II pillar

All of the world’s largest stock markets remained slightly on the plus side in September. Measured in euros the S&P500 Index, which includes the largest US enterprises, rose by 2.5% last month, and the value of the Stoxx 600 Index, which reflects the well-being of Europe’s largest enterprises, rose by 3.6%.

Both the US Federal Reserve and the European Central Bank have done an about-face in terms of their monetary policy this year and lowered interest rates. However, all medicines lose their effectiveness if taken for too long, and unwanted side effects also begin to materialise.

Corporate indebtedness has grown, although enterprises have not spent all of their borrowed money on investments. A large portion has been used to repurchase shares and pay dividends. Government debt burdens have also grown, regardless of the fact that there is no longer a need to pay interest and they are even being paid for taking a loan.

In its analysis, Deutsche Bank has shown that the average debt of the world’s largest countries already exceeds 70% of GDP. It is the highest level in the last 150 years, if you leave out the rapid growth in public debt during World War II.

Living at the expense of the future

Recently, it has become more prevalent in Estonia to support the standpoint that if money can be borrowed in such a way that you are being paid to do so, this opportunity should be taken. However, I believe that more important than the loan interest rate is how the borrowed money is used.

If a loan with an interest rate of 0% is invested into a project, the rate of return of which is greater than 0%, it is justified. However, if the loan is used in such a way that it creates nothing, the borrowers are digging a hole, from which it is not easy to climb out of because the debt is owned by a stranger (even with an interest rate of 0%). In the end, we shall be poorer by the amount of the borrowed money, not richer. It does not matter whether the loan has a 0% or 10% interest rate, it is vital that we would earn a higher rate of return than the interest rate of the loan we have taken.

In particular, I have heard politicians say that because of the lower interest rates it is not reasonable to invest right now – it would be better to spend. Justifying spending and encouraging consumption has for years (but not always) been the world-view of Isamaa politicians (although they still consider themselves to be right-wing and conservative).

Two previous Ministers of Finance, who both came from the Isamaa Party, spent the reserves of both the Estonian Health Insurance Fund and the Estonian Unemployment Insurance Fund. The last Minister of Finance appointed from among the ranks of the Isamaa Party described it as the efficient use of money, and also included permission to spend the reserves of the Estonian Health Insurance Fund and the Estonian Unemployment Insurance Fund, in order to cover running costs, in legislation. The Estonian Health Insurance Fund and the Estonian Unemployment Insurance Fund have reserves only on paper – actual money does not exist, one of the current ministers admitted. Maybe this is why the Great Peters of Isamaa have targeted people’s savings in the pension funds.

“Expert opinion”

When it comes to Isamaa’s economic ideology on the scale of left and right (or rather not having a world-view), it is best characterised by their choice of spokesman. Several politicians from Isamaa have highlighted Indrek Neivelt as someone whose competence should not be doubted.

I do not know whether the politicians of “right-wing” Isamaa realise that “left-wing” Indrek Neivelt has never represented their right-wing politics. Hereby, I am not stating which world-view is correct but rather admitting that Isamaa does not understand the scale of left and right, at least not in terms of the economy.

Moreover, I do not understand why Neivelt is considered an expert, whose competence should not be doubted. What has Indrek Neivelt done after leaving Hansapank that would give anyone the reason to consider him an expert in a field? When Rain Lõhmus left Hansapank, a team of top specialists followed him. Possibly, Indrek Neivelt also hoped that a team would leave with him from Hansapank, which was acquired by the Swedes, so they could start something new together. No one followed Indrek!

His record sized ego on the Estonian scale has yet to overcome this disappointment. Indrek’s post-Hansapank experiments, both as an entrepreneur and an investor, do not demonstrate his competence. His huge ego continues to need society’s attention and Facebook likes. For Neivelt, being popular is more important than facts and intellectual honesty. Everyone could see that in the 4 September “Esimene Stuudio” show, on ETV, where he engaged in a debate with Ardo Hansson over the topic of pension reform.

Neivelt’s criticism about how money is added to pension funds for decades, before more starts coming, out has raised some eyebrows. If you save money for a trip happening in a year, you put money aside for 12 months, so you could eventually withdraw it and go on the holiday. It is the same with saving for your pension. If you start saving for your pension in your twenties and your pension arrives in about 45 years, it does mean that you save and grow your pension assets for about half a century and start using it when you are 65 years old. If you withdraw the money before retiring and spend it, then you would have nothing in your bank account when you are 65.

The same logic applies to the pension system as a whole. It takes about 40-50 years from creating the system until the point in time when payouts start exceeding deposits. Which is why the II pillar is called the funded pension. In the last 17 years, the rate of return of pension funds has exceeded the increase in the cost of living, so the funds saved for pension have not gone up in smoke nor has the purchasing power of pension assets decreased. Neivelt’s statement, as if the Swedes are receiving a pension three times bigger than their deposits, is not a fact but a hyperbole constructed to draw attention, presuming a lot of unrealistic prerequisites.

Neivelt likes exaggerations in the style “Estonian people failed to earn EUR 1 billion. A billion euros!”. However, he is not ashamed to add an accusation to the article, published in Postimees, in April, directed at the pension reform critics of Isamaa, whom he maligns with his delusions: “However, lies and half-truths are spewed to the media, with those people who want to change something being accused.” Neivelt should look in the mirror to see who is the one spewing the lies and half-truths.

Isamaa, Parvel Pruunsild, and Indrek Neivelt began their attack with a cold-blooded lie that the money in the pension funds is going up in smoke. I hope that both Neivelt and Seeder have the honesty and courage to admit their mistake and have, by now, managed to acquaint themselves with the reality that the purchasing power of the pension funds has increased, not decreased.

Discipline helps to bring success

There is no doubt that the pension reform of Isamaa and the current government coalition means smaller pensions in the future, even in the case where the beginning of retirement is being postponed further and further.

In comparison with their salaries, the pensions of Estonian citizens are the lowest in Europe, and life after retiring is shorter than in other European countries. Thereby, Isamaa wants to force a pension reform that would make Estonia’s pension system even more minimal. To retain the current replacement rate (pension compared with the last net salary) of Europe’s lowest pension, which in Estonia is about 40%, it is proposed to postpone the retirement age.

Essentially, it means that a large group of people shall pay 20% of their salary as pension instalments to the state budget for 40 years but will not receive anything in return if they leave this world before reaching their retirement. Basically, for many people, postponing retirement means eliminating the I pillar in the same way that Isamaa is trying to remove the II pillar by making the funded pension voluntary.

Wealth and assets accumulate only when less is spent than earned. For me, freedom is linked to coping on my own and this presumes a certain amount of wealth. Wealth and thus also freedom presume at least some discipline in financial issues and in a broader sense as well. You shall never become rich and free while spending.