Second Pension Pillar: Private Money or Part of Social Insurance?

The second pension pillar issue has again become politically relevant in 2026. Several initiatives, including “ManaBalss” – which had gathered over 26,000 signatures by mid-June – and a draft law by the party “Latvia First” (signature collection from May 2026 to May 2027), demand voluntary withdrawal of accumulated capital. The argument is that this money is private savings unlawfully restricted by the state. However, the actual situation is more complex.

The Saeima considered a collective claim on April 1 but reached no final decision; the matter returned on May 21, again without resolution. The Union of Greens and Farmers proposed a narrower option – allowing funds to be used for medical expenses – but after a government change, the coalition failed to agree.

Legal Nature

Although VSAA records individual capital in each participant’s account, the second pillar is part of the mandatory state pension insurance. The law defines the funded pension as a component of the old-age pension. The Bank of Latvia describes it as a mandatory state-funded scheme, unlike the third pillar, which is a voluntary private scheme. The IMF also refers to Latvia’s model as a three-tier system with a mandatory funded second pillar.

Currently, of the mandatory social contributions, 15 percentage points go to the first pillar and 5 to the second (previously 6%, but from 2025 to 2028 a transitional rate of 5% applies). These funds are not an additional private payment but a portion of the unified social contribution system.

Inheritance Rules

Since 2020, participants can predetermine how their savings are handled upon death. By April 2026, 43% of participants had communicated their choice; of these, 82% opted for inheritance under civil law. Heirs may receive a lump-sum payment or add the inherited amount to their own second pillar. For capital accumulated until end-2019, an 80/20 split applies (20% goes to a special budget).

Constitutional Aspects

In a 2025 case on the temporary reduction of the contribution rate, the Constitutional Court held that in social rights matters, Article 109 provides broader protection than Article 105 (property rights). The court initiated proceedings under Articles 1 and 109, but not under Article 105, indicating that the second pillar cannot be regarded as simple private property.

Economic Arguments

The Bank of Latvia warns that allowing early withdrawal would create a future pension capital deficit. Compensating for this would require raising the social contribution rate to 39% (currently around 34%). Demographic trends worsen: currently there are 2.6 working-age individuals per pensioner, but by 2060 this ratio could drop to 1.4. The IMF also highlights long-term challenges from population aging.

At the same time, recent data show improvements: the equity share in portfolios rose from about 33% to 65%, commission reductions saved approximately €400 million, and Latvia ranked 6th among OECD countries in nominal pension fund returns. The system covers over 1.3 million participants and €10 billion in assets.

Conclusions

The slogan “it’s my money” is partly true – the capital is individualized. However, that does not imply the right to use it at any time. The second pillar is a mandatory social insurance element, not a freely accessible private savings account. Early withdrawal would create long-term deficits that must be covered by taxes or result in lower pensions.