Analytics, Estonia, Financial Services, Funds, Pensioners

Labor and social policy analyst at the Praxis Center for Policy Studies Magnus Piirits said that if this were to happen, pension disparity will increase even further. 

"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. People with higher income meanwhile will continue depositing money in their pension fund or make their own investments," Piirits said.

Piirits said that 4% of the contributions made in the second pillar fund, or the funded pension, come at the expense of the first pillar -- the state pension, which means that 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 in state-funded pension 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.

Helir-Valdor Seeder, chairman of the junior member of the government coalition Isamaa and initiator of the pension reform, said that the plans of low income earners are indicative of financial literacy.

"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 noted that low income earners need this money for 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 segment is question will receive 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.

One the whole, most people are not in a hurry to withdraw their money, the chairman of Isamaa noted.

"In the end, 20, 25 or 30% of second pillar fund owners will do it," he said, adding that mass payouts from the second pillar are not likely to occur, either. 

The survey conducted by Kantar Emor also indicated that while in the younger segment, people lean towards other investment opportunities, older people, however, intend to continue making contributions to the second pillar fund.

Piirits said that what merits consideration with regard to this trend is whether or not a minimum age limit should be imposed on being able to make payouts from their second pillar fund. 

"The pension system should be looked at as a whole," Piirits said, adding that in late 2018, the state pension system was rendered more equal to reduce pension disparity, and from 2021, the first pillar fund will be less dependent on income. 

"As the funded pension depends on one's salary, however, rendering it voluntary may reduce the motivation to pay official wages," Piirits said.

He said that as the first pillar is soon to be based on greater solidarity, people will have more rights even if they only earn minimum wages. 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, it 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.

A correlation was found between respondents' plans with regard to their second pillar fund and their political preferences. Two thirds of the respondents supporting the junior member of the government coalition, the Estonian Conservative People's Party (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 the results are indicative of EKRE supporters' dissent as they seek to oppose the previous governments' decisions.

"What is spreading among supporters of EKRE is distrust of institutions," he said.

In comparison by gender, men are more likely to continue accumulating funds in the second pillar. Voog noted that this may indicate that women feel more pressure to repay their debts, whereas men feel more confident to start investing despite their loan obligations.

With the second pillar fund reform, joining and exiting the fund will be made voluntary, which gives income earners three options to choose from -- either to continue making contributions to the second pillar fund, stop the contributions and continue to hold the money in the fund, or to stop the contributions and withdraw the savings. When the reform takes effect, those who have already joined the second pillar will remain a member by default, and those who are entering the labor market will also join it by default. The reform is planned to take effect in 2020 and payouts from the second pillar fund will become available from 2021.