The money withdrawn from the second pension pillar triggered a massive liquidity shock in Estonia's economy, Bank of Estonia economist Jaanika Meriküll told ERR. Nearly 5 percent of Estonia's annual GDP entered the economy in just one month, and from a policy perspective, it's important to understand what happened to that money, explained Meriküll, who analyzed exactly that in her research.

"To grasp the scale of the shock — one-fifth of savers exited the system, which amounted to 12 percent of the adult population. That means 12 percent of adults saw a significant boost to their everyday income. We estimate that the amount withdrawn from the second pillar was equivalent to roughly 7.5 times the average monthly income for those who took the money out. That's an extremely large liquidity shock."

The study revealed that the people who withdrew funds tended to have relatively little in savings and carried above-average levels of debt. Many of them had consumer loans, which they began actively repaying with their pension money.

"Roughly 30 percent of the withdrawn funds went toward reducing outstanding consumer loans, with about €250 million in total debt paid down. We also found that a fairly large share of the money was used for consumption."

What surprised Meriküll was that half of the withdrawn money was still sitting in deposits a year after the reform.

"It hadn't been put to use. So, essentially, financial assets moved from pension funds into places where they earned less than they would have in the funds."

Another study looked into how young LHV clients used their pension money. Bank of Estonia economist Merike Kukk analyzed data collected in Triin Bulõgina's master's thesis and found that people aged 18-35 directed most of the money toward consumption.

"Consumption saw the largest increase, particularly in the first month and also in the second month, compared to those who did not withdraw their pension savings. By the third month, the consumption patterns no longer differed from those who kept their money in the fund."

Another major use of the pension payouts was loan repayment, which also saw significant shifts.

"In the first, second and third months, loan balances decreased notably. But after that, we didn't see those balances remain at a lower level. In our comparison between second pillar savers and those who withdrew, it appears that although the latter eagerly used pension payouts to repay loans, eventually their loan balances reached the same level as the comparison group. This suggests that new loans may have been taken out. For example, a year after this positive effect — where they temporarily had lower debt levels — there was no lasting difference."

One of the original assumptions behind making the second pillar optional was that people would be able to invest their money more wisely on their own. But this change hasn't been observed among younger people, Kukk noted.

"We see that investments increased somewhat in the first month, but not in the months that followed, especially when compared to the control group. So some of the payouts were invested, but not in a lasting way. It was more of a one-time shift rather than a permanent change in saving or investment behavior."

While a significant portion of pension money remains in deposits overall, the younger age group did not leave their funds sitting in their accounts.

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