Coalition agreed on pension reform bill, differ on ensuing pension hike

Ismaa leader Helir-Valdor Seeder championed second pillar pension reform and managed to get it into the coalition government platform, but now faces differing opinions on what to do with the potential freed-up money.
Ismaa leader Helir-Valdor Seeder championed second pillar pension reform and managed to get it into the coalition government platform, but now faces differing opinions on what to do with the potential freed-up money. Source: Priit Mürk/ERR

The coalition government came to an agreement Monday night to carry out pension reform in one move, with money saved contributing to a pension hike, ERR's online news in Estonian reports. The issue has seen some differences of opinion on making a pensions hike contingent on the bill, however, with Centre and EKRE broadly speaking in favor of this, and Isamaa more sceptical.

Making the so-called second pillar of the Estonian pension system, employee contributions, optional, was a central plank of the Isamaa party's election manifesto ahead of the March general election, which argued that doing so would improve competitiveness as the second pillar tends to underperform related to the economy.

Minister of Social Affairs Tanel Kiik (Centre) told ERR that, following a three-hour meeting, the decision was taken to cover all pension reform in one bill rather than two or more.

"Since there are quite a few technical issues, including tax and legal matters, the agreement covered contributions to the reforms from the justice ministry, as well as the social affairs and finance ministries," Kiik said.

Finance minister Martin Helme (EKRE) noted that simplifying the matter in the one bill, not to mention passing the bill as soon as possible, was necessary for clarity.

"Professionals might want to move more cautiously thatn our political dictates," said Helme, adding that: "Our primary decision was that we would not be unambitious about this."

"Major reforms must be done boldly and in one fell swoop, not in a jumble of confusion," he continued.

"Our common position is that we need to do this all at once as people need to understand what the conditions the reforms were made, when making choices. Otherwise, they could run the risk of taking a leap into the unknown with their decisions," Helme said.

Projected timescale

Helme said that the coalition's intention was to put the bill before the Riigikogu this autumn, with a view to it coming into force on Jan. 1 2020 should it pass the vote. This did not mean people would be able to leave the second pillar immediately, however, as there were still technical issues to address, including those concerning IT, Helme said.

However during the course of 2020 people would be able to opt out of the second pllar or suspend payments: "In other words people will be able to claim payouts not long after that," Helme continued.

Isamaa leader Helir-Valdor Seeder reiterated that the new system would not magically come into being with the changeover of years, estimating the payouts would start from the second half of 2020.

"We'll enable the very real switchover to be in a short time for the majority of people," Seeder said.

The draft bill itself should be before the cabinet in a few weeks, when details about reforms and their schedule will be clearer.

Under the current system, employees pay 33 percent social tax, 20 percent going on pensions including state pensions. In the case of the second pillar, the person pays 2 percent towards their own pot, with the employer doing same, making 16 percent the actual amount taken from a monthly salary on pensions.

Thus by leaving the second pillar, tax revenues freed up for the state will rise in the immediate term.

This windfall, the coalition agreed Monday, will be used to hike pensions extraordinarily, though this would be treated under a separate law, Tanel Kiik said.

The actual date the hike comes into effect is not yet known and is to be decided at the next state budget, he added.

Don't know how many will actually opt out

However, Isamaa leader Helir-Valdor Seeder has said that the hike cannot be contingent on second pillar reform, noting that the state budget cannot immediately cover the increase, meaning something of a rift between Isamaa and the Centre Party.

Tõnis Mölder (Centre), Riigikogu social affairs committee chair, suggested that Seeder's position on the pension hike could lead to the bill stalling at the Riigikogu (Centre, EKRE and Isamaa between them have 56 seats, giving a majority at the 101-seat Riigikogu, but without Isamaa supporting the bill, with their 12 seats, that majority would evaporate).

For their part Isamaa reject the claim that they are opposed to the hike and its linking to pension reform, noting that they simply urge caution on how to fund the hike.

EKRE sat more on Centre's side on this issue, with Martin Helme noting that the pension increase and the second pillar reform, while not formally linked, are in cash terms inveitably related.

"We talked through the schedule. We didn't quite set dates, but depending on how we plan to reform the second pillar, it can provide us with a framework for when or how we can move forward with retirement growth," Helme said, though adding that the immediate revenue arising from those leaving the second pillar may not on its own cover the hike.

"The question is not just how many people are leaving, but also who is leaving, higher paid people, lower paid people, or the average," Helme added.

"However in any case, the number of second-pillar withdrawals will not, even under our most generous assumptions, cover the full cost of pension hikes," Helme continued.

"This is one topic we need to discuss as to how to make it work. Even after this reform, we need to find additional resources. This is also clear," he said.

Government vision for how the reform would pan out

While the second pillar is not being entirely abolished, those already in the scheme as well as future joinees will be able to opt out – effectively reinstating the status quo before 2010 – with no differntiation between the two groups.

Terms and conditions will need to be set up by the government, though second pillar cashouts will be made within two years of application, according to the agreement. They will also be subject to income tax.

Those optiing in will be able to apply for a second pillar contribution to an investment account, rather than the existing fund.

Opponents of the second pillar removal say that it would hit lower earners harder. In addition, the International Monetary Fund (IMF) has expressed concerns that the removal would, given Estonia's ageing population, increase the burden on future generations further, as people potentially raid their pensions savings early.

The second pillar comprises mandatory contributions to pension pots from employees, as against employers (first pillar) or private pension schemes (third pillar).

Mandatory from 2010, those born in or after 1983 must pay into the second pillar; those born between 1942 and 1982 had the choice to opt out when the scheme was first introduced.

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Editor: Andrew Whyte

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