Signe Riisalo: Average pension should be and remain exempt from income tax

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Signe Riisalo. Source: Ken Mürk/ERR

Pension hikes need to continue also in the coming years. What is more, additional sums should not be swallowed by income tax – the average pension needs to be and remain exempt from income tax. The state should not hike pensions with one hand while taking it back in the form of income tax with the other, Signe Riisalo writes.

We will all get old one day, a popular song goes. However, we do not have to get old and could instead value and promote actively growing old. One part of growing old is reaching the retirement age that should come with a solid pension and the ability to work only if one wants to work instead of struggling for survival.

Of course, this requires us to hike pensions and more. Rendering average pension free of tax would leave pensioners with that part of additional sums currently spent on paying taxes. True, this would benefit people receiving average pension who might still also be working. I find that the state should not hike pensions with one hand while taking it back in the form of income tax with the other.

Pension hikes must continue in the coming years

Last year's pension affects the annual indexation of pensions. So too are this year's extraordinary pensions hike and indexation seeds for pension advance in the coming years.

The average 1.6 percent pension hike entered into force in April. Coupled with the extraordinary pensions hike, the average old-age pension for 44 years of seniority grew by €24 to €552 a month. A pension supplement per adult child for one of the parents will be added following a decision by the previous government.

The basic national pension recipients of which number 3,000 was hiked by €30 to €255.

Extraordinary pensions hike is just one part of a bigger picture with which we want to boost the prosperity of the elderly. A complete approach to making the elderly feel valued will allow them to satisfy their social needs, participate in public and cultural life, keep their wits sharp and pursue work that inspires them or contribute to society in other ways, such as by helping others or promoting community initiatives as volunteers.

I'm glad to see the mindset according to which an elderly person is a valued employee and member of community courtesy of their experience and knowledge has become more widespread. That was also the focal point of the "Vanus on väärtus" (Age is a value) social campaign from last year that concentrated on motivation and necessity of elderly employees.

Tallinn University program "Development of capacity for the protection of interests of the elderly" offers representatives of organizations trainings for creating a supportive environment for remaining active while growing old and the ability to effect necessary change.

I convened a mental health task force complete with an expert think tank to put together measures for alleviating rising stress levels in what is a prolonged crisis in March. Mental health issues concern all social groups, including the elderly who are not only at risk from the virus but often also from loneliness, fear and anxiety.

We have been keeping a worried eye on the number of people leaving the second pension pillar in recent months that will force society to take greater responsibility for the coping of individuals after they retire. The solidarity-based first pension pillar is like a life preserver for the future, while pressure on society will be considerable in the coming years as the working-age part of the population continues to shrink.

Subsistence will depend mostly on ourselves and how well we have prepared for a dignified retirement also when we reach the retirement age. Will we bet on the solidarity of redistributing social resources of the first pillar or will we have created for ourselves a solid income based on the second and third pillars to make possible a safe and active retirement?

We need to keep in mind that first pillar pension will remain modest in the future and that quality of life can be maintained by saving up. One possibility is the so-called workplace pension, while few companies offer it today.

All of it suggests that pension hikes need to continue in the coming years. What is more, additional sums should not be swallowed by income tax – the average pension needs to become and remain exempt from income tax. All employees and employers should concern themselves with their future pension today because only by working together can we create premise for a dignified pension. So that we would not have to be afraid of getting old but could instead take satisfaction and joy in growing old.

Subsistence of pensioners in Estonia

Estonia has few elderly living in absolute poverty or a situation where they cannot cope. In 2019, 2.3 percent of people lived in absolute poverty, while the figure was fewer than 1 percent in the 65+ age group.

The absolute poverty line was €221 for a household of a single person. At the same time, relative poverty as an indicator of income inequality was highest among people 65 years of age and older, mainly because the age group has a lower employment rate and often sees people living alone.

Data from Statistics Estonia suggests that 41.4 percent of people 65 or over and 76.8 percent of those living alone lived in relative poverty in 2019, meaning their net income fell short of €611.

The 2018 pension adequacy report suggests pensions are key for alleviating poverty as pension is the main source of income for the elderly. Pension adequacy means pensioners being able to avoid the risk of poverty and actively participate in social and cultural life. The latter helps alleviate the problem of loneliness and risk of social isolation.

The European Commission has repeatedly raised the issue of poverty among the elderly in its report for Estonia. The recent report once again points out the fact that the relative poverty rate for the elderly (people 65 and over) remains very high in Estonia. Estonia's relative poverty rate among the elderly is one of the highest in Europe, third after Latvia and Bulgaria.

The Estonian social protection system is characterized by low social spending in GDP. The same goes for old-age pension. Estonia is among countries spending the least on pensions. While the average EU member state spent 10.1 percent of GDP on pensions in 2018, Estonia spent just 6.4 percent of GDP.

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Editor: Marcus Turovski

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