The year 2025 was decisive for Lithuania – not only geopolitically, but economically. Defence spending increased significantly, while tax and pension reforms reshaped the policy landscape. Yet beneath these headline decisions lies a deeper question, one that extends far beyond Lithuania: are we strengthening the foundations of long-term prosperity, or shifting responsibility ever further towards the state?
In 2026, several key indicators will provide the answer.
Demography and the Sustainability of Pensions
The relationship between the working population and pensioners is becoming increasingly strained. According to projections by the Organisation for Economic Co-operation and Development (OECD), Lithuania’s working-age population will decline by 30 per cent by 2050. The ratio of workers to pensioners, currently around 3:1, is expected to fall to 2:1. At present, the average public pension replaces just 38 per cent of previous earnings — the second lowest rate in the European Union.
A replacement rate of 70–80 per cent is typically considered necessary to ensure a dignified retirement. Against this backdrop, the recent easing of participation in the second pension pillar raises an important question: will withdrawn funds be redirected into long-term savings, or absorbed into short-term consumption?
If the latter prevails, the immediate effect may be a modest stimulus to demand – but at the cost of higher inflation and weaker financial security in the decades ahead.
Demography compounds the challenge. Although 63,000 additional people settled in Lithuania in 2025, projections suggest the population will decline to 2.7 million by 2050 – a 7.3 per cent drop compared with the beginning of last year.
According to United Nations data, Lithuania will experience one of the steepest relative population declines globally over this period. In this context, sustainable and well-managed labor migration will become critical not only for business competitiveness, but also for the viability of publicly financed pensions.
Labor Market Signals: Shortages Amid Unemployment
Another warning sign lies in the labor market. Since the pandemic, unemployment has fallen from 9.3 per cent in the third quarter of 2020 to 6.6 per cent in the third quarter of 2025. At the same time, the job vacancy rate has risen from 1.4 per cent to 2.2 per cent. This combination – labor shortages alongside persistent unemployment – suggests structural problems rather than cyclical weakness.
A relatively generous social benefits system may, in some cases, reduce incentives to re-enter employment or retrain. Lithuania again ranks first in the EU in terms of the unemployment trap rate: for some individuals, returning to work may not significantly increase disposable income.
The consequences are long-term. Prolonged detachment from the labor market makes reintegration increasingly difficult. In some cases, reliance on benefits becomes intergenerational. Such well-intentioned social protection risks undermining both personal independence and economic competitiveness, as businesses face growing labor shortages.
LFMI estimates that employing at least half of those currently receiving unemployment benefits would generate annual savings of over €274 million for the national budget. Yet the 2026 budget prioritises faster growth in social spending, with benefits increasing by 5–6 per cent rather than the previously planned 1 per cent.
Rising Debt and Limits of Borrowing
Public debt presents another critical indicator. In 2026, Lithuania’s debt is projected to increase by €6.4 billion, potentially reaching €50 billion by 2028. Higher defence expenditure may be unavoidable in the current geopolitical climate, but borrowing must be accompanied by structural efficiency reforms.
This includes reviewing underutilised state land, divesting non-core public assets, and streamlining administrative processes. Fiscal sustainability cannot rely indefinitely on new debt issuance; it requires measurable improvements in public sector efficiency – in time, cost and outcomes.
Civic Examination
Demography, pensions, labor market participation and public debt are not merely technical indicators. Together, they reveal how responsibility is distributed between individuals and the state.
So far, the balance appears to be shifting towards greater reliance on government solutions. Yet long-term prosperity depends on active citizenship: individuals taking responsibility for their own savings, employment and contribution to society.
The most important examination of 2026, therefore, will not be fiscal or demographic – it will be civic. Whether in Lithuania or elsewhere, the central question remains the same: will we choose independence and productivity, or passive dependence?
Written by Martynas Gruodis, Head of Partnerships, Lithuanian Free Market Institute
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