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Estonia: The Riigikogu discussed pensions as a matter of significant national importance

NordenBladet — The matter of significant national importance “The Future of Pension – Who Will Provide for the Elderly?”, initiated by the Social Democratic Party Faction, was deliberated at the Riigikogu today.

Presentations were made by the Head of the Management Board of Praxis Center for Policy Studies Tarmo Jüristo, Senior Research Fellow of Tallinn University Lauri Leppik, doctoral student of the University of Tartu and economic expert Kaspar Oja, and member of the Social Democratic Party Faction Riina Sikkut.

Tarmo Jüristo said that the theoretic net replacement rate of the Estonian pension system is the lowest in the European Union at around 40 %. Estonia has the highest at-risk-of-poverty rate in the EU among the over 65 year olds who live alone, amounting to nearly 80 %. As a large proportion of the people aged 65 and over receive income that is close to the poverty threshold, even the slightest drop in the relation between salaries and pensions leads to a rapid increase in the number of people living at risk of poverty, Jüristo warned.

“Estonia leads the ranking in Europe in the employment rate of people over the pension age, which is reflected in the lowest relation between the average length of retirement and of working career among the Member States. Whichever way you look at these numbers now, the current situation leaves no doubt that social problems will appear in the future, followed by political pressure to push Estonia’s pension system towards a wider choice. It is more than likely that there will be considerable pressure towards increasing the volume of funds in the Estonian pension system in the future,” Jüristo said.

The second pillar foundations in Estonia hold a total of EUR 4.5 billion. “This is the money we have been putting aside over the last 17 years individually and collectively, and it should reduce the burden of the next generation to fund our pensions,” Jüristo said. Jüristo sees further ways to enhance the second pillar disbursements system, which has already been considerably improved by the recent changes. “The risk profiles of foundations and the choice of foundation by the individuals across their life cycles can be further optimised, more information can be provided, and average service fees have plenty of room to come down. All this creates the conditions for higher productivity than has been achieved so far.”

Lauri Leppik spoke about the two fundamental ways of funding pensions. “The first is something we call permanent financing, inter-generation redistribution; and the second, what we call pre-financing, where every generation collects their own pension funds,” Leppik explained. Very many European countries use what he termed as a mixed model, i.e. using both permanent and pre-financed pension systems; sometimes such mixed financing is used within one pension system.

Leppik said that in a situation where the Estonian replacement rate of the first pillar with its permanent financing is one of the lowest in Europe, an individual who wants to rationally plan their future, not depend financially on their offspring, and disperse risks, but is able to save money only in small instalments, has very few opportunities, other than to turn to a pre-financed pension scheme. “Because it is not possible to buy additional pension from the state; the state does not provide that service, and sadly would also be unable to provide it,” Leppik said.

“Estonia’s second pillar pension foundations have attracted severe criticism, and I do agree that some of that has been well justified. However, we could view the second pension pillar as a cooperation effort between the public and the private sector. The private sector is providing a public service,” Leppik added.

Kaspar Oja focused on collecting pensions in the context of macroeconomics. He sees the topics around ageing and pensions gaining increasing importance in the society. In light of the demographic situation, less people are of the age to enter the labour market than in the age to leave it; over the last years, nearly 6,000 less have entered the market than left it, and Oja does not foresee this situation changing.

He does not think it’s enough to simply save for retirement. “In order to live off the pension alone, purely thanks to savings and with no insurance solutions, one should save up significantly more than would actually be efficient. In order for funded pensions to work, we need some sort of insurance solutions, we need the kind of payment solutions that would allow us to pay pensions in the long term,” Oja said.

Oja also said that the slowing down of Estonia’s economic growth reflects similar past developments in Finland. “The first pillar system, which is based on the tax revenue, is unlikely to ensure us growth as quickly as capital revenue would, if the investments have been made in sufficiently numerous instruments.”

Riina Sikkut stressed the need to remember that we are developing our pension system for the benefit of the people. She listed four aspects that should not be forgotten: people want to receive more in the future; theoretic knowledge that the people have does not translate into their behaviour – neither in taking care of their health nor their personal finances; there is massive inequality of incomes and assets – it would be useful to keep an eye on the income distribution curve when changing taxes, pensions, or any other benefits; children are not a pension pillar – the economic coping of an elderly person cannot depend on whether they have children, and what the financial situation of their children is like.

“We are already feeling a pressure towards an extraordinary increase in pensions, and we are seeing how difficult it is to secure even a seven euro increase,” Sikkut said. “In a situation where the percentage of working-age population is falling, we are unable to ensure a living pension from the current taxes. And of course it makes sense to find other solutions as well, whether they involve saving up for your own retirement, or something else. The second pillar can be improved but it would be irresponsible to jeopardise the coping of the future pensioners to such an extent for the benefit of short-term gains tomorrow,” she added.

During the debate, Indrek Saar (Social Democratic Party), Jürgen Ligi (Reform Party), Tõnis Mölder (Centre Party), Urmas Espenberg (Estonian Conservative People’s Party), Priit Sibul (Isamaa), Heljo Pikhof (Social Democratic Party), Oudekki Loone (Centre Party), Aivar Sõerd (Reform Party), Heiki Hepner (Isamaa) Kalle Grünthal (Estonian Conservative People’s Party) and Andres Sutt (Reform Party) took the floor.

 

Source: Parliament of Estonia

 


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