In 2021, Estonia performed a €1.3 billion experiment on its own economy. By January 2026, Lithuania is set to do the same – but with a larger population and a much cheaper ‘exit fee’ for its citizens. While reforms look similar on paper, there are key differences that will define the market outcome.
From January 1st, 2026, a new reform regarding the second pillar pension system will take place in Lithuania. As seen in Estonia, this will likely lead to a significant outflow of capital. A majority of these funds will be used to clear debt, purchase consumer goods/entertainment, or be put into bank. The goal of this article is to predict the likely impact of Lithuanian reform on Baltic market. And do so, by comparing both reforms, and touching upon the behavioral distinctions between Estonian and Lithuanian citizens.
REFORMS THEMSELVES
Overall, Estonian reform provided a significantly bigger incentive to stay in the second pillar.
- Government contributions: Estonian government contributes 4% of gross salary, whereas the Lithuanian contribution is merely a 1.5% from national average gross salary from two years prior.
- Flexibility: Estonian reform introduced a Pension Investment Account (PIA), where a person can manage their own portfolio, while at the same time receiving advantages of the second pillar (staying in the system). Lithuanian reform does not provide anything similar.
- Barrier to exit: An Estonian non-retiree who exits the system must pay 20% income tax on withdrawn funds. On the other hand, a Lithuanian is only obligated to pay 3% tax1.
And to add salt to the wound, the Lithuanian reform gives people a window of just 2 years2 to make the decision to exit, or not to exit. This can create a scarcity effect, which may amplify the scale of withdraws, and the tax of 3% will do a poor job in trying to disincentivize such behavior.
THE “AVERAGE JOE” ARCHETYPE
Looking at the financial literacy and investment tendencies of both nations Estonia tops the board. 39% of Estonians have high financial knowledge, while in Lithuania’s case only 25% do3. Investment tendencies are harder to conclude, but by looking at different studies we can create a somewhat clear consensus – the average Estonian is more likely to invest their money than an average Lithuanian. And a quick glance at consumer behaviour shows us that Lithuanian citizens are leaning closer to the consumerism mentality and prefer liquidity (e.g. money in bank accounts). These factors add up to a conclusion – even if the reforms were identical, the probable turnover rate from 2nd pillar fund would be higher in Lithuania.
ADDRESING THE “COVID EFFECT”
Estonian reform took place in the middle of covid crisis, which could have inflated the number of withdraws, although the true impact is vague. Because majority of people who had withdrawn their funds had more debt, and were less financially stable. So they would probably have done so either way. The scale may have been smaller, but to what extent is hard to measure. Thus we will not take covid’s impact into the consideration.
WHAT SHOULD WE EXPECT?
So, how will the Lithuanian pension reform impact the Baltic market? Learning from the Estonia case – the GDP will spike, a good part of loans will be cleared, certain industries will experience a short-lived boom (e.g. retail), demand-driven inflation will stay higher than preferred – that is for the short-run. Long-term is hard to say, as the Estonian reform took place in 2021, and provides a PIA, which has already made a huge difference4. So, the short-term is where we should focus.
By taking into account the population size difference between both nations, and the conclusions made earlier, we can predict that the impact of Lithuania’s pension reform will leave a more noticeable footprint in the Baltic economy – higher capital spill-over, slightly longer/more intense short-term boom, and hightened inflation.