The effects of making participation in the currently mandatory second pension pillar voluntary would be much greater than they would initially appear, writes entrepreneur Indrek Neivelt.
[Last] Monday, the Pro Patria Party proposed making the second pension pillar voluntary. Chairman Helir-Valdor Seeder had already talked about it before, but the fact that the party now backed it was a surprise to me.
We are in an interesting situation: political parties representing conservative worldviews want to make saving for retirement voluntary, while liberal parties believe that people need to be forced to save for retirement.
Interesting discrepancy. In any case, what's positive is that this topic is relevant and discussion over it fairly heated.
There are two levels to the discussion on funded pensions, and it is occasionally difficult for even me to understand on which level an argument is taking place.
One level involves pension funds' low rate of returns. On this level, topics include unjustly high fund fees, various asset classes and restrictions, whether fund managers are representing the interests of those saving for retirement or only the interests of their shareholders, etc.
Tuleva, which wants to offer its members the best possible rates of return, was established on this level. And on this level, the fund's rates of return are compared to inflation. I would call this the micro level. On this level, there is no question as to whether there is any point to saving for retirement or not. Everyone here believes that saving is necessary. It's just a matter of whether this is mandatory or not.
The other level is the macro level.
This was highlighted by Kristjan Järvan, who considers the first and second pillar in conjunction with one another and finds that, taking the system as a whole into consideration, pension funds' rates of return should exceed wage growth. Not inflation, but wage growth!
Otherwise the first pillar would be more advantageous to the system as a whole.
And considering the Ministry of Finance's long-term forecasts, the second pension pillar should be abolished altogether. This is the level on which Helir-Valdor Seeder is, who does not believe in this type of long-term savings and finds that it is children, not pillars, that will fund pensions.
Arguments are mixed up across these levels, and it is very difficult to navigate like this.
€1 billion in high-interest loans
Of course, not everyone involved welcomed Pro Patria's proposal. I wonder why Eiki Nestor reacted so harshly to the proposal and thought that it would be a bad thing if someone paid off their quick loan with money from their second pension pillar. I don't agree with that.
Banks have issued consumer credit in the amount of €800 million at an average interest rate of 15% and an average annual percentage rate of charge (APRC) of 20%.
Add to these loans from other creditors and in total over €1 billion has been issued in high-interest loans. And these loans' average interest rate exceeds 20%. The average interest rate on housing loans is 2.5%.
If you consider the rates of return of pension funds, these should exceed the interest rate on home loans. Unfortunately, not all funds are capable of this. But not one fund manager would be capable of exceeding the interest rates of expensive loans.
20% is beyond reach, in any case. In other words, if we consider this from an individual point of view, it would be really good to be able to pay off an expensive loan using their savings. They would be able to pay down their loan, and costs incurred on interest would drop.
I don't know how the €4 billion in pension fund money is divided between various borrowers, and we can only speculate. There are 450,000 consumer credit contracts, and other contracts on top of that. This is the number of contracts, not the number of borrowers.
I don't know how many people or families have taken out expensive loans. But in all likelihood that number falls between 200,000-300,000.
In other words, the average person who has taken out a line of consumer credit has approximately €4,000 in loans. At the same time, the average person has just under €6,000 in pensio funds. In all likelihood, the majority if not practically everyone could pay off expensive consumer loans using their pension savings.
The bigger impact of going voluntary
Using money from one's second pillar to pay off a loan would be a very big relief for borrowers. Many people's stress levels would certainly fall, and life would improve as a result. Lower stress levels are also good for one's health. It's not easy to get by if you frequently have to take out short-term and expensive loans.
A total of €200 million per year would thus remain in the hands of Estonian people, which they could spend on something other than interest or could save, for example. This is a very good result.
And banks would lose €200 million in profits. Plus fund management fees. This is more than a quarter of the banking sector's revenue.
And so I believe that Pro Patria's proposal is very statesmanly and would actually help a large majority of people.
Rational to pay off expensive loans
I don't understand why Eiki Nestor is against people retaining more of their money and banks' revenues declining.
What are the counterarguments?
One counterargument is that as soon as someone is freed of their loan, they will immediately take out another.
Certainly there are people among the borrowers who behave this way among. How many there are, I don't know. This could no doubt be determined with a sociological survey.
Many likewise believe that the second pension pillar is one's only savings, and that Estonian people have too few savings. It is unfortunately true that a situation cannot exist in which everyone has only savings. Someone has to take out loans as well.
It is typically the case that young people take out loans, and middle-aged and older people have savings. The state should encourage rational behaviour in people. And what would be rational is to pay off expensive loans first.
In conclusion, I'd like to say that the effects of making the second pension pillar voluntary would be much greater than they would initially appear. And these effects would not be exclusively economic in nature.
Editor: Aili Vahtla