Bank of Estonia analysis warns of negative impact of pension reforms
The Bank of Estonia published an impact analysis of planned changes to the Estonian pension system on Friday, in more detail than previous analysis done in October.
The Bank of Estonia has maintained its skepticism over making the so-called second pillar pension scheme, which refers to employee contributions, voluntary, something the coalition government intends to do from the start of 2020.
Bank governor Madis Müller said that the second pillar and the first pillar (employer contributions) were not in competition, but rather should work in concert. He also reiterated earlier statements that the proposed change has not been subject to enough impact analysis.
"More than 700,000 people in Estonia are saving for their pensions through the second pillar, and in future the second pillar is supposed to provide one third of each person's pension. The first and second pillars do not compete with each other, they complement each other," Müller said, according to a Bank of Estonia press release.
"The responsible place to start from when changing the pension system would be a description of a quantifiable aim of the changes and their expected long-term impact. It has not been explained during the current process of making changes what size of pension the government plans to ensure for the people of Estonia in the future, nor how it should be funded. Such an important issue ought to be widely agreed in society before changes are made to the current bases of the pension system", Müller continued.
The bank had already found in October that making the second pillar voluntary may shrink future pension pots and lead to pressure to raise taxation down the line.
The bank also found that while the release of the second pillar funds would give a short-term boost to the economy, in future this would be replaced by slower growth or even recession, with labor costs remaining at a higher rate as Estonian exports became less competitive.
Three major concerns the bank had were the quick asset sale that large numbers of people leaving the scheme would necessitate, leaving noone a winner as it would affect both those who remained in the scheme and those who left.
Second, existing pension funds (the second pillar funds are managed investments) would then be averse to buying more high-return assets, given the insecurity arising from the quick asset sales.
Third, pension funds have invested in the Estonian economy and companies and provided an important source, which would then be missing.
The Bank of Estonia's position mirrored to a large extent the line of the International Monetary Fund (IMF). Following a two-week working trip to Estonia, the IMF's Estonian mission delegate Cheikh Anta Gueye warned of the same brief economic boost leaving the fund might give, weighed up against negative effects such as having to provide for an aging population in future.
Finance minister Martin Helme, who appeared at the same press conference Monday with Cheikh Anta Gueye and Müller, later said that the second pillar reform – a central plank of Isamaa's pre-election manifesto – had received a mandate from the Estonian people in the election.
Müller also noted after the press conference that he and the Bank of Estonia have an advisory role only, and no scope in policy making.
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Editor: Andrew Whyte