Lithuania’s population is ageing fast, affecting growth and well-being of the country. High emigration, particularly of the young, is adding to the demographic pressure. Health outcomes, especially for men, are among the poorest in the OECD, and poverty among the elderly is widespread. Fertility is relatively high and rising but remains below the population replacement rate. Good policies covering several areas can help master the economic and social consequences of an ageing society. Pension reforms in the wake of the “new social model” made the system more sustainable but it should be better targeted at poor pensioners. Health care and long-term care are improving but further steps should be taken to make it more patient-friendly and less hospital-centric. Life-long learning is weak especially among older workers, and policy should provide more incentives to firms to offer and workers to take up life-long learning activities. Also, the government should strengthen programmes that help keep contact with the diaspora even if emigrants do not intend to return to their home country soon, and it should relax the rules for high-skilled non-EU immigrants. Finally, to raise both birth rates and labour market participation of women, support for childcare should be strengthened further.
OECD Economic Surveys: Lithuania 2018
Chapter 2. Ageing together
Abstract
Growing life expectancy and low fertility in the early years after renewed independence are rapidly changing Lithuania’s demography. The old-age dependency ratio – the share of population of more than 65 or 80 years old – is projected to almost double between 2013 and 2050 (Figure 2.1). Large emigration, particularly of the young, is adding to the ageing pressure, while immigration is unlikely to rebalance Lithuania’s demographic structure in the near future given political constraints. Older workers are well-integrated into the labour market, but their productivity tends to be low and life-long learning activities to upgrade skills are quite modest. The old-age gender gap is one of the largest in the OECD: while women’s life expectancy is around average, men’s is among the lowest of all OECD countries, pointing at challenges for both lifestyle and health care.
Getting old is inevitable, but good policies can help master the economic and social consequences of an ageing society. Ageing concerns the entire population, so policies to foster inclusive growth and well-being for the elderly should cover all age groups. As such, this chapter discusses age-related policies under a wide angle ranging from pensions to family policies. The next section assesses the sustainability and adequacy of the pension system after the reforms undertaken in the wake of the “new social model” adopted in 2017. Section three turns to age-related issues in health and long-term care, in particular the challenge to increase healthy life years. Section four addresses life-long learning and the integration of older workers in the labour market. Section five deals with international migration and its potential to raise productivity and income at home. Section five surveys family policy and its role for raising both fertility and labour force participation of women.
Figure 2.1. Lithuania is ageing rapidly
Note: The declining old-age dependency ratio in Lithuania around 2040 might be the result of less emigration of the young.
Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects. The declining old-age dependency ratio in Lithuania around 2040 might reflect the impact of emigration of the young in the years before.
Pensions
After a thorough reform, the pension system has become sustainable
Pension sustainability has been an ongoing issue in Lithuania despite relatively small pension spending of around 6.8% of GDP (Figure 2.2). After renewed independence in 1991 Lithuania inherited the former Soviet Union’s pension system, which was characterized by a low retirement age – 55 for women, 60 for men – and high income replacement rates ranging between 50% and 100% (OECD, 2018). The pay-as-you go-system soon ran into deficit, which in 1996 prompted the government to raise the retirement age to 65 years for both sexes by 2026. To ease pressure further, the government introduced funded pensions in 2004, although their sustainability effect will only be felt once the system begins to mature in two or three decades. Rapid growth of pension entitlements after 2000 and plummeting GDP in the wake of the 2008 crisis temporarily pushed pension expenditures above 8% of GDP in 2009. Since there was no indexation formula, rent freezes and discretionary indexation of pensions became the main instrument to react to fiscal deficits (Medaiskis and Jankauskienė, 2014). Despite these measures, the social pension fund accumulated a debt of around 7 % of GDP, and the 2015 stability plan predicted pension spending to reach 9% of GDP by 2030 (European Commission, 2015).
In 2017 the government thoroughly revamped the old-age social security system, essentially tackling the spending side by introducing a pension indexation formula and by increasing the required length of pensionable service. The reform is expected to bring pensions on a long-term sustainable path. The widening difference between revenues and spending will eventually help reduce social security contributions for the first pillar pay-as-you-go system and move them to second pillar funded pensions (Figure 2.3). The reform, which is a central part of the “new social model”, consists of four cornerstones:
Establishing a “sustainability factor” by indexing pensions to the economy-wide wage sum, thereby taking into account a shrinking workforce.
Gradually shifting the funding of basic pensions from the social security to the general government budget. In 2017 contributions were reduced by 1% point and funding moved to general government, yet the timeframe for further shifts is not set yet.
Introducing a transparent and simple formula (point system) by which contributions translate into pension entitlements.
A gradual increase of service years from 30 to 35 required to get a full pension.
Box 2.1. Main features of the Lithuanian old age security system
Lithuanian old-age social security consists of three pillars: a pay-as-you go defined benefit pension system (first pillar), a statutory private funded pension scheme (second pillar) and tax-favoured private savings (third pillar). Contribution rates amount to 25.3 % of gross wages, of which 22.3% are paid by employers and 3% by employees. Since the second and third pillars were only introduced in 2003, the pay-as-you-go system still makes up the overwhelming part of pension payments. The Lithuanian pension system is relatively small with around 6.8 %of GDP (OECD average around 8%), although social security contributions are high (Figure 2.2).
First pillar: The first pillar pay-as-you go pension is composed of two parts: 1) a basic part which depends on the number of years worked, and 2) an earnings-related part which is capped at five times the former wage. Both parts are about equally-sized, making the system quite redistributive. An additional social assistance pension, not means-tested, is paid to those with small or no pension entitlements. A specific “state pension” exists for specific groups such as veterans. Pensions are indexed to the growth of the economy-wide wage sum over 7 years (sustainability factor). 35 service years will be required to obtain a full pension in 2027; and 15 service years are required to get a pension at all.
