No Significant Pension System Reforms Should Be Rushed

20.05.2026.

Articles

Currently, a signature collection is underway in Latvia regarding the draft law "Amendments to the State Funded Pension Law," which provides for the possibility of withdrawing pension 2nd tier accumulations. In this context, the experience of Lithuania and Estonia is often cited in the public sphere. Although the Baltic countries' pension 2nd tier systems share a common goal, their structure and financing principles differ significantly. It is precisely these differences that determine what the withdrawal of funds actually means in each country.

What is common to the Baltic countries' pension 2nd tier and what are the differences?

The Baltic countries have established the pension 2nd tier with a unified idea – to invest a portion of social contributions in financial markets so that future pensions are less dependent solely on changes in the ratio of workers to retirees and are more based on long-term investment returns. However, the principles of making these contributions differ significantly in Latvia, Lithuania, and Estonia.

In Latvia, the pension 2nd tier is fully integrated into the social insurance system. Of the total mandatory state social insurance contribution rate (20%), 5% is allocated to the pension 2nd tier. This means that a person does not have to make any additional contributions and their net salary does not decrease, because they have made a decision to participate in the pension 2nd tier. Thus, the social contribution made by a person is distributed between the pension 1st and 2nd tiers. In practice, this means that the accumulation is formed automatically and without additional financial burden today.

The approach in Lithuania is different. Until the beginning of 2026, the pension system operated on the principle of automatic enrollment (auto-enrolment), but a person could opt out or withdraw. However, since the beginning of 2026, participation in the 2nd pension tier is completely voluntary. The most important thing is that in Lithuania, when building pension accumulations, the social contribution made by a person is not split. The worker additionally makes a contribution of 3% of their gross salary, to which the state supplement of 1.5% of the average salary in the country is added. Thus, participation in Lithuania's pension 2nd tier system means a conscious choice to reduce one's current income to accumulate more for the future, while the state stimulates this.

A similar approach is also in Estonia. The state allocates 4% of social contributions only if the worker themselves makes additional contributions from their gross salary. They can choose to contribute 2%, 4%, or 6%. In Estonia as well, the system is now voluntary – a person can choose not to participate or withdraw from it.

From the participant's perspective, this difference is very significant. In Latvia, to participate in the pension 2nd tier, a person does not have to make additional payments from their own pocket, as the total tax burden does not change. In contrast, in Lithuania and Estonia, participation in the 2nd pension tier means a real choice to pay more today and consciously reduce one's current income.

This is precisely the significant difference that must be taken into account in Latvia's current discussion. In Lithuania and Estonia, people largely withdraw or stop their own voluntarily created additional accumulations. In Latvia, however, the pension 2nd tier accumulation is formed from a part of mandatory social contributions intended for pension provision in old age.

The fundamental goal of all pension systems is the same – to provide citizens with sufficient income after reaching retirement age. The main criterion by which any reform should be evaluated is whether the system can long-term provide a sufficient pension amount for the majority of the population. Essentially, a pension system is a mechanism that helps citizens save a portion of regular work income until the future time when they will no longer have it.

What is happening in Lithuania, and what does Estonia's experience show?

In Lithuania, the withdrawal of funds from the pension 2nd tier is currently taking place, as such an opportunity is provided for in the reform launched last year. In the public sphere, there is often a misleading impression that people simply "withdraw all of their 2nd pension tier accumulation." In reality, this is not the case, and there are certain restrictions.

A person can receive:

their additional contributions made to the 2nd pension tier (3%);

profit earned from the contributions made.

The state-supplemented portion is not paid out in cash. The state allocates it to the person's pension 1st tier and continues to implement the principle that state co-financing will continue to serve the purpose of the pension.

According to information available to the Bank of Latvia, in the first three months alone, approximately 37% of Lithuania's pension 2nd tier participants applied to receive cash. As a result, the total amount of accumulations decreased by approximately 40%. Although a slight increase in residents' interest in deposits and investments has been observed after the reform, it is already visible that a significant portion of the withdrawn funds was used for immediate consumption and covering short-term obligations.

Estonia had similar experience previously, where in 2021 it introduced a much more voluntary pension 2nd tier model and allowed people to withdraw accumulated funds. Also there, a very large portion of participants initially chose to withdraw money. About one-third of participants withdrew from the system or withdrew their accumulations, and a total of several billion euros were paid out from pension funds.

Estonia's central bank and other institutions' evaluations later showed that a significant portion of the money was used for daily consumption, debt repayment, and real estate purchase, rather than long-term investments or forming new pension accumulations.

This again highlights the central dilemma of pension systems – long-term accumulations very often compete with people's current needs. This is precisely why in many countries, restrictions and special conditions are set for pension accumulations to ensure that the accumulated funds truly serve the pension for old age, rather than short-term consumption.

It is important to understand that "withdrawal of funds from the pension 2nd tier" in the Baltic countries essentially means different things, because the structure of the pension systems themselves differs.

