Latvian Pension System Faces Scrutiny as Early Withdrawal Debate Intensifies
The potential for Latvian residents to access their second-level pension savings before retirement is sparking debate, with concerns raised about the stability of the entire pension system. Ināra Pētersone, Vice President of the Latvian Employers’ Confederation and head of the Healthcare Employers’ Association, warned during a TV24 discussion that allowing early withdrawals would lead to the “collapse of the entire pension system.”
Pētersone cited calculations from the Ministry of Welfare, which indicate a declining replacement rate – the ratio of pension income to pre-retirement earnings – as retirement age increases. “The later you retire, the lower the coefficient you will get back,” she explained.
A key point of contention raised by Pētersone centers on the taxation of inherited second-level pension funds. She questioned why a 25.5% personal income tax is applied when funds are inherited by a designated beneficiary, effectively requiring a quarter of the money to be paid back to the state. However, if the remaining family member is added as a beneficiary to the second-level pension and the funds are transferred to their account, no tax is levied. “It’s the same money, but a coercive mechanism has been created,” Pētersone stated. “Although people are told that this is their money and they can do with it as they please, in fact, that is not the case.”
The debate over early access to pension funds comes as Latvia’s second-level pension system has accumulated significant capital. According to Swedbank investment management head Angelika Dobrovolska, as of the end of January 2026, the accumulated capital in Latvia’s second pension level will exceed 10 billion euros – representing one of the largest private savings pools in the country, both individually and at the state level.
Bank representatives argue, as reported by BB.lv, that mass early withdrawals would be a “strategic mistake” that would jeopardize the future financial security of a significant portion of pensioners. Dobrovolska emphasized that these funds are not “free money” but deferred salary intended for retirement.
The concerns echo those seen in Estonia, which implemented a reform of its second-level pension system in 2021. A subsequent study by the Bank of Estonia revealed that 15% of individuals spent the withdrawn funds on everyday needs, 30% used them to pay off consumer loans, and 50% left the money in accounts where it was eroded by inflation. Dobrovolska contends that this decision not only diminished future pensions but also contributed to inflationary pressures as a portion of the pension capital entered consumption.
The broader context, as highlighted by the International Monetary Fund in a 2025 report, is the challenge of ensuring adequate and affordable pensions in Latvia. The country’s three-pillar pension system – comprising an earnings-related public scheme, a funded mandatory pillar, and a private voluntary contributions pillar – faces difficulties in guaranteeing sufficient retirement income and combating old-age poverty. The IMF paper suggests policy options to improve pension adequacy and address future challenges.
The debate also touches on the global trend of aging societies and increasing life expectancy. Dobrovolska points out that central banks and the European Commission are increasingly advocating for increased real pension savings, rather than relying solely on a solidarity-based system. She argues that relying solely on future taxpayers creates a risk of a budget crisis, and Latvia is ahead of many European countries in mandating savings from its citizens.
While the specific details of any potential changes to the second-level pension system remain unclear, the discussion underscores the complex interplay between individual financial freedom, national economic stability, and the long-term well-being of Latvia’s aging population. The potential consequences of allowing early withdrawals are significant, and the debate is likely to continue as policymakers grapple with finding a sustainable path forward.
