Second pillar pension reform continues to divide politicians

Helir-Valdor Seeder (left) and Andres Sutt, together with presenter Anna Pihl, on Tuesday's Esimene stuudio.
Helir-Valdor Seeder (left) and Andres Sutt, together with presenter Anna Pihl, on Tuesday's Esimene stuudio. Source: ERR

Isamaa party leader Helir-Valdor Seeder says that getting rid of the second pillar of the Estonian pension system, what he called the "worst product in the world", would bring far more benefits than losses. Opposition Reform Party MP Andres Sutt said that it would change very little in a positive way, and affect the most vulnerable in society most.

Appearing on political discussion show Esimene stuudio Tuesday evening, moderated by Anna Pihl, the pair went head-to-head on the controversial move by the coalition government to make the second pillar, made up of employee pension contributions put into managed funds, voluntary, rather than mandatory.

The policy was a central plank in Isamaa's pre-election manifesto; proponents including Seeder argue that the current system is too rigid and inflexible, and performs below market rates. In this they line up against both the central bank, the Bank of Estonia, and the IMF, who both urge caution in removing the mandatory membership of the second pillar, while conceding the system can be improved.

Helir-Valdor Seeder (Isamaa, coalition government)

Seeder said that the scheme had been in place for 20 years (the mandatory requirement to contribute kicked in for most present-day earners in 2010-ed.) and was never popular.

"People's savings in the pillar are burning up. It is wise to trust people and believe in their sense of responsibility. Practice has shown that an average person can certainly better invest and manage their money than various pension funds today, as analysis shows. In any case, it is more profitable for people today to confine themselves to the first pillar (employer contributions-ed.)," he said.

On being asked what might happen if people become profligate with their pension pot, having taken the opportunity to liberate it, then come begging to the state, Seeder said that there have always been people who live hand to mouth and payday to payday, adding that this was a small proportion of society.

"All legislation can't be based off the five to seven percent who will blow their second pillar money immediately when they leave. But they still have the state pension (i.e. the first pillar-ed.)" Seeder said.

Supporters of the reforms say that funds will be enough for many people to invest how they wish, including in real estate. Seeder, who is not a government minister, also quoted precious metals as a safe bet.

Andres Sutt (Reform Party, opposition)

In opposition to Seeder, Andres Sutt of Reform said it was necessary to look at the pension system in toto, and when doing that, the proposed reforms will cause more harm than good.

"If we make the second pillar voluntary, it will mean lower pensions in the future and less investment in Estonia. We are pulling the carpet out from entrepreneurs in Estonia because pension funds are the only long-term money providers," he said.

Opponents of the reforms have said that raiding the second pillar will remove an important source of investment into the private sector via the managed funds.

The change would affect lowest earners most, Sutt said, which could potentially be a much larger proportion than Seeder was implying, since only about 1 in 50 people in Estonia regularly invest, Sutt claimed.

"By making the second pillar voluntary, the people with the lowest incomes will be disproportionately affected; those with the higher incomes are the ones who can do the most (in terms of investing)," he noted.

"Today, the average pension in Estonia is about 40 per cent of the average wage, and it will get worse after losing the second pillar. The result is that pensioners will be poorer, and this burden will be reflected in higher taxes, higher retirement ages or higher public debts," he continued.

Sutt also said that at present the second pillar has an average balance of €6,000 per person, not a sufficient sum for real estate investing.

The reform will come into effect from Jan. 1 2020 if the bill passes the Riigikogu vote; first disbursements from the second pillar are likely to come from late on that year.

The original Esimene stuudio broadcast (in Estonian) is here.

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Editor: Andrew Whyte

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