Three years ago, Estonia made it possible for residents to withdraw all the accumulated money from the funds, but it did not take long to notice that this did not bode well for the state. Now it can be seen that many of the savers simply spent the money, they no longer have savings for retirement, because they did not invest anywhere.
Invites you to learn from Estonia
During the conference held in Lithuania, the Governor of the Central Bank of Estonia, Madis Muller, shared his thoughts on the many wise economic decisions made in the country over more than 30 years. But the current situation shows that they were also bad, especially when it comes to mandatory savings for retirement. From 2021 at the end of the year, Estonians, who until then had all contributed and saved for their pension under the Tier II scheme, got the opportunity to withdraw their savings from the funds and spend the money as they wished. The current results and lessons from this provide an opportunity for both Estonia and Lithuania to see in reality what such a decision brings.
The data shows that about half spent this money on simple consumption.
“The result was that about 150 thousand of people took out all of their retirement savings during the year. The data shows that about half spent this money on simple consumption. This means that these people will no longer have savings when they retire.
The other part used the money to pay off existing loans, which in some cases is quite smart because it helped avoid possible interest or could be harmful if interest rates were to decrease in the long run. Only a small part of this money was invested,” explained Madis Muller, Governor of the Central Bank of Estonia.
If we want to learn from the example of Estonia, there should be more discussion at the state level first. In Estonia, the permission to withdraw accumulated funds created a positive effect on the country’s economy, but it was short-lived.
What is the purpose of allowing withdrawal of savings?
As for the withdrawal of accumulated funds from pension funds in the presence of certain conditions, exceptional cases (for example, the Constitutional Court said that such cases must be exceptional when the accumulation becomes pointless), the purpose of the permission to withdraw savings is to create greater trust of the population in the system and the attractiveness of the system itself.
In this case, it is extremely important to discuss and find a compromise on what those conditions could be. The pension system can only function successfully if it is massive and stable. It is very important that the conditions created for residents should not directly affect the results of pension funds and the assets accumulated by other savers.
If we are talking about proposals to allow everyone to withdraw the accumulated assets, without any exceptional conditions, the goal is short-term benefit and, one might say, appeasing the public. This, most likely, is not a sustainable solution that would solve society’s problems, reduce social exclusion, and increase pension benefits.
The Estonian population has become even more dependent on state support than before this decision.
“Now, on average, the Estonian population has become even more dependent on state support than before this decision was made. Also, the population generally has less savings considering the demographic situation in the country. It seems that the Government has finally recognized this as a problem and has started to move in a slightly different direction. Starting next year, everyone who wants to will have the opportunity to pay higher contributions to Tier II pension funds and receive tax discounts as a result,” M. Muller shared the country’s experience.
Accumulation in pension funds is the simplest form of investment
The long ongoing debate reveals that it is not easy to make long-term decisions, which are often not the most popular, but are extremely necessary for society, and to make them attractive to everyone. In the case of additional retirement savings, the goal of the Lithuanian state is at least 70 percent. aspiring replacement rate, which would be formed from different sources of income: “Sodra” pension, additional personal accumulation of each person, employer’s involvement.
Looking at foreign examples, it can be seen that even in advanced foreign countries, which can boast of solid, time-tested pension systems, there are also debates. However, continuity, agreements and long-term adherence to them, use of funds accumulated for retirement upon retirement are features of Western systems. In the case of pension accumulation, it is extremely important to look for compromises that would be both useful and attractive to the population, but at the same time, it is natural that discussions and questions will arise.
From 2019 accumulation does not affect old-age pensions paid from “Sodra” at all. The results of the cumulative system show only positive trends. The average investment return in Tier II pension funds since the Life Cycle Funds were established is as much as 71 percent. So it is obvious that the system works and is useful for future residents of retirement age.
The examples of foreign countries show that saving in additional pension funds is the easiest way to save for old age. Of course, there are many different instruments that anyone can use to save for old age. However, it also requires a certain level of professionalism, investment knowledge, and a lot of time. The system of additional savings for retirement in Lithuania is focused on the fact that residents can take care of their dignified old age without investing additional time or resources.
Demographic changes show that our society is aging and we will face more and more problems in the future. The “Sodra” system will face an increasing burden, which is likely to result in a decrease in pensions in the future, or the state will have to allocate an increasing share of the budget to pensions of residents.
Speaking about Estonia, M. Muller emphasized that the damage has already been done and society has split into two opposing camps.
One part will continue to rely on greater government support, while the other will invest and try to save in other ways, not necessarily relying on or paying more into pension funds. There has also been an increase in investment over the past five years. For example, five years ago, more than 12 thousand were counted. individual securities accounts, and currently there are already about 110 thousand of them.
“One of the lessons that seems important to me is the regulation of pension funds. This is a critically important decision, as it is necessary to ensure that their hands are not tied too tightly, which would lead to lower returns for consumers, and that taxes are not too high, as this would mean higher contributions for savers,” said the Governor of the Central Bank of Estonia.
In order to get bigger retirement pensions, we need to regularly invest funds, accumulating a part of the monthly remuneration.
You can find the speech of the Governor of the Central Bank of Estonia in the video from 1:00:00
VIDEO: 10th International Financial Markets Conference
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