Second pillar: The second pillar is a defined contribution scheme based on pension funds, created in 2004. Participation in the funded pension scheme is voluntary, yet joining is irrevocable, and around of 85% of the insured decided to opt in so far. The second pillar is funded by a social security contribution of 2%, an additional voluntary 2% on a person’s salary and a state subsidy of another 2%, known as the “2/2/2” arrangement. Funding is planned to rise to “3.5/2/2” in 2020. Households are free to move between various pension funds. Occupational pensions, although legislated in 2006, never came to existence.
Third pillar: The third pillar consists of individual, tax-favoured savings. A voluntary personal pension contract can be terminated and pension savings can be withdrawn at any time. Contributions for private pension savings are tax deductible up to a ceiling of 25% of an individuals’ salary and up to EUR 2 000 per year. Less than 3% of the working age population has a voluntary personal pension.
The statutory retirement age was 63.5 for men and 62 for women in 2017 and increases by 4 months for women and 2 months for men every year until it reaches 65 for both sexes in 2026. The effective and statutory retirement ages are very close as early retirement is financially unattractive and postponement of retirement is possible and rewarded by a higher pension. Pensions are not taxed, except for third-pillar savings withdrawn before retirement.
Figure 2.2. Pension spending is relatively low, despite high contribution rates
Source: OECD taxing wedge database; OECD Social Protection and Well-being database; and Eurostat, social protection database.
Figure 2.3. The recent reform is expected to increase sustainability of the pension system
Note: Spending includes first-pillar social insurance pensions but excludes social assistance and state pensions.
Source: Ministry of Finance of Lithuania.
The reform stopped short of introducing an automatic link from life expectancy to the age of retirement, which is seen as the most effective way of maintaining sustainability of the pension system (OECD, 2011). In 14 OECD countries, the current legislation foresees a rise of the age of retirement beyond 65, and several countries Denmark, Finland, Italy, the Netherlands, Portugal and the Slovak Republic) have elements in their pension systems that provide a link from life expectancy to the retirement age (OECD, 2017a). To address the demographic transition, Lithuania should consider an automatic adjustment from life expectancy to the statutory retirement age, as initially planned. However such a reform must be planned carefully as it raises equity concerns since life expectancy – and hence how long a retiree can benefit from the pension – tends to be lower for low-income groups (Cingano, 2014).
The pension reform retained the minimum service years needed to obtain a pension at all to 15, which is relatively high compared to other OECD countries (OECD, 2017a). Pension systems that predicate such a long waiting period may make it difficult for people with shorter working lives or longer career breaks to qualify for a pension. It might also discourage older workers to take up work, especially given high contribution rates, and foster informality. In Lithuania specifically, the waiting period could discourage emigrants from returning to their home country for work. The negative impact of the long waiting period is mitigated since workers delaying their retirement age are entitled to higher pensions. Still the government might wish to assess to what extent the long minimum qualification period has negative consequences for work and employment, especially of return emigrants.
The pension system is redistributive but not targeted at old-age poverty
The average pension-to-wage ratio is around 60%, which is a bit above the OECD average. Yet the pension system is more redistributive than in most other countries, reflected in one of the highest net replacement ratios for low-income earners in the OECD. For example, a person working at the minimum wage will get a pension of around 77% of the former salary, while a person who earned five times the average wage receives only 21% (Medaiskis, 2016). One of the reform objectives of the government was to increase “fairness”, i.e. to strengthen the link between wages and pension entitlements (Rajevska, 2016). The reform lowered the average net replacement ratio, yet the absolute difference in the net replacement ratios between high and low earners remained the same, because of a substantial ad-hoc increase of the basic pension in 2017 (Figure 2.4). The rising significance of pension funds, with no cap on pension entitlements, will likely reduce this difference.
Despite being redistributive, the system is not very targeted at the poor, and the 2017 reform did little to increase pensions for very low incomes. The at-risk of poverty rate of the elderly, defined as the share of people living below 60% of the median income, is more than 25% and thus substantially higher than in most other OECD countries or for other age groups (Figure 2.5). Old-age poverty in Lithuania affects in particular women over 65 who often had lower salaries, shorter contribution periods, and often tend to live in single households because their life expectancy is much higher than men’s. Although the net replacement ratio for low-income earners is high, many pensioners do not receive a full pension because of incomplete or informal work careers. The social assistance pension, to which are entitled those with pensions below a minimum threshold, makes up around 30% of the minimum wage only.
However, additional social benefits targeted at the elderly, such as a heating supplement, add to pension income. Moreover, widespread homeownership, the highest in the OECD, provides further benefits to retirees. Older homeowners have generally paid-off their mortgages and thus fully benefit from not having to pay a rent. If this benefit is taken into account, the economic situation of pensioners in Lithuania is likely to look better. For this reason, the government should consider a rise of social assistance pensions, while ensuring that these pensions are means-tested. Raising minimum pensions is all the more important as the new indexation formula will slow down the growth of pension entitlements going forward. Also, merging the social assistance pension with other social benefits would make old-age social assistance more transparent and simplify administrative procedures for beneficiaries.
Figure 2.4. The Lithuanian pension system is very distributive
Note: The net replacement rate is defined as the individual net pension entitlement divided by net pre-retirement earnings, taking into account personal income taxes and social security contributions paid by workers and pensioners. For Lithuania a 2% contribution to the private funded pension was assumed.
Source: OECD (2018), OECD Reviews of Labour Market and Social Policies: Lithuania, OECD Publishing, Paris.
Figure 2.5. Old-age poverty is high
Source: Eurostat.
Strengthening the second and third pillars
Second-pillar defined contribution pensions are funded by the so-called “2/2/2” arrangement discussed in Box 2.1. The government in 2012 decided to strengthen the second pillar and move to a “3.5/2/2” arrangement by the year 2020, thereby reducing the social contribution rate for the first pillar. Total contributions to the second pillar are projected to reach around 1.3% and pension funds’ assets 56% of GDP in 2060. Contributions to the second pillar are not compulsory - although the decision to do so is irrevocable - and non-contributing households may face income gaps in old age. Having a stronger second pillar is important as first pillar pensions are projected to gradually decline from around 35% to 17% of the former salary, mainly as a result of the new indexation rule. The government should make second pillar contributions compulsory, as is the case in most countries, to ensure that households achieve a sufficient pension level in old age. Funded pensions systems tend to be more sustainable because pension payments rely strongly on available funds, while volatility tends to be higher since pension funds follow the ups and downs of capital markets.
