Opinion: How to really plan for, and go about, pension reform ({{commentsTotal}})

Lauri Leppik, Senior Research Fellow at Tallinn University.
Lauri Leppik, Senior Research Fellow at Tallinn University. Source: Private collection

Pension reform is one of the topics on the table with coalition discussions of any hue. The system as it exists is set up in three stages, called ''pillars''. The first pillar is the state pay-as-you-go contributory pension, the second is the mandatory funded pension with personal pension accounts, and the third is an additional, voluntary pension a person might make via private schemes.

Isamaa, one of the three parties engaging in the current coalition talks, made the removal of the second pillar (or rather, making it voluntary and allowing withdrawal of accumulated pension savings) a central policy plank in the lead-up to the 3 March election. Whether it will get this policy past the other two, larger, parties in the negotiations, Centre and the Conservative People's Party of Estonia (EKRE) remains to be seen. However, for Lauri Leppik, senior researcher at Tallinn University's demographics centre, this approach of making such important and wide-ranging reforms the plaything of politicians, without wider consultation, is damaging.

In the following piece he discusses policy making in the pensions field, in particular regarding the second pillar, using an analogy from a real-life environmental question. He will thus see how, when it comes to some areas at least, the impact of reforms on fish requires more analysis than the impact of reforms on people.

We have a country house in Taevaskoja [in Põlvamaa in South Estonia-ed.], just a few hundred metres from the Saesaare reservoir. About five years ago, discussions started as to whether the reservoir [which was constructed by damming the Ahja river to construct a hydroelectric power station in the early 1950s-ed.] should be removed. The main argument in favour of the removal were two-fold: Restoring the Ahja river valley to its historical state, and allowing fish to move freely along the river.

There are legitimate arguments on the other side too – the removal of a renewable energy source, and the recreational activities like swimming and boating which the reservoir affords.

In cases like this – the future of a man-made landscape – the law prescribes how to reach a decision. A detailed plan is necessary, where the proposed solution is outlined; environmental impact assessments should be carried out, and the risk and impact factors from both environmental and socio-economic perspectives should be examined. Public consultations should be organised. It is only after these mandatory steps, that the decision can be made on whether to remove the reservoir, or retain and renovate it.

In a sense, the second pillar of the pensions system can be seen as a ''dam'', built on the free flow of the ''water'' that builds up in order to raise retirement funds in a ''reservoir''. Like the Saesaare reservoir, opinions differ on whether this ''dam'' is a good, or rather bad, even very bad, thing.

Policies lacking a detailed plan and analysis

That said, we have very different methods for reaching decisions in environmental matters compared to societal areas. Politicians can facilitate the dismantling of the second pillar of the pensions system without any detailed plan. They are under no obligation to provide a detailed solution or order multiple impact analyses; simple newspaper articles can substitute for these.

So it works out the other way round – make the decision first, and only follow up with the details and evaluate the effects later – than with the environmental projects.

In this way, politicians can simply permit such a decision and then push it through with the other parties in closed negotiations as part of a broader deal. This may all seem like an unbelievable paradox – which in fact it unfortunately is.

With decisions on the environment, we are obliged to follow the principles of evidence-based policy-making, but regarding decisions about society, politicians still succumb to the temptation to decide things behind close doors and then provide the justification and solutions.

Indeed, we have a government regulation in place on good practice of law-making, which oblige legal bills to outline the problem and various possible solutions, and analyse the effects of available alternatives. Unfortunately, however, reality has so far been the case that coalition agreements are stronger than this government regulation.

In today's world, however, we can't consider such decision-making process affecting thousands of people to the tune of millions of euros as normal.

Just as with rivers and their flora and fauna, we should not make crucial decisions affecting society's well-being before we have elaborated the practical solutions in detail and thoroughly analysed the social impact of the possible solutions, taking into account, not only biodiversity, but societal diversity and the situation of different socio-economic groups. Just as we don't talk about the ''average fish'', we shouldn't refer to the ''average person'', either.

Editor: Andrew Whyte

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