Decline in tax inflow may prevent indexation of state pension in 2021 ({{contentCtrl.commentsTotal}})

Pensioners in Tallinn (picture is illustrative).
Pensioners in Tallinn (picture is illustrative). Source: Siim Lõvi/ERR

The decline in tax receipts in April and May may lead to a situation where the first pillar pension fund cannot be indexed in 2021, which would mean the state pension will not grow next year, the financial sector umbrella organization FinanceEstonia has said.

Joel Kukemelk, member of the FinanceEstonia working group on funded pensions, said the second and third funded pension pillars have rapidly recovered from the temporary decline caused by the coronavirus. Assets of Estonian pension savers exceeded the five-billion-euro mark in June.

"Assets in both the mandatory as well as the supplementary funded pension pillar have recovered well," Kukemelk said in a press release. "Sadly, no such recovery has been observed in the state pension, or the first pillar."

"Even though this does not mean that anyone's pension will decline, the funds earmarked for pension payments will decline as a significant decrease in tax inflow can be expected," Kukemelk noted, adding that the state of the first pension pillar will be directly affected by developments in the labor market, on which the economic downturn caused by the coronavirus has only begun to make its mark.

"While the social tax inflow, from which state pensions are paid, grew on year in the first quarter, tax receipts declined in April and in May and the same can be expected for the next few months," he said.

Head of the funded pensions working group Kristjan Tamla said it is possible the indexation of the first pension pillar may not prove possible next year, as a result of which the state pension will not grow in 2021. 

"The decline in tax inflow was mitigated by the state aid package in April and May, which among other things also supported continued employment. When this ends, the inflow of labor taxes may drop notably," he noted.

Tamla said that the economic forecast published by the Bank of Estonia on Wednesday likewise points out that Estonia is facing difficult times and in order to better cope with the situation, both the people and the state would do well to build up stocks and save up for retirement. 

Current growth in pension funds compared with the state pension clearly shows that the pension system is one entity in which all pillars are important, both the state pension, mandatory funded pension as well as the voluntary funded pension, Tamla concluded.

Savers in the second pension pillar number 689,000 in Estonia and assets in the pillar total €4.87 billion. People who also use the supplementary funded pension to save up for retirement number 53,000 and their assets in the pillar total €201 million. Different pension funds number 25 in the second pillar and 11 in the third pillar

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Editor: Helen Wright

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