Will early withdrawal from the second pension level be allowed? Or only for the sick? 0 20

Until 2021, participation in the 1st and 2nd pension levels was mandatory for residents of all three Baltic states. Estonia was the first to implement a reform, where about 150,000 people opted out of the 2nd pension level - approximately one-fifth of all participants. They withdrew more than 1.3 billion euros, with many using this money to purchase cars or household appliances.

In Lithuania, starting from 2026, residents will no longer be automatically registered for the 2nd pension level. Those already registered will be able to exit the system or withdraw up to 25% of their savings.

The head of the Lithuanian Ministry of Finance, Kristupas Vaitekunas, explained to Latvian television that the 2nd pension level has always been perceived negatively in society, as people were unhappy about being made participants without their consent.

What about Latvia? Should it follow the example of its closest neighbors?

A Ministry of Welfare official responsible for pensions responded to the LSM.lv portal quite briefly: "Currently, discussions are ongoing with specialists in this area. Amendments to the law on state-funded pensions will be made after the most acceptable solution is found."

In the first half of the year, information emerged that the Ministry of Welfare plans to promote amendments to this law, allowing individuals to exit the 2nd pension level two years before retirement age and transfer their savings to the 1st level.

Bank of Latvia economist Oleg Tkachev noted that the changes in Estonian and Lithuanian laws have received well-deserved criticism from local economists (including from the central banks of both countries) and from international financial organizations, including the IMF. He called this case "one of those relatively rare instances where Latvia should not follow the example of Estonia and Lithuania."

Earlier in his blog, Tkachev explained that the returns of the 1st pension level depend on the development of the Latvian economy and the dynamics of Latvia's population, while the 2nd level depends on processes in international financial markets.

"Unfortunately, soon demographic problems in Latvia will become more pronounced, and the second level of pensions will play an important role in maintaining the long-term stability of the pension system," the economist stated.

If early withdrawals from the 2nd level account are allowed or if they are transferred to the 1st level, the future income of the pensioners themselves will effectively be at risk.

"Moreover, it should be understood that this opportunity will most likely be utilized by people with lower income levels. Thus, their pensions in the future will become even smaller, deepening the income gap and contributing to poverty. To ensure a minimum living standard for pensioners with very low income levels in the future, taxes will have to be raised. Essentially, this will be nothing more than a one-time government subsidy at the expense of an indirect increase in government debt, as the obligations taken on by the state will have to be repaid," emphasized Tkachev.

He also reminded that the Latvian pension system is internationally recognized as one of the most progressive in the world and that the mission of the Bank of Latvia is to work on improving the existing system, rather than "breaking it with thoughtless decisions."

Professor Inna Steinbuka from the University of Latvia also believes that if pensions are allowed to be managed in this way, it will exacerbate financial problems in the future. There are many pensioners in Latvia at risk of poverty, and "such prospects may seem demotivating and contribute to discussions about early withdrawals and their spending on everyday consumption. But they may, on the contrary, prompt consideration that savings need to be significantly increased, as future pensioners will be supported by a much smaller number of taxpayers. Unless, of course, there is a global technological leap that changes the approach to the pension system as a whole."

The professor recommends not changing the law and adhering to the IMF's recommendations. "In Lithuania, the reform provides for the possibility of withdrawing savings in the case of serious illness. Perhaps this option should be considered, as it could enhance the freedom to manage one's funds in a critical situation and would not create a shock for the macroeconomy as a whole," the expert stated.