Figure 2.6. Funded pensions are gradually replacing the pay-as-you-go system
Note: Differences in the replacement rate between figures 2.4 and 2.6 are due to different method for calculating pension entitlements after tax.
Source: Ministry of Social Security and Labour, based on EU demographic projections, 2017.
With the growing importance of the second pillar for old-age income support, the government might consider strengthening the effectiveness of pension funds and to ensure that pensions are secured to the extent possible. Pension funds are mostly owned by banks, and households are free to choose among them. As such, the government has to ensure that pension funds are managed sustainably, efficiently and equitably. This would imply: 1) analysing appropriateness of the current restrictions on investment strategies and their sustainability, 2) strengthening the comparability of pension fund offers, 3) making the offering process more efficient, more transparent and more accessible to households, 4) monitoring and analysing direct and indirect costs and fees of pension funds, and 5) continuously surveying competition in the private pension market and identifying and removing barriers to entry (OECD, forthcoming a).
Finally, private third pillar savings are not very important in Lithuania, mainly as a result of low incomes. Less than 3% of the working age population have a voluntary pension savings account and savings are generally small. The government provides incentives for private savings by a relatively generous tax deduction, as 25% of an individual's salary and up to EUR 2 000 per year is tax-deductible. Tax exemptions have a fiscal cost and may distort financial decisions of households. Moreover, since high-income households tend to save proportionally more than low-income households, tax-favoured saving tends to make the tax system regressive, which is exacerbated by Lithuania’s flat personal income tax. Yet tax exemptions can be justified on the grounds that Lithuanian pensions are relatively low and policies to increase saving for old age are welcome.
Health care
As in most countries, an ageing population has substantial implications for the health care system. Health costs tend to increase with life expectancy and a higher share of older people in total population, together with growing incomes and technological progress (Oliveira-Martins and de la Maisonneuve, 2014). Some costs depend crucially on age, such as dementia, whose prevalence rises sharply with age (WHO, 2011). Ageing should however not be seen as the main culprit for growing health costs. In particular, health status and prevalence for diseases are sometimes considered a more important driver for health-related cost than age (Breyer et al, 2015 or Karlsson and Klohn, 2014). Since people are not only getting older but also healthier, a healthier life can partially offset the rising cost of a longer life. And healthy life is amenable to policy.
Indeed, there is growing evidence that with suitable policies and programs people can stay healthy and independent well into old age, while health cost can be kept under control. The longer people can live independently, care for themselves and remain mobile, the lower are the costs of long-term care. Keeping the ability to live without hospitalisation despite of physical malfunctioning also tends to reduce cost. Many elderly require some form of permanent assistance for the most basic activities of daily living, creating a heavy economic and social burden on families and the wider community. Reducing severe disability from disease and health conditions is thus one central element for containing health care costs in an ageing society (WHO, 2011). This chapter gives an overview on challenges of the Lithuanian health care system, its current outcomes, and how to improve them in favour of the elderly.
Health outcomes are still poor but improving
The health care system has undergone important improvements yet health still appears to be a source of dissatisfaction for Lithuanians when assessing their well-being (Figure 2). Life expectancy in Lithuania is among the lowest in the OECD, and the gender gap is larger than in any OECD country (Figure 2.7). Moreover, fewer Lithuanians report that they are in good or excellent health than in the OECD on average. Differences in health status and mortality between rural and urban areas are relatively large, albeit decreasing (Statistics Lithuania, 2016). Lithuania's gain in average life expectancy since 1970 has been four years only, which is lower than in the OECD with more than ten years. In Lithuania life expectancy dropped by 4 years in the late 1980s and early 1990s and only started rising again in the mid-1990s when the economic situation of the country started improving. Life expectancy and healthy years of life are increasing fast by now.
Figure 2.7. Life expectancy is low and the gender gap large
Life expectancy and healthy life at birth, men and women, 2016
Source: Eurostat.
Poor health outcomes are partly the result of life-style factors. Cardiovascular diseases, alcohol and tobacco consumption and accidents are affecting the health status of the population and driving the large gap in life expectancy between men and women. Policies to improve the health status of the population must therefore be broad, including prevention and the promotion of healthier lifestyles for all age groups and both sexes. In 2017 the government increased excise taxes on alcohol and tobacco with the explicit aim to reduce consumption, and restricted the number of sales points. The Lithuanian health strategy 2014-2025 is rightly articulated around a patient-centred and whole-of-life approach which emphasises the importance of tackling the various health determinants, including the role of public health and of prevention (Seimas, 2014). Concomitant action plans detail the activities to be undertaken, although these plans focus too often on whether an action has been taken or not. The government should further strengthen prevention and should put more emphasis on monitoring implemented policies, to understand whether they brought the expected results, and whether they did so efficiently.
Spending on health is low but pressure is looming
Lithuania’s spending on health care is among the lowest in the OECD; even if one takes the country’s low GDP per capita into account (Figure 2.8). Likewise, with around 12% of public spending, Lithuania gives relatively little priority to public health, akin to the other Baltic countries. Still, countries with similar health spending levels achieve higher life expectancy or years of healthy life. This suggests that the effectiveness and efficiency of the Lithuanian health care system and health outcomes could be improved without necessarily having to increase spending, both private and public.
Figure 2.8. Lithuania spends little on health
Source: OECD taxing wedge database; OECD Social Protection and Well-being database; and Eurostat.
The health care system is financially sustainable but some pressure is looming (Box 2.2). In the years leading to the economic and fiscal crisis, health expenditure in Lithuania grew faster than in the OECD, reaching 7.5% of GDP in 2009. The share then declined but as of 2014 total spending accelerated again to outdo average growth in OECD countries (Kacevičius and Karanikolos, 2015). The health care fund turned into deficit, and the share of spending covered by general government rose from less than 20% in 2010 to around 35% in 2013. Health and long term care spending are expected to increase further by 2 to 4.5 percentage points of GDP by 2060 (European Commission, 2015b), driven mainly by long-term care needs, though Lithuania is one of the two countries with the lowest anticipated growth in public health expenditure. Again, more efficient and targeted health care spending could help keep spending pressures under control, while ambitious targets for health status should be maintained, and short term savings that could entail high costs in the medium- to long term should be avoided.
