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Government’s pension reform no move towards welfare state

Professor Lauri Leppik of Tallinn University insists that the government's proposed policy shift is not towards a welfare state like Sweden and Norway have it.
Professor Lauri Leppik of Tallinn University insists that the government's proposed policy shift is not towards a welfare state like Sweden and Norway have it. Source: (Postimees/Scanpix)

According to Tallinn University’s Lauri Leppik, the government’s pension reform is not a step towards a Nordic-model welfare state, but rather towards the state guarantee of an absolute minimum pension to keep people from slipping into poverty after they retire.

Lauri Leppik, senior researcher at the University of Tallinn’s demographics center, points out that the minimum national pension is below the absolute poverty line, and the average pension in Estonia also still below the relative poverty line.

Estonia’s old-age pensions are based on a three-pillar system. The second and third pillars are where people collect money all their working lives, with the second being obligatory for anyone born in 1983 or later. The third pillar entirely depends on an individual’s voluntary contributions.

The reform currently discussed concerns the first pillar, or the national pension. This part of an individual’s eventual retirement income doesn’t depend on voluntary or obligatory contributions to a personal fund, but financed out of social tax revenue.

One of the things that makes pension reform inevitable is the fact that the Estonian population is both getting older, and shrinking. Where for the last 20 years the number of working citizens paying social tax per pensioner was slightly above 2, by 2060 it is expected to drop to just 1.3.

That the government wants to peg the retirement age to the average life expectancy of the population is no surprise, and a popular policy elsewhere in Europe as well, Leppik points out. In Estonia, such change of the system would affect anyone born in 1962 or later.

The other reason for reform is the great and still growing inequality in terms of salaries, and resulting from it also in terms of contributions to the obligatory second and voluntary third pillar. Whoever does not have the means to save while still working, and whoever can only make proportionally small contributions to the second pillar is at risk of slipping below the poverty line as soon as they retire.

This can be counteracted in the current set-up only by making changes to the first pillar, the national pension, the funding of which is regulated by the state. Currently the first pillar consists of a basic pension that is the same for everyone. Then there is a supplementary pension based on years worked, which applies for anyone who worked before 1998. Starting Jan. 1, 1999, Estonia switched and introduced an insurance-based supplementary payment that could now be calculated based on how much an individual was paid. Their pension after they reached retirement would then be based on how much they had contributed in social tax paid.

The government’s plan is to go back to a system where the years worked count instead of the amount of social tax paid. The change would affect anyone entering the labor market in 2037 or later.

For them, the system would include a first pillar based on the basic pension and years worked; a second pillar, to which they make obligatory contributions based on how much they earn; and a third, entirely private pillar, the payments into which depend entirely on their own readiness to save for their retirement.

This way, the government hopes, people who do not have the option of making voluntary contributions, and who aren’t paid a high salary that would contribute a lot to the obligatory second pillar can still live out their lives in dignity and without the risk of descending into poverty.

Compared to the Nordic as well as some Western European countries, Estonia still isn’t moving towards a comfortable old-age income like those countries can guarantee it, Leppik explains, but rather towards the pension system of a classically liberal state, where people’s responsibility for their own old-age income is very high. Comparable countries with such system are the Netherlands, Britain, and Ireland, Leppik points out.

“And in those countries the first pillar has this basic function to guarantee minimal protection against poverty. And adding to this there then are several market-based private pension systems.” The strong position of those countries’ politics, Leppik stresses, is to make it very clear that the state’s task is just the guarantee of the minimum.

Editor: Editor: Dario Cavegn

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