No. 3




Is Endowment Pension Impoverishing the Nation?

18 June 2001


RiTo No. 3, 2001

An important element in the endowment pension scheme is that it requires adequate savings to function. Therefore, a decision to launch an endowment pension scheme cannot merely be political. Instead, it should be an integrated economic resolution, which reinforces the need to re-invest endowment pension funds in the country’s economy, and thus lower the cost of finance capital for domestic businessmen. However, more important that that is to ensure that the obligation to lay aside money for pension reform does not increase the poverty of Estonian society.

It is important to find the optimum balance between economic development and the level of social security. Pension funds can build their assets only through the economy. Therefore, the pension system will develop to the same extent as the Estonian economy. At the same time, economic development is not the only important element in this equation. It is important to ensure adequate quality of life, by means of social security, which guarantees entitlement to state assistance in the case of old age, incapacity, loss of breadwinner and poverty.

This is becoming an obstacle to continued economic growth. In other words, economic development cannot exist without a reasonable system of social security. At the same time, social security needs economic development to exist. One of the most important duties is to transform from Soviet-era state paternalism to civic responsibility. The country needs to create a legal framework and help people to cover their primary needs. Individuals have responsibility and obligation when they participate in the solidarity of society and in ensuring personal wellbeing.

Finally, everything related to pensions boils down to the demographic situation and economic growth. It means that if the situation, with regard to employees and pensioners, is favourable, it does not make any difference whether the national pension is an endowment pension or a pension based on the solidarity principle.

The reasons why the country was forced to leave the PAYG method have been well publicised and analysed. Overwhelming evidence supports the decision to introduce three pension scheme pillars. An EMOR survey on financial behaviour indicates that Estonians are able to invest around 300 million kroons. Although it is a small amount as a financial market instrument, analysts still need to assess its impact on impoverishment when this money is removed from primary consumption. In the current economic climate of Estonia, we simply cannot force more and more people into poverty, forcing them to save funds that are scarce and that do not even ensure daily subsistence.

Full article in Estonian