Access to health care is widely universal, and disparities across income groups or between different parts of the country are quite small (Figure 2.9). The number of low-income households foregoing medical treatment for financial reasons is lower in Lithuania than in other Baltic countries and in the European Union as a whole. Households living in rural areas visit primary care providers almost as often as those living in urban areas (Statistics Lithuania, 2015). Rather, hospitalisation is more likely in rural areas, suggesting a lack of outpatient care there (Jurevičiūtė and Kalėdienė, 2016). However, access to medical technologies, measured by number of tests per 1000 population is lower in Lithuania than in OECD countries, including Estonia and Latvia (OECD forthcoming b). Moreover, high emigration rates and a lack of medical personnel in rural areas are thinning out health services. Currently physicians working in rural and remote areas are paid a mark-up and, more generally, will receive a considerable pay rise in 2018, but retain doctors and nurses in Lithuania will remain a challenge for the coming years.
Box 2.2. Main characteristics of the health care financial system
In the late 1990s, Lithuania moved away from a health system mainly funded through state and local budgets to one funded by the National Health Insurance Fund (NHIF). In 2015, the funding of the healthcare system was mainly based on social security contribution (57%), followed by out-of-pocket payments (32%), general government spending (10%) and private insurance (1%). Compulsory health insurance provides a standard benefits package for all beneficiaries. All residents and employed non-permanent residents must pay a health contribution (6% of gross earnings for employees and 9% for the self-employed), plus there is a 9% payroll tax paid by employers. The state covers vulnerable groups (children, elderly, disabled, unemployed, maternity leave), which account for about 60% of the population, resulting in a universal coverage system. Since 1997, the NHIF has been the main financing agent for the health system, accounting for 57% of the total expenditure on health in 2015.
The Ministry of Health is a major player in health system regulation through setting standards and requirements, licensing health-care providers and professionals and approving capital investments. In the 1990s many health administration functions were decentralized from the Ministry of Health to the regional authorities. The 60 municipalities varying in size from less than 5 000 people to over 500 000, became responsible for organizing the provision of primary and social care, and for public health activities at the local level. They also own the majority of polyclinics and small-to-medium sized hospitals, yet concerns exist over whether they have the capacity to effectively govern these facilities. Out-of pocket payments consist mostly of direct payments because the role of private insurance is very small, albeit increasing. Spending on medicines and medical goods represents two thirds of out-of-pocket payments, which is one of the highest shares in OECD countries.
Figure 2.9. Access to health care for all income groups is good
Note: Countries are ranked according to values for total population. The vertical bars show the difference between unmet needs for high- and for low-income households.
Source: Eurostat.
Private out-of-pocket costs represent around 30% of health care spending, more than in most OECD countries. Spending on medicines and medical goods represents two thirds of these costs. Private health insurance is not developed in Lithuania; therefore the bulk of private spending is borne by the individual household. While some out-of-pocket payments for prescribed medicines partly depend on patients choices, such as buying originator drugs instead of a generic version, others are beyond the influence of patients. Even if there is 100% reimbursement, the NHIF pays the pharmacy a reference price while the pharmacy retail price is often higher. As a result, patients may end up paying more than is being reimbursed, which may put a burden especially on older and poor people. The Ministry of Health is now reforming the reimbursement and reference price system, thereby narrowing the difference between reference price and retail price and incentivising the use of generic drugs. New provisions implemented in 2017 helped reduce co-payments by around 20%. However, the government might do more to reduce out-of-pocket costs for patient, e.g. by providing financial incentives for pharmacies that sell generic drugs at cheaper prices (IMF, 2015).
Tackling corruption remains a crucial area for promoting inclusive health in Lithuania. According to a number of studies 35% to 50% of Lithuanians have paid a bribe in exchange for health care services, mainly to “jump the line” for obtaining hospital care (Murauskiene, 2013). The median value of an illicit payment seems to be substantial, estimated to average the annual minimum wage per year, thereby limiting access for people with low incomes, especially the elderly (Stepurko et al., 2015). Measures already taken include an information campaign to change behaviour of medical personnel; making the declaration of additional income mandatory for medical specialists; and the establishment of a hot line to report informal payments (OECD, forthcoming b). According to the Ministry of Finance, all transactions over EUR 3 000 will no longer be allowed to be carried out in cash as of 2018, which is likely to reduce informal payments and the corrosive impact of bribing. Finally, higher wages for doctors and nurses should also reduce bribing.
Health care is still hospital centred
The mix of spending for the different health functions remains an issue. After renewed independence in the early 1990s, Lithuania inherited a health system that was typical of the Soviet Union: it was exclusively public, centrally-planned, financially integrated, hospital-centred and provided services to the entire population (Semashko system). Reforms were first driven by the need to modernise the system and to make it more centred on patients. During the 1990s, the government granted more autonomy to the state hospitals and handed over responsibility for out-patient services and local hospitals to the municipalities. The compulsory health insurance legislation of 1996 introduced a contractual model with a third-party payer (the National Health Fund) and relatively autonomous public and private providers. Over the last 15 years Lithuania has gone some way towards reorganising the hospital sector and reducing its size, and rebalancing service delivery in favour of outpatient care (Figure 2.10).
However the health system remains hospital-centred, to the detriment of outpatient and preventive care. Surveys carried out in different countries suggest that patients, especially the elderly, prefer other forms of care over hospitalisation by a wide margin (Kaiser Foundation, 2017). Yet Lithuania remains with Germany and Austria among the European countries with the most hospital beds, and although their number has continuously declined, most of that decline took place in the 1990s and is now slower than in other countries of the region. Hospitals are often small and occupancy rates are low, driving costs and carrying risks for patients requiring special treatments. In 2016 the government decided that in order to concentrate services in fewer places and to reach a minimum scale, a hospital will no longer be contracted by the National Health Fund if it carries out fewer than 300 births per year or less than 400 major surgeries, which is welcome, but several exceptions to the rule could make it difficult to obtain the desired consolidation. As in most countries, political economy constraints may further slow-down reform vigour: municipalities tend to resist the merger or closure of a local hospital, perceived as reducing both access for older patients and local quality employment (OECD, 2013).
