Social affairs minister: Limit second pillar voluntary withdrawals

Social affairs minister Tanel Kiik (Centre).
Social affairs minister Tanel Kiik (Centre). Source: ERR

The Ministry of Social Affairs has proposed the Ministry of Finance amend its pension reform bill to limit the amount of money which can be withdrawn from the so-called second pillar fund.

The draft bill was issued last Wednesday, with interested parties given a week to submit feedback, comments, suggestions etc. by midnight this Wednesday, Nov. 6. The social affairs ministry, a key player and part of the same coalition government, had not submitted its comments as of Wednesday afternoon, but now it has.

The social affairs ministry suggests limiting the amount which can be withdrawn to one third of the fund, once membership of the second pillar, which deals with employee contributions, has been made voluntary where it was mandatory for most wage earners since 2010.

Either this one third requirement, which constitutes the individual's own contributions at 2 per cent of earnings, could be retrieved, leaving the remaining two thirds, added by the state from the social tax, could be the only component which could be withdrawn before retirement age, or alternatively the entire sum could be withdrawn no earlier than 10 years before retirement.

Critics of the reforms say that large numbers of people withdrawing from the second pillar could cause a brief economic boost, followed by a slowdown, as well as leading to smaller overall pension funds with an aging population, and other issues.

"The bill, which is in the process of being approved, will allow people to use the part of the state's contribution from social tax for other purposes as well," social affairs minister Tanel Kiik (Centre) said of the proposal.

"We therefore propose that the bill be amended so that only one third of the assets, the equivalent of the payment portion of the funded pension, can be withdrawn from the second pillar before retirement age," Kiik went on.

10-year time limit on returning to second pillar should be removed, Kiik says

Kiik says this solution would avoid claims of unequal treatment between people solely with pensions in the first pillar (the state pension) and those in both the first and second pillars.

"Alternatively, a regulation whereby people can apply for the full amount (2 percent + 4 percent-see above) of their assets to be paid out 10 years before retirement age could also be considered," Kiik added, noting the example of the U.K., where funded pension payments are possible from the age of 55.

The minister also proposed enabling people who have left the second pension pillar to rejoin it earlier than the 10 year limit in the current bill, echoing suggestions by Swedbank, operator of one of the second pillar managed funds, and Finance Estonia.

According to Kiik, the 10-year limit, which he says was not discussed in the original pension reform proposals, reduces a person's ability to save for retirement with the support of the state.

"If, due to some life event, a person wants to take a so-called 'grace period' from the second pillar contributions for a short period of time, they must give up the opportunity to make contributions for 10 years. The purpose of this restriction is not explained in the letter of explanation accompanying the bill. Nor was it agreed during the government discussions," Kiik said.

Finance minister Martin Helme said that feedback would be taken into consideration in the final draft of the bill, which still has to pass a Riigikogu vote. Should it pass, the law comes into effect on Jan. 1 and individuals will be able to start withdrawing from late 2020, the government said.

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Editor: Andrew Whyte

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