Lithuania is poised to grant citizens greater control over their second-pillar pension savings beginning in 2026, mirroring a recent reform in Estonia. The move, which allows citizens to opt out of the mandatory savings plan or withdraw a quarter of their accumulated funds, is sparking debate over the balance between individual financial freedom and long-term retirement security [[1]]. While proponents cite public dissatisfaction with the system’s returns, international financial institutions have voiced concerns about the potential strain on the state budget and the overall impact on future pensions.
Lithuania is moving to give citizens more control over their retirement savings, following a similar move by neighboring Estonia, but the decision is drawing criticism from international financial institutions. The shift reflects a growing debate across the Baltic states about the best way to secure financial futures for their aging populations.
Changes to Lithuania’s Second-Tier Pension System
Pension systems in Lithuania, Latvia, and Estonia are built on a three-pillar model. The first pillar is a state-guaranteed pension funded by current worker contributions. The second pillar consists of personal savings invested to supplement retirement income. The third pillar is a voluntary fund for those seeking even greater financial security. Until 2021, participation in the first two pillars was mandatory for all employed individuals in the Baltic states.
Estonia was the first to reform its system, allowing citizens to opt out of the second pillar. When the new rules took effect in 2021, approximately 150,000 people – about a fifth of those enrolled – withdrew from the second-tier pension system, accessing more than 1.3 billion euros. Roughly 1.1 billion euros remained with individuals after taxes, with many using the funds for purchases like cars and appliances, while others deposited the money into everyday spending accounts.
Lithuania is now following suit. Starting in 2026, citizens will no longer be automatically enrolled in the second pillar. Those already participating will have the option to leave the system or withdraw up to 25% of their accumulated savings.
“We always follow the Estonian example, so we had to do this. But, more seriously, this pension system has always been perceived negatively by the public.”
There are two main reasons for this, according to Lithuanian Finance Minister Kristupas Vaitiekūnas. “First, it was mandatory, and people didn’t like that. They were included in the second pillar without their consent, without their will. They were simply included. But the second reason is more structural. We started the second pillar system in 2004. And since 2004, the returns from the second pillar have been lower than the returns from the overall economic development.”
Lithuania’s Move Draws Criticism
The decision has been criticized by both the European Commission and the International Monetary Fund, which warn that the reform could reduce future pensions and increase pressure on the state budget as the population ages. Nerijus Mačulis, chief economist at Swedbank in Lithuania, disagrees with the assessment that the second-tier pension system is unproductive.
“The general impression is that most of the population supports this decision. I think it’s freedom to withdraw funds from your pension savings account, even if those funds are intended for use in the future when you retire. However, some people actually want to maintain liquidity and use the money now. A survey shows that most people will not withdraw money, but will continue to save in the second pillar. And perhaps a third of those who are still actively saving money in the second pillar will withdraw funds.”
“We have mixed feelings, because we understand that while this reform will bring some satisfaction and additional funds to people in the short term, it will have negative economic consequences both in the near future and in the long term,” Mačulis explained.
The Finance Minister noted that “some people will spend the money on healthcare, education, housing. All of that is good. Of course, some will spend the money on, for example, mobile phones or vacations, and that is not so good. So there are drawbacks. There are also benefits. It is our political choice.”
Should Latvia Follow Suit?
Following the changes in Estonia, discussions arose in Latvia about whether to adopt a similar approach. A petition was even launched on the “Manabalss.lv” initiative portal, but Latvia did not pursue serious discussions on the matter.
“If the same thing happens in Latvia as in Estonia in 2021 and 2022, and in 2026-2027 also in Lithuania, one of the recommendations would be to use our example of how to replace this structure.
“Because the Estonian example showed that 20-25% of the population withdrew money from the second pillar, and it did not bring anything good for the future. In Lithuania, perhaps it will be a more or less similar or even larger percentage. And let’s see what we will do with this money. But it seems that the same example – as in Estonia – could repeat itself,”
said Regimantas Valentonis, investment manager at Artea Asset Management.
Mačulis added: “Most likely, politicians are looking around and looking for popular decisions, but my only advice is – don’t do it. You are in a favorable position – you can learn from the mistakes made by the Estonians and Lithuanians. And it is always better to learn from the mistakes of others, not your own.”
Not everyone is critical of the idea – some Lithuanian economists believe that the ability to manage one’s own pension savings is a logical and necessary step.
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