Second Level Pensions: Lithuania Opens Access to Savings — What Do They Think About It in Latvia 0 8

Estonian Experiment

Back in 2021, the authorities in Estonia took a "bold step" — they allowed residents of the country to withdraw their savings from the second pension level if they wished. The money could be used to pay off loans and leases, as well as other debts, including tax debts, could be used for medical treatment, or even left in a bank account to be gradually spent. Many experts — both in Estonia and beyond — still criticize this revolutionary decision.

Firstly, because it significantly fueled inflation — the withdrawal of several billion euros stimulated price increases for both real estate and all goods and services. Secondly, it created a threat to the stability of social and pension systems.

Thirdly, not all residents (the same situation exists in Latvia, of course) possess financial literacy, and the ability to easily manage a significant amount of money can cause great harm to these residents. For example, upon retirement, they may only rely on a "bare" old-age pension, as their savings account has already been depleted. As a result, pensions will simply not be enough for basic needs, and the state (more precisely, local governments) will need to find ways to help these people.

Withdrawals Allowed, but Not All

One way or another, Lithuania will also open access to its residents' pension savings starting January 1, 2026. But with nuances. Firstly, if significant amounts have accumulated in the savings account, only up to 25% can be withdrawn. The entire amount can only be withdrawn if the money is needed for treatment of a serious illness. If the entire amount is withdrawn by individuals who have not reached retirement age, a 3% tax will need to be paid on the withdrawn funds. If the savings amount does not exceed 10,800 euros, it can be fully withdrawn, but only during 2026 and 2027. People will also be able to voluntarily exit the second pension level system.

Latvian experts have already rushed to criticize their neighbors.

Edgars Volskis, Doctor of Economics, Pension Expert:

"In Estonia, many are already complaining about that decision, as they realized it was a mistake. And in Lithuania, this decision will not lead to anything good.

I don’t know what our politicians are thinking; discussions about the second pension level will surely happen here as well, but I would strongly advise against following the path of Lithuania and Estonia. Latvia's pension system is considered one of the most stable in the world. I think we should not abandon this 'banner'."

Of course, the Lithuanian politicians who made this decision had their reasons. Firstly, the popularity of the second pension level in Lithuania is very low — residents do not believe in the effectiveness of this system: due to inflation "eating away" these savings, and because a large portion of the savings is used outside the country, meaning it does not flow into the Lithuanian economy, and because, unfortunately, not everyone lives to retirement age to benefit from these savings.

A Few Words About Our System

But let’s turn to our second pension level system. Let’s recall that 5% of the gross salary of every working Latvian is transferred monthly to the second pension level account. The system has been in operation since 2001, and its goal was to create additional pension savings for working Latvians (mandatory contributions were introduced for all Latvians aged 30 and older) or, more precisely, to create their own pension capital. The funds of the second pension level are managed by commercial banks and pension financial institutions that have the appropriate license.

The funds are invested in various investment projects — mainly or almost always in projects abroad. However, in recent years, at least conservative plans have not been yielding profits, most often resulting in losses. Nevertheless, a certain amount can be saved for retirement, which will increase the pensions of Latvians. We understand that with modest salaries for most workers in Latvia, it is unrealistic to expect a decent pension in old age.

Learning from Neighbors' Mistakes

Rumor has it that discussions about whether to follow the example of Estonia and Lithuania will soon begin in the Latvian government. Apparently, the opposition in the Saeima, especially considering the elections, will not be idle and will try to get ahead — proposing their changes to the Law on Funded Pensions. Perhaps those experts are right who oppose allowing the population to fully withdraw and freely manage their second pension level savings. This will further fuel the already high inflation in Latvia, and most importantly — ultimately harm those who will simply "spend" this money immediately — for example, buying a car or spending these savings on travel and expensive clothing.

Perhaps it is worth considering allowing residents to withdraw some portion of their savings, but not just to spend on a lavish lifestyle, but for specific purposes. For example, if surgery or treatment (for example, abroad) is genuinely needed, if there is an urgent need to pay off mortgage debt that arose for objective reasons (a sharp decline in income), or for education (themselves or their children), or as a down payment for obtaining a mortgage for a primary residence. With such a reasonable approach, an epidemic of inflation or a collapse of the pension system is unlikely to occur.

In any case, regardless of whether we follow the example of our Baltic neighbors, the question of the effective use of second-level savings remains relevant. Only a tiny portion of these savings is invested in the Latvian economy, and the capital market does not feel the presence of these funds at all. As for the radical solution — the right to withdraw savings before reaching retirement age — it is unlikely to be adopted anytime soon. Although in the run-up to elections, politicians may feel tempted to rush…