SoDra's pyramid scheme needs to be reformed.
Lithuania’s State Social Security System (SoDra), just like all other state social security systems are based on a pay-as-you-go principle, that is, current recipients are financed by current taxpayers. Essentially, this system functions as a pyramid scheme — if contributions were to decrease due to economic, demographic or other causes, the pyramid would begin to crumble.
In addition, the current system has another major flaw — insurance is mixed with welfare. In most cases it is impossible to distinguish whether a certain disbursement is insurance or a social benefit. It is obvious that minor changes within the framework of the current system will not suffice — what is needed is a fundamental transformation. For this reason, the Lithuanian Free Market Institute calls on the government to strictly separate the cases where insurance principles can be applied from cases where that is impossible.
The Lithuanian Free Market Institute has presented to the Lithuanian government and general public a conceptual proposal on the transformation of the SoDra. It is assumed that the conceptual proposal will attract attention from politicians and governments in other countries, experiencing similar difficulties. The situation of the social security keeps on getting worse and the increasing gap between inflows and outflows is financed by high interest rate loans. Deteriorating demographic conditions will only deepen Social Security’s problems, meaning that within the next decade the state system will not be able to meet its financial commitments.
As LFMI’s research shows, insurance principles can apply to only two types of disbursements — work injury insurance and health care insurance, together with sickness pay. These types of insurance are already offered on the market, so there is no need for the state to offer this insurance exclusively.
Principles of insurance cannot be applied to old age. People should individually prepare for old age by saving a part of their income instead of it being taken away for immediate redistribution. As a compromise, we propose compulsory saving for retirement, so that employers would transfer 10 percent of wages to employees’ personal retirement accounts. Regarding other insurance benefits (such as maternity, unemployment benefits) that are currently offered by the state system, we propose to replace them with voluntary saving. After the state relinquishes its functions to the private pension funds, insurance companies and other market players, state would still remain with one important function — to help those in need.
The proposed transformation would allow for timely and stable pension payments to current pensioners and those who will become recipients soon. It would also ensure viability and sustainability of the current state social security system. As a result of the proposed transformation social security contribution rates would decrease, meaning that people would receive a larger share of their income allowing them to save and/or buy private insurance.
Kaetana Leontjeva is a policy analyst for the Lithuanian Free Market Institute, a pro-market policy institution with representatives on the Lithuanian government’s Sunset Commission.
Disclaimer:
Views expressed in the opinion section are never those of the Baltic Reports company or the website’s editorial team as a whole, but merely those of the individual writer.
The Lithuanian Free Market Insitute is lobbyist group!
I dont think so that the opinions the LFMI holds would stand any scientific proof. Secondly a society works bcs of its solidarity of the weak and the strong. Not everything can be counted in money be it Litas or Dollar.
The state cannot give up its social security system, or what is called as such. Social Security is necessary to keep a broad democratic support on all levels.
Of private insurances could offer products, but for example a health insurance only needs a healthy customer to make profit….and so forth
In peoples life there are so many circumstances that cannot be forseen, added up on the whole society there is big degree of uncertainy. So LT would follow the neoliberal ideas of the LFMI than we would end up in the US. No social security system at all, everything under influence of loobyists, the most expensive health care system in the world with a huge amount of people not even able to use it. Huge personal debts especially bcs of health problems.
Additionally what happens in a case that those financial conglomerats that should insure us all will go bankrupt or lose everything by bad speculations…then the LFMI will scream for the help and bail out of the state! And the taxpayer will pay twice.
A state social security system also will at least finance a stable system with access for everyone!
“Regarding other insurance benefits (such as maternity, unemployment benefits) that are currently offered by the state system, we propose to replace them with voluntary saving.”
Saving of what?? People at LFMI probably earn too much but an average LT family with a chield cannot save much and from the salary it would be hard to save for everything.
Also a completely financed system will disadvantage the less educated, thats what the financial industry needs most…. less informed people signing filthy contracts!
Yep. Just what any country needs. Go down the path of the USA to a privatized insurance system with out of control costs.
“As a result of the proposed transformation social security contribution rates would decrease, meaning that people would receive a larger share of their income allowing them to save and/or buy private insurance.” Nonsense! It is businesses that are penalised by the huge SODRA payments (hence the huge black economy which actually has the detrimental affect of leaving many thousands uninsured).
SODRA has squandered the opportunity to build reserves by the experiment in demographic engineering that has seen the recent “baby boom”. Thanks SODRA, where will the teachers and schools be in ten years?
Kaetana, thanks, but no thanks. We ALL know how well a private scheme – and I do mean SCHEME, works, especially those in the US, where such affordable private alternatives already exist.
Yeah, separate the insurance from the social services, why not create TWO monsters from one?
To blame SODRA for the black economy, rather than business owners who decide to hand out untaxed “vokes” to their workers, which keeps wages much lower (and keeps money away from SODRA) is STUPID!
But then again, why not try? I’ll bet that the people of Lithuania will not roll over and show their bellies like the hypnotized, drugged, and uneducated americans. I would like to see all the heads on pikes of the rich who think this is good along Gedimino Prospektas by the Seimas.
Peddle this foolish talk somewhere where people can’t see how people are so well served by private systems, like in the US, where taxpayers fund emergency room as primary care facilities, children don’t get medicine, and some states have infant and maternal mortality rates worse than several african countries.
Oh yeah, just to let you know, all the rich people can buy their own insurance. They still have to fund SoDra. That’s the price of keeping our society well, and the people who have the money in the money.
just wonder why the LFMI gets the opportunity to express its opinion here and no other opinion published? I know the site is young but hey professional balanced yournalism
check out the webite of LFMI there work young wanna be liberals with no life experience its worth to check out the cvs of the employers
Dear European,
Thanks as ever for you interest in Baltic Reports and for your frequent posts.
In regards to your latest post, I must point out that your opinion is being published, isn’t it? :)
The LFMI sent this one to us, and given their influential position with the current government, we thought Baltic Reports readers may be interested in what LFMI is advocating.
If anyone would like to write a rebuttal piece to this one, we are certainly open to publishing it. So far nobody has offered.
Regards,
Nathan Greenhalgh
Editor
Baltic Reports