Constitutionality of pension reform to be ruled on by Supreme Court en banc ({{contentCtrl.commentsTotal}})

Supreme Court of Estonia.
Supreme Court of Estonia. Source: Supreme Court of Estonia

The application of President Kersti Kaljulaid seeking to declare the pension reform unconstitutional will be handled by the Supreme Court of Estonia en banc, which will issue a decision this fall, the Constitutional Review Chamber of the Supreme Court ruled.

If the reform of mandatory funded pensions enters into effect, people who have not yet reached retirement age would be entitled to demand the redemption of the units of a mandatory pension fund as well as the payout of money in their pension investment account.

In addition, the reform would entitle people to terminate their pension agreement concluded before Jan. 1, 2021 and be paid out an amount equaling the surrender value of the pension agreement.

Having familiarized itself with the application of the president and the positions of the other parties to the proceeding, the Constitutional Review Chamber of the Supreme Court found that if a person withdraws money from a pension fund or a pension investment account before reaching retirement age, they will receive no mandatory funded pension payouts after retirement or these will be smaller compared with a situation in which the person had accumulated money into the second pillar the entire time.

The Constitutional Review Chamber also observed that for such individuals, the first-pillar pension will also be smaller, as during the period that money was accumulated into the second pillar, 16 percent, not 20 percent, of social tax paid for the person was paid into the assets of state pension insurance, meaning the first pillar of the pension system.

To date, remuneration for work and other similar payouts to people who have accumulated money into both pillars, as well as to those who have accumulated money into only the first pillar, have been taxed equally, the Constitutional Review Chamber pointed out.

The reform of mandatory funded pensions would entitle people who have joined the second pillar to get unrestricted control of assets accumulated by means of the payment of social tax immediately. No such possibility would be established for the people who have not joined the second pillar, although their remuneration was taxed with social tax on the same basis, the Constitutional Review Chamber observed.

Since the planned measure is about the termination of agreements already concluded, an expectation may have arisen in people that the rules applied to pension agreements will not change to be more unfavorable for them afterwards.

Furthermore, the Constitutional Review Chamber observed that if the pension reform takes effect, people who have joined the second pillar will be able to get unrestricted control of their pension assets when in retirement age, whereas those who have not joined the second pillar will have no such possibility.

On February 7, President Kersti Kaljulaid opted not to proclaim the law on the reform of mandatory funded pensions. The Riigikogu passed the bill in unchanged form again on March 11, and on March 16 once again submitted the bill to be proclaimed by the president.

The Estonian head of state decided for a second time not to proclaim the pension reform bill, and submitted an application to the Supreme Court seeking to have the bill declared unconstitutional.

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Editor: Aili Vahtla

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