People making modest salary would repay loans

Fast loan. Photo: Sille Annuk

Future pensioners making modest salary today would use funds released from their mandatory funded pension as a result of a planned reform for repaying loans and covering daily expenses, a survey ordered by Postimees and carried out by pollster Kantar Emor reveals.

Analyst for labor and social policy at the Praxis Center for Police Studies Magus Piirits said that should the forecast prove accurate, income of pensioners will be even more uneven in the future.

“In addition to funded pension assets, those opting to leave the second pillar will also lose in state pension as second pillar holders have fewer state pension rights. People making better salary are more likely to continue paying into their second pillar or seek alternative investment opportunities,” he said.

Piirits explained that mandatory funded pension gets 4 percent from state pension, meaning that those who have joined the second pillar have fewer state pension assets. Therefore, people withdrawing second pillar funds will effectively be withdrawing some state pension units early.

If the reform enters into force and people decide to pull out of the second pillar, they will also lose in terms of state pension as the money they withdraw includes 4 percent they did not get in their state pension.

Danger of payment under the table

Architect of the second pillar reform Helir-Valdor Seeder (Isamaa) said that what the study says about low-paid people suggests the opposite: people can make financial sense.

“Let us talk about consumer credit. If people see a chance to reduce their future expenses by way of consumer loans, it constitutes sensible economic behavior [to take out a consumer loan],” he said.

Seeder said that people with modest income need the money to cover everyday expenses. “If you only make a little money and have to part with another 6 percent, you have no choice but to ask the bank for a loan,” he said and referred to the situation as a vicious circle.

Seeder also said people in question would qualify for bigger state pension should they decide to leave the second pillar. “Mandatory funded pension costs low-paid people the most. We can presume they do not have much in the way of second pillar assets anyway, meaning they will benefit down the line,” the politician said.

Seeder explained that most people will not rush to withdraw the money. “Perhaps 20, 25 or 30 percent of people will decide to go for it in the end. They will definitely not withdraw pension assets all at once,” he said and added that there will not be an ATM rally.

The Kantar Emor poll also found that older people are more likely to think about retirement and pension. The younger the respondent, the more likely they were to consider other investment options, while those about to retire were more likely to retain payments into the second pillar.

Magnus Piirits suggested that perhaps an age restriction should be introduced for withdrawing mandatory funded pension assets.

Praxis pointed to another danger. “The pension system needs to be seen as a whole. In late 2018, state pension rights were lent solidarity to curb pension inequality in the future: starting in 2021, state pension will not be as dependent on salary as it is now. Because funded pension is dependent on salary, making it voluntary could increase appetite for payment under the table,” Piirits said.

He explained that as state pension becomes more universal, meaning that a person will earn more pension units even if they are only paid the minimum salary, opting out of the second pillar will leave a very small portion of pension dependent on salary. This would take away the motivation of people working through limited companies to pay themselves more than the minimum wage.

Piirits said, in light of the planned reform and the results of the survey, that children and young people are expected to bear the load in the future that in turn requires tax hikes or considerable population increase over a longer period of time.

“What this will mean in practice is increased immigration, an even higher retirement age or a combination of the two. Therefore, it is rather likely the pension reform will create more future problems than the current system would,” Piirits said in summary.

People’s responses also depended on political preferences to some extent. Among the respondents, supporters of the Conservative People’s Party (EKRE) stand out in that two-thirds of them do not plan to continue paying into the second pillar. Most EKRE voters would place the money into an investment account, while a fifth would use the money to repay loans.

Kantar Emor survey expert Aivar Voog explained that it reflects EKRE voters’ mentality. “EKRE have taken a lot of protest votes. They have set themselves in contrast to what previous governments have decided. EKRE voters are generally distrustful of institutions,” he said.

Voog said there are a lot of wealthy self-employed people among supporters of the national conservatives, while there are also rural area residents only making modest income. The latter are the keenest on pulling out of the second pillar.

Men would rather continue saving

Looking at gender differences, men are more likely to continue contributing to the second pillar. Voog said that the difference isn’t great but could suggest women feel more compelled to square away existing obligations. He suggested that men feel more confident and are prepared to invest on top of previous obligations.

More Estonians than non-Estonian-speakers would repay loans. Voog said this is because non-Estonians tend to make less money.

The expert pointed out that while opinions are usually rather universal or differ only based on nationality, the survey at hand revealed differences in terms of nationality, age and level of income.

The funded pension reform aims to make joining and leaving the second pillar voluntary. This leaves people with three options: to continue making second pillar payments, to stop making payments but retain assets already collected or to stop making payments and withdraw the money.

Those who have already joined the system would remain by default, while people just entering the labor market would join by default. The reform is set to enter into force in 2020, with the first opportunity to withdraw funds created in 2021.