A Billion Down the Drain: Estonia's Experience Shows What Can Happen If Pension Funds Are Withdrawn Early 0 15

The pension system is designed to ensure that all residents of Latvia have at least a relatively decent old age. Its destruction — even with good intentions or out of populism — is a dangerous game that can lead to grim consequences. The second level of pension savings is intended to reduce the burden on the state budget, diversify risks by attracting private managers who ensure the growth of these funds and guarantee their safety until retirement. On the other hand, they also need stability, as a situation where every participant in the system can withdraw their savings at any moment does not foster long-term trust. The Manabalss initiative cites increased trust in the pension system as an advantage, but it remains unclear how its dismantling and free disposal of savings can strengthen that trust.

Estonia's Example

In Estonia, about 150,000 people, or approximately 20% of all participants in the system, took advantage of the opportunity to opt out of the second pension level. The total amount withdrawn exceeded 1.3 billion euros, of which around 1.1 billion euros was deposited into residents' accounts after a 20% income tax was paid. Data from the Bank of Estonia shows that these funds were mainly not directed towards long-term investments. More than 55% of the money was spent within the first three months on current consumption, and over 40% was used to pay off consumer loans and previous debts. Most often, savings were withdrawn by working-age individuals between 35 and 55 years old with average incomes and no other disposable funds.

Inna Steinbuka, a member of the Fiscal Discipline Council, explains this psychological motivation: "In our conditions, where low feelings of security prevail due to the geopolitical situation, people tend to live for today and do not think about what will happen in ten years. Therefore, I think many would have withdrawn this money."

Analyzing Estonia's data, researchers identified other behavioral features: spending on gambling in the two months following the receipt of funds accounted for 9%. Oleg Tkachev, an economist at the Bank of Latvia, notes: "Nine percent of the amount spent went to gambling! This shocked me. Another 10% went to paying off loans, and the rest was for consumption."

Arthur Rose, a board member of IPAS INDEXO, emphasizes: "Estonia's example showed that the main recipients of payments were financially vulnerable groups — older people with lower education and incomes. That is, those who will have no other savings in old age. It is no secret that the next government of Estonia had to correct this decision."

Macroeconomic Impact

A sum equivalent to 4.6% of annual GDP sharply entered Estonia's economy. People actively purchased cars, electronics, and household goods. Consumption among recipients increased by 87% in one month and by 29% in a quarter.

Inna Steinbuka describes the situation as follows: "In one month, an amount comparable to the country's GDP flowed into the economy, and people began to spend actively. This contributed to GDP growth in the first year, but in the following year, a decline followed."

This surge in demand increased quarterly inflation by 1–2 percentage points. A year later, household indicators returned to previous levels. Estonia's Prime Minister Kristen Mihal characterized the reform sharply: "Allowing early withdrawal of second-level savings was a very big mistake. It was the largest crime against the future."

Demographic Factors

Economist Oleg Tkachev warns: "The size of pensions in the future will decrease in relation to salaries, as the demographic situation in Latvia is not improving. The number of taxpayers is decreasing. If the second level is removed from an already small pension, many will be close to the minimum pension."

Inna Steinbuka agrees: "The number of workers supporting retirees is decreasing, and the state will soon be unable to pay pensions at previous levels. The second level compensates for this demographic process."

Sandra Stabina, director of the social insurance department at the Ministry of Welfare, notes the difference from Estonia: "Estonia has a basic pension. We do not have that — the system is based on contributions and guaranteed amounts." She also emphasizes that inflation is taken into account in pension indexing and the system has built-in protection mechanisms.

Impact on the Financial Sector

Mass withdrawals of funds would hit the capital market. Inna Steinbuka warns: "We should not punish the Latvian capital market so severely, which already needs local investments."

Oleg Tkachev adds: "Banks are becoming too cautious. They are stopping investments in riskier but profitable assets because people can withdraw their money at any moment."

Sandra Stabina emphasizes: "You will not be able to protect yourself — the consequences will affect everyone. If taxes need to be raised or funds redistributed, it will also affect those who did not withdraw money."

Arthur Rose also notes: "We cannot invest in hard-to-liquidate assets if significant amounts may need to be paid to clients at any moment."

Are Exceptions Allowed?

Sometimes it is proposed to allow the use of savings for business or housing purchases. However, Inna Steinbuka believes: "For the average person, second-level savings are insufficient to start a serious business or buy a home."

She supports only one exception: "In Estonia, people with serious illnesses could withdraw their money. I fully support this approach."

Sandra Stabina warns about the dangers of expanding exceptions: "If one is allowed — others will be allowed too. This creates a significant risk."

She reminds that the pension system protects against loss of income in old age, and the risks of treatment should be covered by health insurance and voluntary third pension levels, from which funds can be accessed earlier — from the age of 55.