Bank of Estonia chief Madis Müller says that many people in Estonia lack the ability or discipline to save, meaning the pension reform given the go-ahead by the Supreme Court on Tuesday will lead to both reduced pension pots and potentially higher taxation.
"When the pension reform enters effect, people will be able to freely leave or join in the new year," Müller, who had opposed the reform bill when it passed the Riigikogu, told ETV news show "Aktuaalne kaamera" (AK) Tuesday night.
"Those people who want to continue collecting [in the second pillar] do not need to do anything. Withdrawing all funds (leaving the second pillar cannot be done in installments – ed.) will incur 20 percent income tax," he added.
The second pillar of the Estonian pensions system refers to employer/employee contributions, with membership being mandatory for most wage earners since 2010. It is distinct from the first pillar (state pension) and third pillar (private pension schemes).
The bill, the brainchild of the Isamaa party, met with controversy and faced a legal challenge from the president who declined to promulgate it after it passed at the Riigikogu early on in the year.
However, the Supreme Court rejected the president's argument that the bill treated people unequally in relation to the constitution, ruling in its favor Tuesday morning. Within hours, the president had promulgated the bill, which will come into force on January 1 2021, with those applying to take out their second pillar funds likely able to do so from autumn that year.
Survey: 21 percent of second pillar members say they will take out funds
A recent Kantar Emor survey revealed that 21 percent of respondents say they plan to withdraw their money once it becomes possible.
Madis Müller told AK that making the second pillar voluntary removed an assurance that sufficient numbers of people will save for old age, as many people lack the motivation or know-how to save and invest, he said.
"We know that from observing actual behavior, there are a lot of people who don't have the ability to save on their own initiative, meaning the [mandatory] second pillar is a good way of ensuring saving," he said.
However, while the change is likely to lead to a shrinking of pension funds, those remaining in the scheme will not lose out, fund managers have been saying, though another outcome may be higher taxation in future, AK reported.
"In the current situation where pension reform is going through, public finances will be more complicated than before and taxation will see a pressure towards rising to higher levels as compared with previously, because the public will correspondingly be contributing less to their pension funds," Müller went on.
A spokesperson from Estonian high street bank LHV supported Müller's opinion, by pointing to the third pillar (individual, private pension schemes), which he said only constituted a small proportion of the population.
"I think that a good indication is the third pillar, which is fully voluntary. This hasn't been used excessively, and thinking about numbers of people who have investments there, we're looking at about 35,000," Vahur Vallikivi from LHV told AK.
"Perhaps this number will now grow, but not by much," he added.
Editor: Andrew Whyte