Currently in Latvia, signatures are being collected for a draft law “Amendments to the State Funded Pensions Law,” which would allow withdrawal of second-pillar pension savings. In connection with this, the experiences of Lithuania and Estonia are frequently cited in public discourse. Although the Baltic states’ second-pillar pension 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 do the Baltic states’ second pillars have in common, and where do they differ?
The Baltic states built their second pension pillars around a single idea — to invest a portion of social contributions in financial markets, so that future pensions would be less dependent solely on the changing ratio of workers to retirees and would be more grounded in long-term investment returns. However, the principles governing these contributions differ substantially between Latvia, Lithuania, and Estonia.
In Latvia, the second pension pillar is fully integrated into the social insurance system. Of the total mandatory state social insurance contribution rate (20%), 5% is directed to the second pillar. This means a person need not make any additional payments from their own pocket, and their net salary does not decrease because they participate in the second pillar. The social contribution a person makes is simply split between the first and second pillars. In practice, this means savings accumulate automatically and without any additional financial burden today.
Lithuania takes a different approach. Until the beginning of 2026, the pension system operated on an auto-enrolment principle, though a person could opt out or withdraw. From the start of 2026, participation in the second pillar is entirely voluntary. Crucially, in Lithuania the social contribution a person makes is not split when building pension savings. The employee makes an additional contribution of 3% of their gross salary, to which a state supplement of 1.5% of the national average wage is added. Participation in Lithuania’s second-pillar system therefore represents a conscious choice to reduce today’s income in order to save more for the future — with the state providing an incentive to do so.
Estonia takes a similar approach. The state directs 4% of social contributions only when the employee themselves makes additional contributions from their gross salary — they may choose to contribute 2%, 4%, or 6%. In Estonia, too, the system is now voluntary — a person may choose not to participate or may withdraw.
From a participant’s perspective, this difference is highly significant. In Latvia, second-pillar participation requires no additional payments from the individual’s own pocket, as the overall tax burden does not change. In Lithuania and Estonia, by contrast, participation in the second pillar represents a real choice to pay more today and consciously reduce current income.
This is precisely the key distinction that must be kept in mind in Latvia’s current debate. In Lithuania and Estonia, people are largely withdrawing or discontinuing the additional savings they voluntarily built themselves. In Latvia, second-pillar savings are formed from a portion of mandatory social contributions earmarked for providing a pension in old age.
The overarching goal of all pension systems remains the same — to ensure that people have adequate income after reaching retirement age. The primary criterion by which any reform should be judged is whether the system is capable of providing a sufficient pension to the majority of society over the long term. In essence, a pension system is a mechanism that helps people accumulate a portion of their regular employment income until a future point when they will no longer earn it.
What is happening in Lithuania, and what does Estonia’s experience show?
In Lithuania, second-pillar funds are currently being withdrawn, as permitted by the reform launched last year. A misleading impression often arises in public discourse that people are simply “withdrawing their entire second-pillar savings.” In reality, that is not the case, and certain restrictions apply.
A person may receive:
- their own additional contributions made to the second pillar (3%);
- the returns earned on those contributions.
The state-contributed portion, however, is not paid out in cash. The state redirects it to the individual’s first-pillar pension account and continues to uphold the principle that state co-financing continues to serve the pension purpose.
According to information available to Latvijas Banka, within the first three months approximately 37% of Lithuanian second-pillar participants applied to receive their funds. As a result, total accumulated savings fell by roughly 40%. Although a modest increase in public interest in deposits and investments was observed following the reform, it is already evident that a substantial portion of withdrawn funds was used for immediate consumption and short-term debt repayment.
Estonia had a similar experience earlier, when in 2021 it introduced a considerably more voluntary second-pillar model and allowed people to withdraw their accumulated savings. There too, a very large share of participants initially chose to withdraw their money. Approximately one third of participants either left the system or withdrew their savings, and in total several billion euros were paid out from pension funds.
Subsequent assessments by Estonia’s central bank and other institutions showed that a significant share of the money was used for everyday consumption, loan repayment, and real estate purchases — not for long-term investment or building new pension savings.
This once again highlights the central dilemma of pension systems — long-term savings very frequently compete with people’s immediate needs. That is precisely why many countries impose restrictions and special conditions on pension savings, to ensure that accumulated funds genuinely serve the purpose of providing a pension in old age, rather than short-term consumption.
It is important to understand that “withdrawing funds from the second pension pillar” means fundamentally different things across the Baltic states, given their differing system structures.
In Latvia, it would mean relinquishing a portion of savings formed from mandatory social contributions and intended to provide a pension in old age. In Lithuania, it means accessing the additional contributions the individual themselves made (3%) and the returns on their investment, with the state supplement redirected to the first pillar. In Estonia, it means the ability to exit or partially withdraw savings built through the individual’s own additional contributions (2–6%) and state co-participation.
