According to recent research, low-income earners in Estonia are among the most likely to withdraw funds from the so-called second pillar of the Estonian pension system, when that possibility becomes available. This has met with a wide range of reaction, from those who view it as a positive thing (e.g. Isamaa leader and second pillar reform driver Helir-Valdor Seeder) to analysts who say it will widen economic inequalities, put a higher burden on future generations, and lead to an increase in immigration. The last point could be seen as ironic given that, according to the research, many of those who support anti-immigration stances and parties, are more likely to withdraw from the second pillar.
The second pillar refers to employee contributions to their own personal pension fund, which has been mandatory for most earners since 2010. Making the second pillar optional was a central policy plank of the Ismaa party, which managed to get the requirement into the coalition agreement signed in April with Centre and the Conservative People's Party of Estonia (EKRE).
If the coalition gets the bill dealing with pension reform passed at the Riigikogu, it would come into effect at the beginning of 2020 with disbursements from the second pillar likely to start hitting people's pockets a year after that.
The research, conducted by pollsters Kantar Emor on behalf of daily Postimees, said that a "large share" of lower earners would withdraw from the second pillar in order to repay loans and cover day-to-day expenses, according to BNS.
Reaction and analysis
A correlation was found between respondents' plans with regard to their second pillar fund and their political preferences, BNS reports. Two thirds of the respondents supporting EKRE said that they do not intend to continue accumulating savings in the second pillar fund. Most EKRE supporters would transfer their savings into an investment account and one fifth would use the funds to repay a loan.
Kantar Emor survey manager Aivar Voog said these results are indicative of EKRE supporters' dissent, notwithstanding the fact that removing the second pillar was an Isamaa policy as noted, as they seek to oppose the previous governments' decisions.
"What is spreading among supporters of EKRE is distrust of institutions," Voog said, adding that men were less likely to withdraw than women.
Robbing Peter to pay Paul?
However, while arguments in favor of removing the mandatory second pillar were that it was too inflexible and its funds generally performed behind the market as a whole (second pillar funds are managed and individuals have some input), labor and social policy analyst at the Praxis Center for Policy Studies Magnus Piirits said that lower earners withdrawing from the second pillar will widen the pensions gap in a type of robbing-peter-to-pay-paul situation, given the relationship between the second pillar and the first (state pension).
"In addition to losing their pension savings, those who leave the [second] pillar will also lose some of their state pension because those who have joined the funded pension have fewer rights when it comes to the first pillar," Piirits said.
"People with higher income meanwhile will continue depositing money in their pension fund or make their own investments," Piirits added, noting that four percent of the contributions made in the second pillar fund, or the funded pension, come at the expense of the first pillar, I.e. the state pension, which means those who have joined the second pillar fund now also have fewer pension insurance components in the first pillar.
This, in turn, means that if they withdraw money from their second pillar fund, they also in a sense withdraw insurance components from the first pillar.
Therefore, if the pension reform takes effect and a portion of people withdraw their money, they will also lose out in state-funded pensions, as the funds from which payouts are made from the second pillar also include the four percent contribution to the second pillar from the first pillar.
Age differences, burden on future generations, immigration
The Kantar Emor survey also indicated stated that older people were more likely to continue to contribute to the second pillar and not leave it, suggesting that a minimum age limit to being able to withdraw might be wise.
"The pension system should be looked at as a whole," Piirits said, noting that in late 2018 the state pension system remuneration was rendered more equal, meaning from 2021, the first pillar fund will be less dependent on income.
"As the funded (second pillar) pension depends on one's salary, however, rendering it voluntary may reduce the motivation to pay official wages," Piirits said.
Piirits also said that as the first pillar is soon to be based on greater solidarity, people will have more rights even if they only earn the minimum wage. If they exit the second pillar, however, just a small share of their future pension will depend on the size of their salary.
According to Piirits, this means that private limited company owners would have little incentive to pay themselves more than the minimum wage, which will increase the likelihood of cash-in-hand wages.
In the light of the planned reform and survey results, Piirits said that the brunt of the burden will be borne in the future by present-day young people and children, which will likely result in tax increases or require an increase in the population.
"In practice, it likely means greater migration, an even higher retirement age, or a combination of the two. Therefore, it is quite likely that the pension reform entails more problems than the present system," he said.
Isamaa chair and second pillar reform champion's view
Isamaa chair and champion of the second pillar reform Helir-Valdor Seeder noted that the survey results demonstrated financial literacy on the part of lower income earners.
"Take credit for consumption, for example. If people have the opportunity to decrease their future expenditure by taking out a consumer loan, then it is economically reasonable to do so," he said.
Seeder also noted that low income earners need the funds for their daily expenses.
"If your income is small and six percent [of it] is taken away from you, then you'll have no option but to borrow from a bank," he said.
According to Seeder, the lower income earners will in effect earn a higher pension by exiting the second pillar fund.
"Low income earners are the ones losing the most with the second pillar pension fund. One can presume that they don't have much money in the second pillar, so they also gain in the long run," he said, adding that there was no real hurry in general to withdraw.
"In the end, 20, 25 or 30 percent of second pillar fund owners will do it," he said, estimating what proportion of second pillar members are likely to leave.
Editor: Andrew Whyte