Larger SODRA reserve is not a basis for new long-term liabilities

 
In the future, residents’ income in old age will depend even more on the social insurance system. The impact of the changes implemented in 2026 on the country’s pension system and the sustainability of public finances will depend largely on the scale of opt-outs from the second pension pillar. The larger the proportion of the population that opts out of the funded scheme, the weaker the contribution of the second pension pillar to retirement income will become, and the greater the role of the social insurance system will be in ensuring the desired replacement rate. This is particularly relevant when young participants are the ones most likely to withdraw from the funded scheme. As the population ages, this will mean greater pressure to increase the government’s long-term liabilities in the future. This is a fiscal risk that was intended to be managed by establishing the funded pension system in Lithuania. It should be noted that the scale of withdrawals from the second pension pillar is already significant, but it may continue to grow until the period during which residents can make a decision has ended. In that case, the second pension accumulation pillar would become a niche category.

As a result of these changes, SODRA’s reserve will temporarily increase; however, this does not represent additional revenue, but rather future liabilities in the face of demographic challenges.At the end of 2025, the reserve fund stood at approximately EUR 4.5 billion. It is expected that over the next few years, the size of the reserve will be significantly supplemented by contributions from SODRA and the state budget received from second-pillar pension funds. During the first quarter of 2026, approximately EUR 1.3 billion was transferred to SODRA. This creates corresponding long-term liabilities and does not mean that additional revenue has been received that can be used to increase existing liabilities. It is also necessary to take into account the long-term challenges facing the social insurance system, the most significant of which is the inevitable ageing of population. In 2025, there were more than three working-age persons for every elderly person, and by 2050, this ratio is projected to drop to two. This will lead to the emergence of a structural deficit that would have to be financed from the SODRA reserve. An analysis^[2] shows that, with no change in policy, demographic pressures would deplete this reserve entirely before 2050. Additional pension indexation would further accelerate the depletion of the reserve. Based on the results of the first quarter of this year, the SODRA reserve will be replenished by a larger-than-planned amount. However, calculations show that, given the liabilities held at the end of 2025, this will not significantly alter the reserve’s situation in the long term. Higher contributions received from the second pillar would allow the reserve to be maintained for an additional year. It should be noted that the SODRA reserve functions as a cyclical stabilisation tool, not as a source of pension indexation. No separate reserve has been established to address long-term challenges.

Using the savings from state budget incentives to increase basic pensions would pose long-term challenges. It is likely that the state budget will save more than EUR 150 million annually, which would be allocated to incentives for participating in the funded pension system. However, it remains unclear how these resources will be used. Without other measures in place, they would reduce the already substantial state budget deficit and borrowing needs. However, there is debate over using these incentives to increase current pensions, which would create additional long-term liabilities for the pension system. If this were implemented by adjusting the basic pension amount, it would have other consequences as well. A rapid increase in the basic pension amount would weaken the link between the social insurance contributions paid by residents and the benefits they receive. In other words, current workers would have less incentive to pay social insurance contributions. Increasing old-age pensions for all recipients is not well-targeted measure for reducing poverty among people of retirement age. Therefore, it is important to consider measures within the social assistance system.

The increased reserve should not be used for decisions that would raise the long-term level of liabilities without creating sustainable sources of revenue. The larger SODRA reserve following the amendments that have come into effect does not indicate a structurally improved financial condition of the pension system. Contributions from SODRA and the state for participants who have withdrawn from the funded scheme become pension points, which implies future liabilities. Furthermore, following a short-term increase in the reserve, the impact of an aging population on public finances will become apparent. In addition, as the role of the second pension pillar weakens, greater pressure for future pensions will fall on social insurance. Therefore, the fiscal risk during this period is not the increase in the reserve itself, but the unwarranted tendency to use it for decisions that would further increase the state’s long-term liabilities. New liabilities could only be undertaken if they were backed by corresponding sustainable revenue sources. To meet existing liabilities and not neglect other social objectives, such as reducing poverty among the elderly, a combination of various measures is necessary. The independent fiscal institution notes that not only revenue measures are needed, but also structural reforms, particularly those that promote labour productivity and sustainable economic growth. The International Monetary Fund^[3] also discusses maintaining the SODRA reserve in the future. Preserving accumulated first pillar balances would be essential to build buffers against adverse demographic trends and the weakened second pillar.

^[1] SODRA is Lithuania’s State Social Insurance Fund Board, responsible for managing social security contributions and benefits, including pensions, health insurance, and other social support programs.
^[2] Available online: https://www.valstybeskontrole.lt/EN/Post/18749/will-the-sodra-reserve-withstand-the-inevitable-changes-in-lithuanias-demographics.
^[3] Available online: https://www.imf.org/en/news/articles/2026/05/26/mcs052626-lithuania-article-iv-mission.