In other words, in Latvia the discussion concerns the mandatory portion of pension savings; in Lithuania, voluntarily built additional savings; and in Estonia, participation in the system as a whole, with an additional contribution component.
What does this mean for Latvia?
The debate about allowing withdrawal of second-pillar pension savings is not merely a question of individual choice. It is also a matter of long-term social and fiscal stability for the state.
The current petition initiative is largely grounded in the argument that people themselves know best how to manage their own money, and that the state should trust people more to make decisions about their savings. In many cases this is an understandable argument, particularly at a time when part of society is living under financially strained circumstances, facing high housing costs, loan obligations, and rising everyday expenses. In such a situation, the ability to access accumulated funds seems logical and justified to many.
The Lithuanian and Estonian experiences also show that from the perspective of people’s current situation, they are by and large acting rationally — paying down debts, making larger purchases, improving their homes, or simply trying to stabilise their financial situation. The problem is that these individually rational short-term decisions do not always align with the long-term needs and goals of the pension system — or indeed of the individuals themselves.
In the Baltic states, a strong social contract between the state and society continues to operate — people expect the state to take care of them in old age. When retirement income is insufficient, people turn to municipalities, politicians, and state institutions for assistance, and to some extent such support is indeed provided. This is how it works today, and there is nothing to suggest that these societal expectations will change significantly in the future.
This differs substantially from the situation in, for example, the United States, where much greater personal responsibility for pension savings, health insurance, and financial security in old age has traditionally rested with the individual.
That is precisely why the principle of automatic enrolment is widely applied in pension savings worldwide. Behavioural economics shows that the majority of people are unable to build long-term savings with sufficient discipline, as they give priority to immediate needs. Retirement seems too distant to young people, while everyday expenses feel far more pressing. There is also a fairly widespread belief that “we won’t live to see retirement anyway,” which further reduces motivation to save over the long term.
Countries therefore seek mechanisms to automatically engage people in savings. Such systems operate in the United Kingdom, Sweden (the state-managed AP7 Såfa fund), New Zealand, Denmark, and elsewhere. These systems are grounded in the recognition that without automatic enrolment, most people will not build adequate long-term savings.
If Latvia were to choose to make the second pillar fully voluntary or to permit widespread withdrawal of funds, this would have long-term consequences and a significant impact on the country’s social and fiscal situation. Calculations show that people who exit the second pillar and retire in approximately 20 years could have pension income roughly 30% lower than those who remain in the system and continue regular, automatic saving.
This would simultaneously mean greater inequality. Those who are more financially literate and systematically build savings and investments will be able to secure a considerably higher standard of living in old age. A large segment of society, however — relying solely on the first pillar and making no additional savings — risks falling into poverty.
At this point the central question arises, one we cannot avoid answering. If Estonia is moving in a direction where a higher pension can only be secured through additional personal contributions, and Lithuania is moving toward a model where greater freedom also means greater individual responsibility for savings — is Latvia prepared to develop a third, distinctly Latvian approach? And if so, what should it look like?
Would it be a system with greater state involvement, emphasising automatic saving, stability, and protection against the impact of short-term decisions? Or would it be a model in which a greater share of responsibility for retirement income is consistently transferred to the individual — with the assumption that they are sufficiently financially literate, disciplined, and capable of making sound decisions to ensure their own wellbeing in old age?
These are clearly serious questions about a state-level determination regarding the long-term social model of the future — about how much responsibility the state assumes for the stability of citizens’ retirement income, and how much it leaves to their own responsibility and judgment.
At the same time, it must be recognised: if the current automatic savings system is substantially weakened or dismantled, another will sooner or later need to be built in its place. International experience shows that systems relying solely on individual initiative and voluntary saving do not, over the long term, provide adequate pension income for a large portion of society. That is why an increasing role is being assigned in many countries to employer involvement in pension savings. This, however, is not a straightforward process — it will mean additional burdens on employers and more complex system governance.
The debate, therefore, is not merely about the ability to withdraw money today. It is a debate about what kind of system Latvia wants and will be able to sustain in the future, and how effectively it will be able to ensure an adequate pension for a broad segment of society.
That is precisely why the decision on the second pension pillar is in reality far broader than a decision about withdrawing savings today. It is a decision that will shape Latvia’s social reality 20, 30, and many more decades from now. The proposed legislative amendments in fact constitute a serious pension system reform — one that it would be irresponsible to push through hastily, without debate, without analysis of potential consequences, and without a clear vision of the social reality in which we will live in the future.
Author: Evija Dundure, Head of the Insurance and Pension Supervision Department, Latvijas Banka
Source: bank.lv
(Translates using artificial intellect tool)
