The recent economic forecast of the Bank of Estonia concludes that people who have decided to withdraw second pillar pension funds are not the worse off.
Bank of Estonia betting on new consumption from second pillar withdrawals
31st March 2021, 12:35
The so-called second pension pillar currently holds €5.4 billion. This sum will be reduced by a lot more than the central bank’s initial forecast suggested. The recent economic forecast also suggests that leavers include a lot more high-paid people than initially believed. It was initially believed that people earning modest salary or whose savings are modest following other reasons would rush to withdraw assets.
The bank puts the number of initial leavers at 130,000 who are forecast to withdraw a total of €1.2 billion. This would be 17 percent of all second pillar members and 22 percent of total assets. Exact figures will be in on Thursday, March 31 when the first list of leavers will be finalized.
The estimated €1.2 billion total withdrawal is conditional. Because the legislator and banks chose to leave a gap of several months between filing the application to leave the second pillar and the payout, first wave leavers stand to receive the money in September. Matters are further complicated by the fact that the payout is not calculated when the person files the application. That way, sums that eventually reach people are kind of a lottery as they are calculated on the day of payment. If the investments of the person’s chosen pension fund have done well, everything is fine. While the situation will be the opposite should the markets experience a shock in September. It is good to know that applications to leave can be withdrawn until the end of July.
“The first wave will see more money withdrawn than initially believed as people with above average pension savings are set to pull out,” the central bank said.
The Bank of Estonia does not see the withdrawals solely as a negative development as it is hoped a wave of spending will help the economy. “Income at the disposal of households experiencing such a sharp spike will manifest in increased consumption that will deliver a strong positive impulse in the second half-year,” the report reads.
It is also possible that withdrawing and spending pension assets is a forced move for many as financial difficulties have seen people fall back on third pillar savings. The Bank of Estonia also forecasts unemployment to grow. While the spring pandemic is not seen as a major factor, long-term unemployment is believed to continue climbing. Unemployment will continue to go up because of the crisis being dragged out, while it is not forecast to reach last spring’s level.
The analysis also shows that the crisis has not had a negative effect on salaries. Wage growth has remained around 5 percent despite the uptick in unemployment. This has made it possible for households to save more. There is also no visible pressure on companies to cut salaries as deposits have continued to grow, the central bank points out.
Tougher restrictions hinder business opportunities in many different fields and lower labor demand, while the tourism sector and relevant fields were already lethargic and changes in terms of employment have largely taken place. Unemployment Insurance Fund data suggests Estonia has 57,928 unemployed persons for an unemployment rate of 8.9 percent. The Bank of Estonia notes as a positive development that industry and export have not been seriously hit by restrictions and that the situation is improving. “International demand for industrial goods and global trade have already reached the pre-crisis level that holds growth opportunities for exporting sectors in Estonia,” the report reads. The economy is picking up speed, while it will only recover if and when restrictions are lifted.