Lithuania will need to consolidate the hospital sector further, both in the interest of patients and cost efficiency. To do so it will probably have to reassign responsibility for health services to a government level above the municipalities. Several countries reorganised their hospitals over the last decade on a territorial scale. In the wake of a comprehensive municipal reform in 2007, Denmark created a regional level responsible for hospital services. Sweden is testing a similar approach, consolidating municipal hospitals in six health regions. Norway reassigned responsibilities for hospitals at the national level around ten years ago, although this looks rather radical an approach for a service that has a strong community appeal. In Finland, hospital boards manage joint municipal hospitals (OECD 2013). Regionalisation would also allow for a better coordination of different health services including hospitals, primary and specialised care and public health centres, while keeping decision-making power close to the local communities.
Figure 2.10. The health care system has undergone deep reforms but is still hospital-centred
Source: OECD Health Statistics database.
Long term care should be developed further
Long term care underwent significant reforms over the past few years. The government’s long term care strategy is to better integrate elderly in their communities, to turn active treatment beds into beds for geriatric and palliative care and to provide hospital care in exceptional cases only. Since 2010, an integrated system of diagnostic, health care, and social services has been created, and in 2013 a programme for integrated nursing and social care at home for disabled and elderly persons started. Targeted grants for social care for severely disabled persons increased by more than 5 times over the past seven years, and the number of recipients who get day care increased by about 40%. Fewer hospital stays would not only favour patient’s well-being, they could also generate substantial savings given the considerable cost of hospital care (OECD, forthcoming b). Long-term care services are more in demand in urban than in rural areas, where the family often takes care of its elderly members.
Nursing is a patient-centred form of long-term care which should be strengthened further. In Finland, Sweden and the United Kingdom stronger reliance on nurses has proven very efficient in providing community services, preventive care and minor illnesses (Stamati and Baeten, 2014). In Lithuania, since 2015, nurses can prescribe medical aids under a physician’s supervision and have been given a greater role in providing services to chronic patients with non-communicable diseases such as lifestyle counselling, self-care and monitoring of health status. More and more primary health care facilities also employ specialised nurses who provide diabetic food care. The number of staff who provides social services and nursing, including long term care, has strongly increased within a few years. The number of institutional care facilities (nursing homes) also increased over the past few years. Finally, a network of around 55 palliative centres takes care for the terminally ill or those that do not wish further medical treatment. These centres were often established in former hospitals. The number of palliative centres is growing, but waiting lists still exist.
Better long term care will probably require a reorganisation of funding. Long-term care is a blend of social and health care policies (Murauskiene et al, 2013). Funding is currently shared between the health insurance fund, pensions, central and local government, charities and private out-of-pocket payments. Such a system is prone to overlap, fragmentation and cost-shifting. In Lithuania, as in many countries, tensions sometimes arise as to whether the national social security system or municipal social services should assume long-term care for low-income earners. Also hospital care continues to benefit from higher public cost coverage than outpatient care, discouraging the intended move from institutionalised towards outpatient care. For instance, the health care fund pays nurses up to 120 days per year, while cost coverage in a hospital is unlimited. Such disincentives should be eliminated. Finally, long term care patients often have access to only one service provider within their municipality, thereby limiting choice and competition (OECD, 2016a). In several Northern European countries, patients receive vouchers that they can use to contract those providers that offer a service package that bests suits their needs. The Lithuanian authorities might want to explore this option as a cost-reducing and patient-centred measure.
Life-long learning and labour market
Life-long learning is a means to raise productivity and competitiveness of firms and employees and can help address the effect of an ageing population (Box 2.3). It helps align workers’ competences with the skills needed on the labour market, especially for the less qualified, and fosters individual employability in older age. Life-long learning is particularly important in a rapidly changing labour environment. For instance, in the very open, export-oriented and fast-moving Lithuanian economy many firms seek employees with specific foreign language skills to follow export markets, and good quality language-training opportunities for adults could help address these shortages (while computer skills seem to be less of a problem). Addressing an ageing labour force through upskilling and lifelong learning is hence a central policy task to maintain productivity and employment.
Box 2.3. Lithuania’s population is declining while employment is increasing
The ageing of the population has marked effects on Lithuania’s labour force. The working-age population – aged 15 to 64 – in the total population is falling by around 1% each year, as a result of lower fertility, growing life expectancy and high emigration. The population decline is partly offset by a rise of participation rates and employment. In particular, labour force participation of the 55-64 years old rose strongly from 45% to 70% over the last 15 years, mainly as a result of the gradually rising retirement age. Labour force participation of older workers in Lithuania today is much above the OECD average.
High employment rates however imply that it will be more difficult to raise them still further in the future. For that reason policy should focus more strongly on the productivity of those who work, by fostering the skills and competences of older workers among others.
Source: OECD Labour force statistics.
Yet life-long learning – or adult training – are underdeveloped in Lithuania, especially among older workers, and the share of older workers with low qualifications is particularly high. The propensity to engage in life-long learning is lower than in the Baltic peers and other Central and Eastern European countries (Figure 2.11). Participation of the unemployed in training programmes remains limited, although about 40% of the Lithuanian unemployed have no professional qualification (OECD, 2017b). Learning and upskilling activities are largely driven by individual employers, but the majority of them does not invest in workers’ training. This might be due to a lack of resources or time and credit constraints facing small and medium enterprises. It may also result from firms’ reluctance to invest in human capital as they might be afraid of losing better-qualified workers to competitors and hence tend to under-invest in training programmes. Indeed the propensity to invest in learning seems to depend on the benefits individual firms can expect from educating and training their workforce, and these benefits depend partly on government policy (Moretti et al, 2017).
