Experts: Latest second pillar payout likely to exacerbate inflation

The second pillar refers to employer/employee pension contributions.
The second pillar refers to employer/employee pension contributions. Source: Priit Mürk/ERR

The latest round of released second-pillar pension funds will lead to an even greater rate of inflation, experts say.

The Pensions Center (Pensionikeskus) started its third round of pay-outs yesterday, Monday, totaling €100 million – one tenth of the total in the initial disbursement, but still enough to make its presence known in the domestic economy, to the extent of contributing to inflation.

Rasmus Kattai, economist at the Bank of Estonia (Eesti Pank) told ETV news show "Aktuaalne kaamera" (AK) Tuesday that: "This all comes at a time when the Estonian economy is already on overdrive, and Estonian producers have essentially reached the final limits of their production capacity.

Short supply from outside Estonia will also exert an upwards pressure on prices.

"Imports are hampered by the fact that the coronavirus still affects international trade. Restrictions will lead to upward pressure on prices," Kattai continued, adding that the longer-term effects should also be borne in mind.

He said: "In addition to this increase in short-term prosperity, the longer-term outlook, and the problem of a large gap in the payment of pensions or pension savings in the future, must be kept in view."

Kaire Peik, head of Swedbank's pension division, said that about 70 percent of disbursed second pillar money issued in September had been ploughed into paying off loans, and other uses.

Peik said: "Certainly a lot was put towards loan repayments. The loan was repaid, new commitments were made. Naturally, some people also spent their money on consumer things, while others actually also invested some of the sum received."

While far fewer people applied in round three, than in round one, the latest disbursements have seen around double the number of applicants than was the case in the second round, which Kattai says may be a reflection of Covid uncertainty and the current, existing inflation.

The second pillar of the Estonian pension system refers to employer/employee contributions, as against the first pillar (state pensions) and the third pillar (personal, private pension schemes).

Whereas membership had previously been mandatory for most wage earners, a change in the law which Isamaa had sponsored when it was in office with Center and EKRE allowed second pillar pension holders to cash out, starting from January 2021 (when applications were open – the pay-out took place in September).

The first round in September saw over a billion euros paid out to nearly 150,000 people.

Round two, whose deadline for application was July, saw 12,000 people apply for €95 million in disbursements, while the latest round involves 23,000 applicants.

The final sum of payouts is not yet known for round three, though estimates put it at €200 million.

Payments should reach individuals' accounts within the next week, the Pensions Center says.

The rate of inflation stood at a 13-year high in November, at 8.8 percent, driven by record energy price levels, and is forecast to rise further this year.

The Pensions Center's site in English is here.

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Editor: Andrew Whyte

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