The state to again alter pension system

Kristiina Selgis

PHOTO: Sander Ilvest

After every five years the state analyses if our pension system is financially and socially sustainable. Again, a fresh related report is being prepared. What's more: in its action programme, the government has promised to consider introducing flexible retirement age and faster rise of base amount of pensions – a task which the ministries have indeed been performing this past year both by meeting interest groups and analyzing Excel tables.

In March, the social ministry will hand the report to the government. Should the powers that be give orders regarding definite amendment proposals to be made, they will get busy preparing the bill.

Though the report – which came into being by cooperation of social and finance ministries – says nothing too bad would happen with our pension system in 50 years if altogether unaltered, the main problem would be the size of the pension.

«Very many people will be receiving too low pensions if we do not do something,» said social ministry’s social security department’s pensions policy head Kristiina Selgis.

Financially, the pensions pot will be somewhat saved by the work capacity reform which means that work incapacity pensioners will be lifted out of the pension system into unemployment insurance fund budget.

«On paper this is sustainable. While we only look at the social tax part and the number of pensioners, we will make it if we do not want to substantially raise the pensions,» said Ms Selgis. «But the fact that work incapacity pensioners will soon be drawing work incapacity benefits will not alter the state budget situation; they will still have to be supported. Also, due to the ageing of the population, costs will rise regarding healthcare and care for the elderly, for instance. So, all told, the system is not sustainable if we do not get extra workforce from somewhere or we will not be having enormously more children.»

Flexible retirement age

Though the definite proposals will come after the governmental decision, the trend is towards flexibility. In legalese, the pensions will have to be kept «adequate» and therefore, says Ms Selgis, retirement age will probably have to be raised for instance.

«Since the 1970ies, the retirement age has consistently fallen in the world. At the beginning of 2000ies it stayed put as all nations have started to realise that this just isn’t financially sustainable anymore,» she explained.

«Also, the labour force is increasingly thinning – each individual is vital for the labour market. Therefore, retirement age is increasingly tied to expected lifespan, and this is also a variant what to do in Estonia.»

This year in Estonia, retirement age for men and women equalled out at 63 years. Pursuant to a political decision taken in 2010, it will rise to 65 by the year of 2026. Ms Selgis says this should not be altered anymore. Perhaps, however, beginning with 2027 it might be considered that retirement age be linked to expected lifespan which is rather widespread in other nations such as Denmark, Holland, Finland, Italy.

Flexible retirement age means that a standard retirement age is set but an individual may for instance retire vive rears sooner (or later), thereby losing out financially in monthly payments as less money has accumulated to be paid out over more years. Even so, it is being pondered that with early retirement, the minimal length of employment requirement ought to be over 15 years.

Broadly, however, the flexible pension is explained by Ms Selgis as people being also able to partially retire. «As things stand, it is all or nothing. We might offer the option that if at a certain age one no longer has the strength to work full time, the decreased salary might be complemented by a quarter of the pension say. Thereat, the pension cut would only apply to that quarter,» she said.

There has also been a proposal to allow suspending the payment of pension. «While currently pension is prescribed for a lifetime i.e. you cannot say at some point that let’s put it on hold; now we have planned that as a variant an individual can also terminate the pension,» said Ms Selgis.

That would mean that that if an individual becomes unemployed, for instance, and decided to retire, but half a year later he finds a well paid job, then he would be able to terminate the pension payments and as he again retires someday, he would not lose in its size.

Ratio remains the same

Currently, for those who retire early the pension is cut – for good. Meaning: once an individual retires, he is not motivated to afterwards return to the labour market as with premature pensions one may not get pension and salary simultaneously – if you start to work again, the pension payments are halted, and are afterwards continued at a lower rate.

Something also pondered is setting a minimum pension goal. This would not be hewn in law like minimum wage, but Ms Selgis says it could be a goal that an individual investing into the pension system for 15 years from a minimum wage would draw a pension at least equal to minimum means of subsistence (currently at €201.40). Thus he would at least not need to go ask the state for welfare, but ought to be able to cover the housing and food costs from pension pursuant to calculations.

At the moment, the state aims at keeping the average pension at 40 percent of average salary i.e. the arithmetical average. It was found that instead of the arithmetically average pension the median might be followed, of which half of pensions are smaller and half are bigger. Currently, the average and median pension stand at the equal level of about €395, but in the future the median will be lower assesses Ms Selgis as there are many people for whom social tax is not being paid at least to a minimal wage.

«To get a year’s worth of employment length, one must work for a full year for minimal salary, but many have not done that. Like we looked at Estonia’s working age population in 2000–2014 and their insurance shares i.e. how much social tax had been paid – only a third of them had the 15 years of working at minimal wage to show during the period,» she said.

Two thirds have been away whether due to unemployment or are working abroad, but data regarding social tax paid abroad does not reach Estonia.

«If they have paid, then there is no trouble with them; they will get their share of pension from Finland of Norway. But there is trouble with those who have for a long time been unemployed or are in the grey economy and get envelope wages,» said Ms Selgis.

She said the workers register has helped improve the collection of social tax, but it isn’t helping the people who have made no payments these past 15 years for instance.

As prescribed by the governmental programme, a faster rise of base amount of pension should be considered as, currently, increasingly the size of pension depends on the tax paid while the salaries greatly vary. Therefore, as one assessment goes, the equal part of pensions should be boosted faster because currently the pensions are relatively equal but in the future they will no longer be.

Meanwhile, Ms Selgis underlined that the alterations come with the aim of providing people to retire in ten years with the blessed assurance of what is to come – substantial changes will not be made suddenly.

Reform committee reflections

At the government, a committee has been created to tackle these topics chaired by social protection minister Margus Tsahkna (IRL) and including health and work minister Jevgeni Ossinovski (Soc Dems), finance minister Sven Sester (IRL), and several representatives of ministries.

As assured by both Mr Tsahkna and Mr Ossinovski, the need to alter pension system long-term exists, as does the political will to do so.  

Main proposals for changes

Link retirement age rise to expected lifespan

Make retirement age flexible – early and late options offered

Make pension flexible – partial retirement offered, and termination of pension payments

Set a minimal pension aim as equal with minimum means of subsistence

Source: social ministry


Andres Ergma, head of Estonian Association of Pensioners’ Societies

They have arrived at the opinion that after retiring, the average lifespan might be about 15 years. So in 2040 retirement age might already stand at 70. People do live longer, but the issue is how many years they will live healthy.

Raising retirement age must be such as considers the resource of existing population i.e. living and health resource. I do not know of course what life will be like in 2040. With such a long-term view, it is hard to assume anything to be honest. But is the question is whether to raise it sharply or smoothly, smoothly is better.

Setting minimal pension at equal level with minimal means of subsistence is not enough. With that, no sustainable living can be organised. Food, home, medicines – and then the individual ought to be home the whole time as he could not afford anything else. While living at the edge of town and needing to travel to the store, that would no longer be possible. There is indeed a string of additional benefits, such as subsistence benefit, and the lone pensioner benefit planned from 2017 (€115 a year – edit), but it is little anyway.

In Western Europe, pension replacement rate if 60 percent of net wages at the moment a person retires. Even with the new pension reform, for us it will still be somewhere at 35–40 percent. So nothing much changes.

The issue arises: what is the second pillar giving us anyway. Are the means placed there well invested, does it make substantial sense in 40 years? This reform does not touch the second pillar, but I think these things should be viewed as a whole. Then the activity would yield better results.

The flexible pension system i.e. the option to retire, then terminate that and go back to work, rather reminds one of the Soviet time talk that first I’d like to retire and only after that go to work. Sounds like a joke.