latest prognoses for the future.
Elaine Fultz
1
This article is based on the concluding chapter of a recent ILO publication – Pension Reform in the
Baltic States – edited by the author. See Fultz (ed.) (2006). It includes chapters on Estonia, Latvia and
Lithuania. The study of Estonia was conducted by Lauri Leppik and Andres Vork; the study of Latvia
by Inta Vanovska; and the study of Lithuania by Romas Lazutka.
2
See Fultz (ed.) (2002).
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