Next year, participants in Lithuania’s second-pillar funded pension system will face a personal financial referendum: to stay and save, to withdraw and leave, to transfer savings to the third pillar of the pension system, or to invest independently. Estonia tried the same approach in 2021, and economists at its central bank assessed the consequences. Estonia’s experience is highly relevant for Lithuania – similar outcomes are plausible here as well.
Estonia’s Experience
So how did the pension reform affect people’s consumption habits in Estonia? Once early withdrawals were allowed, a boom in purchases of goods and services followed immediately – visible already in the first month. Estimates show that people who withdrew their savings consumed almost twice as much as usual within the period, and those under 35 years old consumed even more intensely. Young people spent more than half of their withdrawn retirement savings almost right away, within the first three months. Across all age groups, spending on gambling jumped by 73%, on leisure and entertainment by 96%, and on clothing by 35%.
But a sudden surge in consumption has a price – and not only for those who withdrew their pension savings. Inflation rose by 2 percentage points due to the abrupt injection of money into the market. Price increases were most pronounced in categories such as clothing, home maintenance and repairs, cars, and entertainment. So while those who withdrew the savingscould enjoy new clothes, cars, and other consumer goods, the rest of the population were losers. For them, the reform meant higher prices and reduced purchasing power – simply put, they could afford fewer goods for the same price.
Nearly a third of the withdrawn funds were used to repay consumption loans. However, among young people, the debt level returned to its initial level within nine months, because repaid loans were replaced with new credit. The improvement in personal finances was therefore short-lived. Those who withdrew funds did not start using alternative investment or retirement-saving instruments. Looking across all age groups, after one year, half of the withdrawn money remained in current accounts – these funds were neither spent nor earned investment returns.
A notable conclusion from Estonian economists is that the option to withdraw accumulated savings early will increase income inequality in Estonia relatively soon. This is because those who exited the pension system were mostly lower-income earners. In the Estonian central bank’s assessment, lower-income individuals will receive smaller pensions in the future as a result, because they will lose the funded component of their check. Meanwhile, higher-income earners who remain in the system will continue to benefit from the funded portion of their pension. The consequence is clear: increased income inequality.
Can We Expect The Same Results in Lithuania?
Will Lithuanians who decide to leave the second pillar use their savings for a short-lived consumption spree and then fail to prepare for old age through other means? Not necessarily. Much depends on financial awareness and on the quality of information available to the public. The State Social Insurance Agency has already published a calculation tool to help people decide whether to continue participating in second-pillar pension funds. Funds themselves also play a crucial role – through direct communication with clients and by providing forecasts of how continued saving could translate into a higher pension in the future.
Each person should assess their individual situation: how much has already been accumulated and how much time remains until retirement age. Some people are indeed dissatisfied with the amount accumulated so far and with the state-provided pension annuity. When the pension-saving system began, the average net wage was only €242. Saving a few percent from such a small base – even if funds generated significant returns – does not result in an impressive sum.
But today the situation has changed fundamentally. In 2025, net wages were already six times higher than two decades ago, reaching €1,484. This means that even by saving only a few percent, over several decades, it is possible to accumulate a meaningful amount.
Moreover, now that wages have moved closer to the European average, it would be naive to expect wage growth to continue at the same exponential pace. That makes saving for the future a far more rational decision today than it was when Lithuania joined the European Union more than two decades ago. At the same time, the state’s capacity to pay pensions financed through social insurance contributions will weaken due to very low birth rates. Forecasts suggest that for workers starting their careers in 2024, the pension could amount to less than 30% of their former net income.
In conclusion, participation in the second-pillar pension system is ultimately a personal choice. Nevertheless, it would be unfortunate if Lithuanians treated retirement savings the way some Estonians did – spending money saved for old age on gambling or clothing. Luckily, it is easier to learn from others’ mistakes than to be the first to face the consequences. When deciding whether to continue saving – and whether to withdraw accumulated funds – everyone should weigh the alternatives carefully. One point is worth remembering: our well-being in old age is, first and foremost, not the state’s responsibility, but our own.
Written by Ernestas Einoris is an expert at Lithuanian Free Market Institute.
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