If Lithuania made its tax system more transparent, like Estonia's, it could collect about €2.5 billion more to its coffers each year, says economist Raimondas Kuodis, deputy chairman of the Bank of Lithuania.
Raimondas Kuodis
© DELFI / Karolina Pansevič

He says that many employees agree to accept off-the-books pay, because they do not realize that the taxes their employers thus save are actually contributions to their retirement savings, according to Kuodis.

"Our tax system is terrible," he said during a discussion about welfare on Thursday, explaining that people perceive their social security contributions as simple tax that the state takes away from them.

"A contribution becomes a tax when there is no clear connection between what you pay in and what you get. However, it would be easy to turn the Social Insurance Fund (SoDra) into a bank where you save money to be used when you retire," Kuodis explains. "How would that change people's incentives to accept off-the-books pay? The current system makes it seem that it's the employer who pays 31% to the Social Insurance Fund, though in fact it's your money. This illusion is a problem - without realizing, people are giving away a third of their salary to their employer by accepting off-the-books pay."

Contributions to the Social Insurance Fund should be made seem like a retirement saving instrument and not a tax.

"The Social Insurance Fund is one of the best twentieth-century inventions that has saved many elderly people from poverty, while private pension funds are not a solution for demographic crises, they are a solution for people themselves," according to Kuodis.

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