Analyst: Second pillar pension payouts came at a slightly bad time

Pension reform protest at Toompea, Tallinn.
Pension reform protest at Toompea, Tallinn. Source: Priit Mürk/ERR

On Thursday, pension system manager Pensionikeskus began making payouts to persons who submitted an application to exit the second pension pillar with €1.3 billion withdrawn from the pension pillar. Bank of Estonia analyst Kaspar Oja said the payouts came at a time when economic growth is accelerated and demand-supply ratios are skewed.

According to the pension system manager, all people will receive their money by the end of the month and payouts will be executed in random order.

If a person withdraws their second pillar savings before reaching retirement age, an income tax of 20 percent is automatically deducted from the payment. When the whole amount is withdrawn in retirement age, income tax of 10 percent must be paid. The state will receive a quarter of a billion euros from the payout process through income tax and close to a billion will make it to peoples' bank accounts.

Central bank analyst Kaspar Oja noted that some €500 million will go to consumption and it will not have too positive an effect during a time of accelerated economic growth than it would during a tougher time.

"We can see the growth is fast, companies have limited supply, they cannot meet demands often times. We know there are long queues for new car purchases and so on. This will amplify the good times too much, the money could have brought more good to the economy at another time," Oja told ETV's daily affairs show "Aktuaalne kaamera" in-studio on Thursday.

The analyst added that the payout process will likely just amplify imports instead of what is actually needed, like workers, products and raw materials.

€500 million is set to reach consumption by the end of the year and Oja said the problem is that the money will be directed to consumption too easily.

"People will make many short-term expenses with money they collected for a long time. The saving period will go to waste. The point of the second pillar was that it will protect against risks the first pillar will not protect. If the population ages, for example, there are less working hands, the second pillar will grow somewhat better than the first pillar. Currently, all our risks are in basket and are tied to the first pillar," he said.

Oja added that such a pension reform was not necessary and Estonia must now think how to develop a defense mechanism to protect against population aging and rising social costs.

Bank of Estonia analyst Kaspar Oja. Source: ERR


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Editor: Kristjan Kallaste

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