Policies to support life-long learning are developing slowly in Lithuania. The only public financial incentive currently available to firms is that training expenses can be deducted from gross wages when paying social security contributions. Employees receive a commuter allowance covering the cost when they attend training away from residence or workplace, a measure that helps workers in rural areas to reach more distant training places. Since 2012, the funding of training through a voucher system has allowed training to better match employers’ requirements, but these training vouchers are only available to the unemployed (OECD, 2017b). Specific training programmes, notably a large part of applied on-the-job training, is limited to jobseekers that have completed vocational training. Yet participation of the unemployed in training programmes remains limited, hardly commensurate with upskilling needs. The new labour code introduced several provisions targeted at lifelong learning, e.g. a study leave of up to five days per year for employees participating in non-formal training, partially covered by the employer.
Figure 2.11. Life-long learning in Lithuania is not well developed
Share of workers in adult training, 2017
Source: Eurostat.
Lithuania should elaborate a broad and flexible programme of lifelong learning and on-the-job training, in particular for older workers. Lifelong learning could be modelled on Estonia’s programme established in 2016, with ambitious but credible targets for participation rates and offering a large variety of training programmes for adult education (OECD, 2017c). Any life-long programme should reflect labour market needs and closely linked to the overall educational system, to ensure consistency. Moreover, training opportunities should be flexible and cover both formal and less formal upskilling activities. To ensure the quality of training courses and their effectiveness in upskilling participants, monitoring of lifelong learning programmes should be strengthened by using certification and ex post evaluation, including of labour market outcomes of participants, to maintain their relevance (Santiago, 2016). To induce older workers to engage in skills upgrading, incentives might be partially linked to age or length of job tenure. Finally, since upskilling needs depend partially on the skills acquired earlier through professional education, upskilling and adult learning programmes should be closely linked to secondary and tertiary education, vocational training and the apprenticeship system.
Broader public financial support is probably needed to help match the demand and supply of skills of older workers, as a skilled workforce has partially characteristics of a public good. Many countries use a combination of tax exemptions, subsidies and direct support of educational institutions to foster life-long learning (OECD, 2017b). Financial incentives are often targeted at specific sectors such as manufacturing, construction, health care or ICT. In Lithuania, a first but important step could be to extend the voucher system - which currently supports only the unemployed - to all workers. The current tax deductions available for employees taking up an upskilling activity could be broadened, maybe graded by age. Another option could be direct financial support to firms that train their workforce, similar to the support given to apprenticeships (OECD, 2018). Spending could be covered by a levy-based fund whereby firms receive support depending on the amount of training they offer. Finally government funding of universities and vocational schools could at least partially be made subject to the amount of joint research and development they undertake jointly with the business sector. The government should regularly assess the need and effectiveness of financial support programmes.
Emigration and immigration
Emigration remains high
Emigration is persistently high. Between 2001 and 2016, more than 15% of the population left the country, and the labour force is decreasing by around 1% per year, contributing to skills shortages. The young are particularly inclined to emigrate, which partly explains why Lithuania is ageing so rapidly. Only a minority of emigrants is returning to their home country, and return emigrants are even more likely to re-emigrate than first-time emigrants, although return emigrants appear to do very well on the Lithuanian labour market (Barcevicius, 2015). Opinion polls indicate that nearly half of the Lithuanian adult population is considering emigration and would like to move abroad for employment, and this share has increased over the past few years (Statistics Lithuania, 2016). Immigration, which could make up for emigration, is picking up only slowly, held back by relatively stringent regulation on immigrant workers, and it is unlikely that in the coming years immigrants may replace those that left the country.
The reasons for Lithuanians leaving the country are mostly economic. Emigration is driven by wage differences with the destination countries and free movement within the European Union, and wage gaps with the main destination countries are closing slowly, so emigration is not expected to decline soon (Westmore, 2014). Short-term economic developments in the home country also affect emigration, as shown by the peak during and shortly after the 2009 crisis (Figure 13). Since more than half of emigrants declare being unemployed, emigration might have contributed to lower unemployment back home and relieved the unemployment benefit system (Statistics Lithuania, 2016). Although the main causes for high emigration remain economic, non-economic reasons also play a role. Some are Lithuania-specific, such as a long tradition of emigration and well-established foreign diaspora networks; a more rural population than in the other Baltics, which is more likely to emigrate; and apparent dissatisfaction with the social and psychological climate in the country (Kumpikaite-Valuniene et al, 2017).
Figure 2.12. Economic factors are driving migration
Source: Statistics Lithuania; and OECD Economic Outlook database.
While the impact of emigration on the labour force is straightforward, the impact on skills and productivity is less clear since official statistics do not register the level of education or professional qualifications of emigrants. A widely-held belief is that the highly qualified are more likely to emigrate. In some sectors such as health care, emigration has indeed led to serious shortages of qualified doctors and nurses, threatening the quality of health care especially for the old. Also, the share of emigrants that leave the country for study purposes may reach up to 25%, pointing at potentially high skill levels (but also at weaknesses in Lithuania’s tertiary education system)(Kumpikaite-Valuniene et al, 2017). A few studies however suggest that the low-skilled are more likely to emigrate, and their emigration could have partially contributed to the observed shortage of low-skilled workers (Sipaviciene and Stankuniene, 2013). By this token emigration could also explain that wages for the low-skilled are rising more rapidly than those for the high-skilled.
Remittances partly absorb the economic effect of emigration. Remittances account for around 3% of GDP, more than in any other country of the region, mainly supporting family members of emigrants in Lithuania’s more rural parts. Their role has been declining over the past few years, reflecting loosening ties between emigrants and their home country and weakening purchasing power in the most important destination countries such as the United Kingdom (Figure 2.13). According to the Bank of Lithuania, remittances become more often used for residential investment but most are still used for consumption especially by low-income households. Business investment based on remittances remains low and could be strengthened, especially to foster small and medium enterprises and business start-ups. The recently passed law on crowd-funding, which promotes alternative forms of financing to banks, could be actively used to tap remittances as a source for business investment in Lithuania (see Chapter 1).
