The 2021 reform both made saving in the second pension pillar voluntarily as well as gave those who had already saved money there the opportunity to withdraw it. Large amounts of money were injected into the Estonian economy as a result of the exodus, Meriküll and Rõõm said in a blog post published by the Bank of Estonia on Monday.

More money was withdrawn in subsequent waves of exits, and by now some 30 percent of holders of second pillar pension accounts have withdrawn their pension savings from them.

In the overview published Monday, the two central bank economists examined the financial position of Estonian residents who withdrew their pension savings from the second pillar in that initial, 2021 wave, using data from that year's Estonian Household Finance and Consumption Survey (HFCS) to identify patterns.

According to their findings, those most likely to withdraw their pension savings were people aged 25-54, while the youngest age group, aged 16-24 and the oldest, aged 55-64, were less than half as likely to do so. A similar pattern was found in the amounts of money saved in the second pillar, as it was Estonian residents with a medium amount of savings that were most likely to exit the pillar.

The graphs below represent those exiting the second pension pillar by age group as well as by asset quintile, for which people were divided into five groups according to the amount of money they had saved up.

A major factor affecting whether people decided to leave the second pension pillar was how much they owned in financial assets — such as bank deposits, investments in shares, third pension pillar savings and the like — and whether they had unsecured loans or consumer loans to their name.

Those in the top 20 percent for owning financial assets were 37 percentage points less likely to exit the second pillar than those in the bottom 20 percent for financial assets. This depended primarily on whether people had liquid assets, which accounted for 88 percent of households' financial assets, and indicates that it was above all people with no savings that were in the first wave to leave the second pension pillar in 2021.

There was also a strong link between unsecured consumer loans and people exiting the second pillar — people with no consumer loans were 27 percentage points less likely to exit the pension pillar than those who had over €4,000 in consumer loans.

More constraints, more likely to exit

Meriküll and Rõõm analyzed the connection between exits from the second pension pillar and liquidity and credit constraints, risk appetite as well as financial literacy, taking people's gender, age and income into account. Household members with liquidity constraints are those who could not get financial help from friends or relatives if they needed, while those with credit constraints are people who would like to get a loan from a bank but are unable to do so.

An individual's decision to exit the second pension pillar depended very much on the choices made by other members of their household. In households where one member decided to leave the second pillar, the likelihood of other household members doing so increased by 70 percentage points. This suggests the decision to exit the pillar was made by households as a whole, rather than by individuals, the economists noted.

The probability of someone exiting the second pillar also increased by as much as 15 percentage points if their household faced credit constraints. Households deemed as having credit constraints are those that have had difficulties in the past three years in getting a loan from a bank, as they couldn't borrow anything at all, were given a smaller loan than they had applied for or didn't apply for a wanted loan as they assumed they would be rejected.

Liquidity constraints on the ability to get financial assistance from outside the household, meanwhile, increased the probability of exiting the second pension pillar by 5 percentage points.

The Bank of Estonia economists also analyzed the connection between exits from the second pillar and risk aversion as well as financial literacy.

They found that the more risk averse someone was and the less prepared they were to take on financial risk, the greater the probability of them leaving the second pension pillar.

This effect was not large, they explained, as an increase of one point in the estimate of risk aversion on a four-point scale meant an increase of four percentage points in the probability of leaving the second pillar. Risk aversion is measured on a four-point scale, where 1 point indicates willingness to take on large financial risks, and 4 points means no willingness at all to take on any financial risk.

Financial literacy, meanwhile, proved to be inversely related to exits from the second pillar, as the higher a person's financial literacy score, the smaller the probability that they would exit the pillar.

Nonetheless, this effect was also not large, as a financial literacy score one standard deviation larger gave a three percentage point smaller probability of exiting the second pillar. An individual's literacy is assessed by weighting three questions about financial literacy within one factor for financial literacy using factor analysis; this variable has a mean value of zero and a standard deviation of one, and the higher its value, the stronger the financial literacy.

Risk aversion and financial literacy affected the decision to exit the second pillar less than assets and liabilities did.

In summary, Meriküll and Rõõm concluded, those who left the second pension pillar after a 2021 reform turned the previously mandatory pillar into a voluntary one were primarily household members who had no savings, had large unsecured loans or were unable to get a loan due to credit constraints.

This profile fits with initial estimates of how the money withdrawn from the pension investments was used, which indicate that a quarter of the money withdrawn went into consumption, around one-tenth went toward repaying loans, and a quarter was still held as deposits in bank accounts in 2022. 

That there were a large number of households with credit constraints among those leaving the second pillar and that a quarter of the money withdrawn remained in bank deposits for a long time indicates that some of the money withdrawn from the second pillar may have been deposited to use in the future for down payments on loans, likely real estate loans. The personal characteristics indicated by such financial behavior, such as risk aversion in investment and financial literacy levels, were also related to the probability of exiting the second pillar, but this had a smaller effect than other characteristics of households' financial profiles.

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