Pension Money for Housing: What Future Retirees Stand to Lose

As of today, it is officially possible to apply to use pension savings. Most people around me plan to withdraw their money and spend it either on paying off existing loans or on buying a new home.

As an economist, I still cannot understand the point of this move.

There are many risks that must be spelled out and understood.

The essence of pension savings is that we save for our own retirement, and when we retire, we should have a guaranteed sum to live on. By allowing pension savings to be used an unlimited number of times, we effectively make it possible to stop saving once a certain threshold is reached. That threshold is now KZT 5,560,000. With a life expectancy of 74 years and retirement at 63, the average person would live on KZT 42,000 a month. That is $100 a month, or $3.3 a day. It is very little, and since life expectancy rises every year, the average payout will be even smaller. And what about those who live beyond 74? There are a great many of them. A more logical approach would be to allow taxpayers to deduct from personal income tax the amount spent on buying a home, along with mortgage interest, as many countries do. In Kazakhstan, the interest deduction applies only to loans from the Housing Construction Savings Bank (HCSB). That would effectively let people direct up to 10% of their salary to mortgage repayment. The deduction could be allowed only once in a lifetime. Incidentally, such a rule would let the entire population claim the deduction, regardless of savings or salary level.

The second most important question is returns. At a minimum, the state guarantees that the return on pension savings will not fall below inflation. But will the real estate that people buy, or the reduced debt obligations, bring in the same income? I have serious doubts. I looked at how housing prices grew before demand began to be stimulated artificially, and found that in Kazakhstan housing prices rose more slowly than inflation over the nine years from 2010 to 2018. Prices started rising after state mortgage programs were introduced, and the growth will most likely continue now, since it will be fueled by pension money combined with mortgages. Because the withdrawal amounts per person are small, they will be just enough for a down payment. That means liquidity entering the market will be at least three times the amount withdrawn for home purchases. But later, once the bulk of the money has been spent and the state programs have ended, prices will at best stop rising and at worst begin to fall. Since current economic growth rests mainly on the construction and consumer sectors, we should not expect household incomes to rise any time soon. More substantial economic reforms are needed to raise household incomes. Therefore, withdrawing pension savings will erode their value over the long term, which on the whole is not a good thing. If the aim is to ease the debt burden and support the construction sector, it would have been better at least to phase the withdrawals over 3–5 years, in proportion to the amount saved. Add to this the depreciation of housing: we have no monumental buildings. In 20 years, an apartment will compete with newly built ones, and as an investment it will no longer be relevant. Even after five years, an apartment sells for considerably less than a brand-new one.

The only purposes I agree with are medical expenses and transfers to asset management companies, because there is a rational link and logic there. But I suspect that less than 5% of all savings will go toward these two purposes.

As the saying goes, we'll see.