Migration policy should rest on three pillars: 1) taking care of those that stay; 2) reaching out to those that left, and 3) attracting the high-skilled who would like to come. Since Lithuanians emigrate mainly for economic reasons, the main policy to turn the emigration tide is improving the economic situation – policies aimed at stronger and more inclusive growth, higher wages, and higher wellbeing. More than 70% of Lithuanian emigrants would return to their home country if the economic situation improved considerably (Statistics Lithuania, annual emigration survey). Policies that foster inclusive growth would hence benefit both resident citizens and would-be return emigrants.
Figure 2.13. Remittances are declining
Source: IMF Balance of Payments database.
Specific policies could also help address the economic and social consequences of emigration. Lithuanian emigrants are becoming more mobile, moving several times between their home and host country (OECD, 2014). Migration has become a multi-stage process, with emigrants keeping contact with their home country even if they stay abroad for long. Government policies should hence focus on the long term, by strengthening the ties that exist between emigrants, their businesses and their home country. Lithuania has developed the “Global Lithuania Programme” to strengthen links with the diaspora and to facilitate reintegration of return migrants. The programme is however scattered across 14 public agencies and involves more than 20 different activities, and the sums spent on a single activity are relatively small. Lithuania might have a look at Latvia whose programme is more targeted involving fewer activities (OECD, 2016b). The “Global Lithuania Programme” was amended in 2017, to strengthen ties with Lithuanians not intent on returning soon, which is a step in the right direction. Given the central role language plays for both a vibrant diaspora and successful integration after a potential return, education abroad of emigrant children should be strengthened. This could be done along the lines of the partly government-funded Polish “Saturday schools” in the United Kingdom (The Economist, 2017). The government is currently developing a demography, migration and integration strategy, aiming at less emigration and higher return migration.
Immigration rules for the high-skilled are tight
Immigration could partly offset population ageing and a shrinking labour force, especially if immigrants work in high productivity sectors. Immigration has slowly increased over the last decade but remains well below emigration. Raising immigration to levels that would fully compensate for emigration looks unrealistic. However, there is some scope to make immigration more beneficial for the economy. The rules for labour immigration for non-EU labour are tight, although the number of occupations requiring no work permit was extended to 14 in early 2018. Moreover, almost 80% of workers are posted to international freight transport companies, which contribute little to growth and income in Lithuania proper.
Policies to attract high-skilled immigrants were strengthened recently and compare well with other countries of the region (Box 2.4.). The restrictions on high-skilled immigrants entering the labour market through the European visa system (“blue card”) were relaxed, with a number of highly qualified professions now exempt from the labour market test and minimum salaries being lowered. Lithuania also offers a permit category targeting investors, extended in 2017 towards foreign entrepreneurs starting up firms involving development of new technologies or other innovations. The government should continue to ease the immigration rules for high-skilled non-European workers. Finally, enrolment of foreign students is slowly increasing, although the number of students who remain in the country after completion of their studies remains low at around 5%, lower than in Estonia where this rate is at around 20% (OECD, 2018).
Family policy
Family policy is a set of measures to support families, to reduce child poverty, to help parents balance work and family and to increase fertility, with the latter becoming more prominent as a means to counter demographic pressure. Such policy includes measures such as paid parental leave, child benefits, the provision of childcare facilities, as well as family-based tax provisions. Family policy sometimes faces a trade-off between supporting childbearing and supporting female employment, as certain benefits may discourage parents, especially women, to work. The trade-off depends on policy design, and each benefit package has its cost and benefits (OECD, 2011). Overall, more support for childcare seems to have a positive effect on employment since caretaking tends to encourage parents to remain active, and it also tends to raise fertility (Box 2.5).
Lithuania fares quite well with regard to the twin objectives of high fertility and female employment. Fertility is above the OECD average and is again rising slightly, although it remains below the population replacement rate of 2.1 as in almost all OECD countries (Figure 2.14). The labour market participation of women is one of the highest in the OECD, while that of mothers is average, suggesting that many women do not return to paid work after giving birth. Lithuania is the country with the largest share of households where women earn more than their male partner (Thomas and O’Reilly, 2016).
Box 2.4. Policies to attract high skilled workers in neighbouring countries
The countries in Lithuania’s neighbourhood such as Estonia, Latvia and Poland, have developed different approaches to attract immigrants and in particular high-skilled non-EU workers. Conditions for immigrant workers to get a work permit vary greatly.
Estonia’s selective immigration policy is oriented towards attracting the high-skilled. The system is relatively complex and seems have attracted few skilled workers needed on the labour market so far. Conditions to obtain a work permit are strict and vary between permit types. An annual quota on migration of 0.1% of the resident population is in place, which was reached in 2007 and 2016 only. Since 2016 the authorities have relaxed entry conditions for sectors affected by labour shortages, such as ICT. Also, the wage threshold for work permits has been reduced.
Latvia at the beginning of 2018 adopted a list of professions where a substantial shortage of labour is forecast and where skilled foreigners, including immigrants from non-EU countries, are invited to work in the country. The new rules simplify job application procedures. The list includes 237 professions in different sectors (science, manufacturing, electrical technologies, construction, ICT, financial sector, fisheries, air transport, etc.). The share of foreign-born working-age individuals in Latvia with a degree from tertiary education is lower than in other Baltic countries.
Poland’s immigration policy is relatively open and not particularly targeted at high-skilled immigrants. There is a simplified procedure to obtain work permits for citizens of Armenia, Belarus, Georgia, Moldova, Ukraine and Russia. Work permits are mainly used for short-term assignments. Ukrainians accounted for more than half of the work permits and more than 90% of labour inflows based on the simplified procedure.
Over the past few years, all countries have passed reforms that facilitate the immigration of high-skilled workers, relaxing the conditions by which they are allowed to enter the country for work purposes
Source: OECD (2016c); OECD (2017c); OECD (2017d).