In Latvia, this would mean giving up a part of the accumulation that is formed from mandatory social contributions and is intended for pension provision in old age. In Lithuania, this means access to the person's own additional contributions (3%) and profit from their investment, and the allocation of the state supplement to the pension 1st tier. In Estonia, this means the opportunity to withdraw or partially withdraw accumulations formed by the person making additional contributions themselves (2–6%) and receiving state participation in the accumulation.

Thus, in Latvia, it is a matter of the mandatory part of the pension accumulation, in Lithuania – of a voluntarily created additional accumulation, and in Estonia – of participation in the system as a whole with an additional contribution component.

What does this mean for Latvia?

The discussion about the possibility of withdrawing pension 2nd tier accumulations is not just a matter of individual choice. It is also a problem of the state's long-term social and fiscal stability.

The basis of the current signature collection initiative is largely the argument that people themselves know best how to act with their money, and that the state should trust people's ability to make decisions about their accumulations more. In many cases, this is a understandable argument, especially at a time when part of the public lives in economically tight conditions, faces high housing costs, credit obligations, and rising daily expenses. In such a situation, the opportunity to access accumulated funds seems logical and justified to many.

The experience of Lithuania and Estonia also shows that from the perspective of people's current situation, they mostly act rationally – paying off debts, making larger purchases, improving their home, or simply trying to stabilize their financial situation. The problem is that these individual and rational short-term decisions do not always coincide with the long-term needs and goals of the pension system and the person themselves.

In the Baltic countries, a strong social contract still operates between the state and society – people expect the state to take care of them in old age. If income is insufficient in old age, residents turn to the municipality, politicians, and state institutions for help, and to some extent such support is provided. This is how it happens today, and nothing suggests that these societal expectations will change significantly in the future.

This differs significantly from the situation, for example, in the United States, where much greater responsibility for pension accumulations, health insurance, and financial security in old age traditionally falls on the person themselves.

This is precisely why the principle of automatic enrollment (auto-enrolment) is widely used in the world for forming pension accumulations. Behavioral economics shows that most people are not disciplined enough to form long-term accumulations, as they prefer current needs. Pension seems too distant to young people, while daily expenses are much more relevant. There is also a fairly widespread belief that "we won't live until retirement," which further reduces the motivation to accumulate long-term.

Therefore, states are looking for mechanisms to automatically involve people in forming accumulations. Such systems operate in the United Kingdom, Sweden (the state-managed AP7 Såfa fund), New Zealand, Denmark, and elsewhere. These systems are based on the insight that without automatic enrollment, most people will not form sufficient long-term accumulations.

If Latvia chose to make the pension 2nd tier completely voluntary or allow widespread withdrawal of funds, it would have long-term consequences and a significant impact on the state's social and fiscal situation. Calculations show that people who withdraw from the 2nd pension tier and retire after approximately 20 years could have approximately 30% lower pension income than those who remain in the system and continue regular and automatic accumulation.

This would simultaneously mean greater inequality. More financially literate residents, who systematically form accumulations and investments, will be able to ensure themselves a significantly higher standard of living in old age. In contrast, a large part of the population, which will rely only on the pension 1st tier and not form additional accumulations, risks falling into poverty.

At this moment, the main question arises, from which we must not avoid answering. If Estonia is moving in a direction where a larger pension can be provided only through the person's own additional contributions, Lithuania is moving in a direction where greater freedom means also greater individual responsibility for forming accumulations, is Latvia ready to develop a third – its own approach? And if so, what should it be?

Would it be a system with greater state involvement and emphasis on automatic accumulation, stability, and protection against the influence of short-term decisions? Or would it be a model in which the majority of responsibility for income in old age is consistently transferred to the person themselves, with the assumption that they are sufficiently financially literate, disciplined, and capable of ensuring themselves the necessary comfort in old age?

It is clear that these are serious questions about state decision-making regarding the future long-term social system model – about to what extent the state assumes responsibility for the stability of citizens' income in old age and to what extent it leaves it to their own responsibility and decision-making.

At the same time, it must be recognized: if the current automatic accumulation system is significantly weakened or destroyed, another will have to be created in its place sooner or later. International experience shows that systems based solely on people's individual initiative and voluntary accumulation do not provide sufficient pension income for a large part of the population in the long term. Therefore, in many countries, an increasing role is being given to employer involvement in forming pension accumulations. However, this is not a simple process. It will mean an additional burden on employers and more complex system management.

Therefore, the discussion is not just about the possibility of withdrawing money today. It is a discussion about what system Latvia wants and will be able to maintain in the future and how effectively it will be able to provide a sufficient pension for a broad part of the population.

This is precisely why the decision on the pension 2nd tier is actually much broader than the decision on withdrawing accumulations today. It is a decision that will determine Latvia's social reality after 20, 30, and many more decades. The mentioned amendments to the law actually mean a serious pension system reform, which should not be rushed without responsibility, without discussion, without analysis of possible consequences, and without a clear vision of what social reality we will live in the future.