SDE: Demolition of Estonian pension system must be stopped

SDE chairman Indrek Saar.
SDE chairman Indrek Saar. Source: Siim Lõvi/ERR

All responsible members of the Riigikogu and non-parliamentary interest groups should prevent the disruption of the pension system and protect the future of the Estonian people, the extended board of the Estonian Social Democratic Party (SDE) said on Saturday.

"The Social Democrats in the Riigikogu oppose the government's plan to amend the Pension Act with which, under the tagline of making the second pension pillar voluntary and in the name of short-term political benefits, the sustainability of the entire Estonian pension system is being destroyed," it is said in the statement.

According to the party, the planned reform is dangerous to the state and society of Estonia for three reasons.

Firstly, it is contrary to the spirit of the Constitution. For the sake of fulfilling one party's cynical election pledge and satisfying the economic interests of a narrow business community, obligations that they are not able to cope with are being pushed onto future generations, the party said.

Secondly, this undermines people's confidence in the country by urgently and for party political reasons reversing the long-term and thoroughly prepared structural reform.

Thirdly, the proposed "reform" will create injustice in society by treating people unequally and harming the lowest-paid and the least secure. A greater tax burden will also be placed upon the shoulders of today's young people in the future, SDE said.

The party said that it is prepared to constructively discuss strengthening the current pension system and improving its sustainability, but said it does not agree with the government's wish to demolish the current system by destroying the sense of security in society.

SDE promised to hinder the adoption of the government's planned bill in the Riigikogu with all parliamentary methods and called on all others to do the same.

SDE chair Indrek Saar said that the dismantling of the funded pension system deals a blow namely to lower-income workers for whom the funded pension constitutes main financial savings. "Therefore, the rhetoric that we trust a person and allow them to decide on their own how much and how to save for retirement is especially cynical," he said.

Second Pillar mandatory since 2010

The coalition government announced in August that membership of the second pillar of the Estonian pension system, which concerns employee contributions, will be optional from the beginning of 2020, should the relevant law pass at the Riigikogu. Previously membership of the second pillar had been mandatory for most earners.

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.

What the changes mean in practice

If the law enacting the reform passes at the Riigikogu, finance minister Martin Helme (EKRE) said in August, it would come into effect at the beginning of 2020, people would be able to start leaving the scheme in July, and the first disbursements would start arriving at the beginning of 2021.

The changes mean that people will be able to withdraw all of the money accrued in their second pillar account. But withdrawing money from one's second pillar account will impact the size of their old age pension.

Helme said: "We hope that pension funds will become more efficient as a result, i.e. banks will make more of an effort." Prime Minister Jüri Ratas (Centre) said that what is most important is the increased freedom of choice that this reform will mean.

"People can continue saving the same way," Ratas said. "One option will be to stop paying into the second pillar, but leave already accrued savings in the pension fund. Or another will also be able to stop making payments and also withdraw the accrued money."

 Central bank to carry out impact analysis

The Bank of Estonia is set to conduct an impact analysis of the proposed changes which will be presented in October. They will analysis what the immediate impact of a change in the pension system may be on the rise in prices and the Estonian economy, Bank of Estonian chair, Madis Müller, said in a press release.

Earlier Bank of Estonia analysis by economist Jaanika Meriküll found that people who were in the second pillar already were likely to save more for retirement than those who had not joined it.

In July, the International Monetary Fund (IMF) expressed concerns about the proposed pension reforms in Estonia, on the grounds of budgetary risk, long term effects, and the lack of in-depth analysis.


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Editor: Helen Wright

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