PIWI proteins are known as mediators of transposon silencing in animal germlines but are also found in adult pluripotent stem cells of highly regenerative animals, where they are essential for regeneration. Study of the nuclear PIWI protein SMEDWI-2 in the planarian somatic stem cell system reveals an intricate interplay between transposons and cell differentiation in which a subset of transposons is inevitably activated during cell differentiation, and the PIWI protein is required to regain control. Absence of SMEDWI-2 leads to tissue-specific transposon derepression related to cell-type-specific chromatin remodeling events and in addition causes reduced accessibility of lineage-specific genes and defective cell differentiation, resulting in fatal tissue dysfunction. Finally, we show that additional PIWI proteins provide a stem-cell-specific second layer of protection in planarian neoblasts. These findings reveal a far-reaching role of PIWI proteins and PIWI-interacting RNAs (piRNAs) in stem cell biology and cell differentiation.