Policies to support families were considerably strengthened over the last two years, sometimes to the detriment of women’s participation in the labour market. The 2017 amendments to the Labour Code offer more part-time working possibilities and remote working as well as flexible working schedules. At the beginning of 2018 a new universal child benefit was introduced, complementing the existing means-tested child-benefit system and lifting support above OECD levels. With up to two years, paid parental leave upon birth is rather generous, and even though the government in 2012 added an option to take only one year of leave against a higher payment, the comparatively long leave could dent women’s prospects on the labour market. Incentives to take shorter parental leave should be strengthened, and leave should be split more evenly between mothers and fathers, as in some Nordic countries (OECD, 2017c). Public spending on childcare support remains below the OECD, yet enrolment has increased from below 10% in 2006 to around 30%, which is close to the OECD average.
The government programme rightly states that reconciling work and family life and reducing social exclusion is crucial to meet demographic challenges, raise birth rates and foster well-being of families (Government of Lithuania, 2016). To reach this objective, Lithuania’s family policy should focus on a balanced package of family benefits. All government levels should commit to increase childcare support and the planned investment in childcare facilities, especially in rural areas where access remains difficult. The government might also consider reducing paid parental leave for women somewhat, and to split it more evenly between mothers and fathers.
Box 2.5. Family policy and its effect on fertility and female labour participation
OECD countries use a large set of policies to help families and to increase fertility. Most countries offer paid parental leave, financial support for families with children and support for childcare. Different weights are given to these policies, which result in mixed incentives for continuing paid work while raising children, especially to women. Analysis so far carried out suggests that the various family policy measures can indeed have quite different effects. Reforms of the child benefit system in Germany, Spain and Poland provide some insights. Tentatively, the various family policy measures tend to have the following effects:
Childcare services have a positive impact on female employment and in many studies they have also been found to have a positive impact on fertility (Luci-Greulich and Thévenon, 2013).
Paid parental leave has a positive impact on fertility and can have a positive impact on female employment, provided it does not last too long. Otherwise it can delay the return to work with a negative impact on wages and career prospects for women. In Spain, an extension of job-protected leave and financial incentives to increase employment of mothers seems to have had a sizeable positive effect on fertility (Faré and Gonzalez, 2017).
Regular child benefits tend to have a weakly positive or no effect on fertility (Gauthier, 2007). But they can discourage female labour force participation and employment and they re-inforce traditional family roles (Jaumotte, 2006 or Low and Sanchez-Marcos, 2015). The 1996 reform of the German child benefit programme, which increased cash benefits and tax exemptions, had little effect on fertility except for higher-income families with more than one child (Riphahn and Wyink, 2017). The Polish 500+ child benefit programme of 2016, which doubled child benefit payments to around 3% of GDP, reduced female labour supply considerably (Iga, 2017). The response to child benefits increases with family size, as benefits for the first child are often means-tested while those for higher-order children are not (Milligan, 2005).
One-off financial transfers upon childbirth (birth grant) do not seem to have a significant impact on either fertility or labour force participation.
The tax-benefit-system plays an important role in fertility and labour market outcomes, especially as second earners are often taxed at higher marginal rates than primary earners as a result of means-testing of family benefits. Overall conclusions remain tentative though, and country-specific studies show heterogeneous results suggesting that the effectiveness of policies vary depending on the labour market, institutional environment and cultural context.
Figure 2.14. Both birth rates and female employment are above OECD averages
Note: The Total Fertility Rate (TFR) is defined as the average number of children born per woman over a lifetime given current age-specific fertility rates and assuming no female mortality during reproductive years. The employment rate of mothers is defined as the share of working women between 15 and 64 years with at least one child and the youngest child being either between 3 and 5 years old or up to 2 years old.
Source: OECD Family database; and OECD Labour database.
An ageing society also offers opportunities
The changing demographics also offer benefits and opportunities for sectors and firms that develop products and services for the elderly. The expanding health and long-term care sector will provide additional employment prospects and create business for supplementary services and products. Catering to an ageing population can help local enterprises to discover products and services that can subsequently be exported and attract foreigners to the country. Health care facilities such as specialised hospitals and spas could cater to a growing number of health-oriented elderly tourists. In neighbouring countries providing health care for residents and foreigners has become a core strategy for creating value added at the regional level (Committee for Economic Policy and Strategic Planning of St. Petersburg, 2017). With its beautiful coastline and well-preserved rural areas, Lithuania is well-placed to attract a segment of international health tourists to whom natural beauty combined with high-end services and a secure environment is key for a successful stay.
Box 2.6. Recommendations to address an ageing society
Key recommendations:
Move pension contributions from the pay-as-you-go system (“first pillar”) towards pension funds (”second pillar”), and make payments to pension funds compulsory for all households.
Move the funding of the earnings-independent “basic pension” from the social pension fund to the general government budget (and reduce social security contribution rates accordingly).
Continue rebalancing the health care system by reducing hospital care and fostering outpatient care and preventive care.
Develop a broad and flexible programme of lifelong learning and on-the-job training, in particular for older workers.
Implement effective migration policy, including a focused outreach to emigrants and a less restrictive approach to immigration.
Extend and improve childcare support and foster early education.
Other recommendations:
Introduce an automatic link from life expectancy to the official age of retirement.
Increase social assistance pensions, and strengthen means-testing.
Assess the extent to which the 15-year minimum service period to obtain a pension has negative consequences for incentives to formal work, especially for older workers and return emigrants.
Continue implementing the 2014 plan for long term care by fostering nursing and home care. Expand the number of palliative care centres.
Foster healthy lifestyles by strengthening prevention policies and put more emphasis on monitoring and evaluation of outcomes.
Consider the creation of “health regions” to become responsible for organising and coordinating the various health functions – hospitals, outpatient care, prevention etc. - on their territory.
Provide more financial incentives to firms and employees to take up life-long learning activities if market forces are considered insufficient to ensure upskilling
Strengthen the link between life-long learning and tertiary education, vocational training and the apprenticeship system.
Reduce barriers to immigration, by extending the list of professions that do not require a work permit and by facilitating the procedures for high-skilled workers.
Strengthen incentives to take shorter parental leave, and split it more evenly between mothers and fathers.
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