Government ministers divided on handling of pension payment suspension

Riina Solman (Isamaa).
Riina Solman (Isamaa). Source: Government Office.

Coalition ministers did not find a unified answer to a question over the wisdom of suspending payments to the so-called second pillar of the Estonian pension scheme, which took place in 2020 as the Covid crisis started to bit.

The question was posed by a journalist from portal Delfi at Thursday's regular government press conference.

Finance Minister Annely Akkermann (Reform), said that the pension reform put in place by a previous administration had had an impact on inflation, adding that claims to the contrary were misplaced.

Akkermann said: "I really hope that this will not be carried out again, as it really is not something to play with," referring to the liberalization of the so-called second pillar of the Estonian pension system, membership of which was made optional where it had been mandatory for most wage earners.

The second pillar concerns employer/employee contributions.

"In retrospect, we can say that this was certainly very expensive for the taxpayer. Second pillar payouts did alter inflation, because they increased the money supply in the market, be it by a little or a lot, but it definitely influenced this inflation level," she said.

Also appearing at the press conference was Minister of Economic Affairs and Infrastructure Riina Sikkut (SDE), who said: "Second pillar payments are not a budgetary policy tool that can be used to cut costs, even in a crisis situation. In a crisis, where quick decisions need to be made to mitigate short-term effects, these decisions should affect long-term plans. A very clear political stance is necessary here."

Minister of Public Administration Riina Solman (Isamaa), whose party sponsored the second pillar policy when it was introduced in 2019, said what had been done in the past could be criticized, but mistakes made during the original setting-up of the second pillar must be corrected.

Solman said: "If we examine the second pillar, we see it is really the case that those people who went to take part in it, especially the lower-paid, have not gained anything from it, but it makes no sense to think of these people as stupid."

"Now that the [second] pillar reform has been completed, the government will proceed on the pension reform direction and focus on improving people's financial literacy, instead of [focusing on] past decisions," Solman went on.

Foreign Minister Urmas Reinsalu (Isamaa) said there would be no need for any future suspension of payments into the second pillar, as the pension reform had already granted people the freedom to decide what to do with their own pension money, but also noted that the policy had been somewhat of a leap into the unknown and so alterations were not off the table.

"Looking back, are any of these decisions being reversed – of course, a lot," he said.

Reinsalu rejected the correlation between the freeing-up of the second pillar membership and 2022's soaring levels of inflation – the highest in the eurozone – however, noting that Latvia and Lithuania and other countries in the region had also experienced similarly high price increases, regardless of those countries' policies on pension contributions.

As to possible solutions, Reinsalu said that austerity would be "much more painful" than other ways of tackling inflationary pressure.

In January, close to 342,000 people will be compensated for the suspended second pillar payments in one lump sum, which will cost the state around €270 million.

This compensation refers to those who remained in the second pillar through to the present, who were born in 1961 or later, and who kept up their 2 percent contributions (matched by the same contribution from employers) between the period July 1, 2020 and August 31, 2021.

Initially, this disbursement had been set in two installments, but has now been amended to one payment, this month.

The government opted to suspend payments to the second pillar in 2020.

This was not the first time this had happened; between June 1, 2009 and December 31, 2010, payments were suspended, though fund-holders could opt out and voluntarily choose to continue their payments. Membership of the second pillar was made mandatory in 2010.

The state also has to compensate what the second pillar pension funds would have yielded during the time the payments were suspended, at an average of 9 percent yield, and totaling €22 million.

Riigikogu finance committee chair Aivar Kokk (Isamaa) had said earlier in the week that obtaining a loan at 9 percent was a good rate (ie. the state had in effect gotten a loan at this rate during the worst of the coronavirus' economic effects).

The policy was put in place by the Center/EKRE/Isamaa coalition, in office April 2019-January 2021.


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Editor: Andrew Whyte, Barbara Oja

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