Government backs down on pledge to keep average old-age pensions tax-free
The government is abandoning one of the key pledges in its coalition agreement to keep the average pension tax-free. Prime Minister Kaja Kallas (Reform) said the move was necessary to save costs.
"It was in the coalition agreement, it was in the agreement that we had when we put together the national budget strategy, but we have to take this action now simply because the new financial needs that we have in terms of national defense have challenged us to look at how we can cut costs even further," Kallas said at a government press conference.
Social Protection Minister Signe Riisalo (Reform) added that the cost of pensions will increase by more than €1 billion in the national budget strategy period up to 2027 with indexation alone, and by more than €220 million this year.
"The costs that the state has are very high and we also have to assess our capacity. How much tax money we collect and how much the state has committed to its citizens," Riisalo said.
Riisalo added that the government and parliament will always have the option to increase the income tax exemption for pensioners on an ad hoc basis.
Margus Tsahkna (Eesti 200), minister of foreign affairs and leader of the Eesti 200 parliamentary group, said that the indexation of pensions is a significant burden on the state budget, but there are no plans to change it. "This adjustment is simply necessary today," Tsahkna said.
Minister of the Interior and leader of the Social Democratic Party Lauri Läänemets agreed with Riisalo, adding that the alternative would be an annual increase in VAT or income tax. "Because the economy currently does not generate revenue for the national budget, taxes would have to be used to do so."
Representatives of all coalition parties confirmed that there are no plans to change the indexation system for pension increases.
The first point of the government's coalition agreement under the heading of social policy is a pledge to keep the average old-age pension tax-free.
On Wednesday, the government decided that from 2025 the income tax-free threshold for pensions will remain unchanged at €776 per month. However, the finance ministry forecasts that the average pension will rise to €826 in 2025. So with the income tax-free rate, the average pension in 2025 is expected to pay €11 per month in income tax, or €132 a year.
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Editor: Aleksander Krjukov, Kristina Kersa
