Hands off second pillar, say analysts, economists, experts in open letter

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

An open letter was published on Monday stressing the importance of Estonia's second pillar pension funds, and that instead of discussing how to make it voluntary or dismantling it, Estonia's political parties should deal with more serious issues. The letter was signed by some of Estonia's most eminent economists, business analysts and entrepreneurs.

No alternative to funded pension system

Seeing as there is currently no viable alternative to a pension system based on saving money, dismantling it would mean the creation of a substantial financial burden for Estonia's coming generations, the signatories write, and that in a situation where demographic change affects the country even more.

"This means at least one of three things: either the income of pensioners will shrink, the tax burden will increase, or the retirement age has to be raised even quicker," the signatories write. "The labour market's reserves to increase employment aren't endless. Health, among other things, puts a limit to increased employment as well."

The share of full-time employees in Estonia's working population is already the highest among the European countries. With salaries continuing to grow, a trend towards lower numbers is likely. "Taking into account the already high activity of pensioners in the Estonian labour market, it is far from certain that raising the retirement age would increase this share further," the letter reads.

Pensions part of long-term social contract, changes require broad political consensus

A country's pension system is a long-term social contract that can't be changed on a whim, the signatories suggest. "Principal changes to the pension system require a debate in society and broad political agreement. That is exactly how the current pension system was created. Sudden changes to important details of the system negatively affect people's trust in the pension system as well as in the state as a whole."

The funded pension system works towards the long-term sustainability of the state's social system and cannot be sacrificed for short-term goals in Estonia's day-to-day politics, the signatories write. "A sustainable pension system isn't petty cash that can be spent to fulfil campaign promises."

Obligatory, automatic nature of second pillar an advantage, not a problem

That the current system is obligatory for everyone as well as automatic is a strength of the system and not a weakness, the signatories point out. "Studies have shown that many people don't put money aside voluntarily. Those who don't have the second pillar simply have that much less money, they haven't saved more elsewhere," they write.

In addition, the close connection of tax and the pension pillar promotes the honest declaration of income, and works against a black economy. That the funded pension system also increases an individual's independence from the current political situation is no small matter either, the letter states.

While the first pillar depends on the whims of Estonia's politics a lot more, the second pillar actually works to hedge risks between Estonia and the rest of the world thanks to the share of foreign investment in it. "The risks of the first pillar are connected with Estonia," the signatories write.

Signatories: Pseudo-debate distracting people from actual issues

The talk about the opening-up or the dismantling of the second pillar is distracting from actual, more serious issues, they add. Though there is no doubt that the second pillar needs to be fixed and made more effective and cheaper, this has to happen through a reduction of management fees and by revisiting demands made to the privately run funds, the signatories write.

The signatories of the letter include analysts, economists and entrepreneurs from a range of institutions broad enough to include all of Estonia's most important universities, banks, ministries, investment funds, industrial associations, trade unions and think tanks.

Editor: Dario Cavegn

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