Working pensioners are facing tough choices. Even though they are still sharp as a pencil and healthy, working full time might not be as practical as it used to be.
Working pensioner Ilme (name changed – ed.) who is 66 years old was forced to take a step due to the government’s tax policy she wouldn’t have otherwise. She is working half-time from this year as her salary and pension together are too much in the new tax system. “I have enough brains and energy to continue, but it just doesn’t pay anymore,” said Ilme, who has a background in programming and finance.
Two of Ilme’s friends chose the same path. One switched to half-time and the other quit as her employer did not offer a half-time position.
“I have calculated that in a situation where pension is paid out 12 times a year, the new system would only give me ten,” Ilme explained. She believes pension should be excluded from taxable income as that is what is creating injustice.
She now works 2.5 days a week and gained 2.5 days she uses for meeting with friends or spending time with her grandkids. “I would have continued working full time and not even considered a half time position otherwise,” she said.
Ilme, who has also worked as a chief accountant and auditor, had no trouble understanding the new tax system. Her acquaintances ask her for advice considering her professional background. “People are confused,” the woman said.
The tax system of Jüri Ratas’ (Center) government, that entered into force on January 1, hit working pensioners especially hard as 57 percent of them lost in pension in January. The reason was a change in how minimum exemption is calculated.
Until this year, pensioners could use, in addition to the €180 basic exemption, additional exemption of up to €236 for a total of €416. From this year, pensioners are subject to the general basic
exemption of €500 the effect of which on income falls as income grows and disappears from a gross salary of €2,100.
This means a loss of up to €83 a month for pensioners earning bigger salary. While PM Ratas has repeatedly said most pensioners stand to gain from the tax reform, the opposition is still considering bringing a vote of no confidence against him.
Levelling of the tax system
Minister of Social Protection Kaia Iva (IRL) said around 28 percent of working pensioners must pay more tax now, but added that the new system benefits nearly 69 percent of working pensioners and 80 percent of all taxpayers.
The minister finds that working is still motivated as it is the only thing able to create prosperity, and because no one pays more than 20 percent income tax in Estonia. “People keep at least €80 per every €100 earned irrespective of salary,” she said.
Iva said the government does not plan to change the newly introduced tax system. “Pension has been taxable income since 2002, which is also not something we plan to change at this time,” the social protection minister said. She referred to what happened to working pensioners as harmonization of the tax system.
“If before, working-age people had an annual exemption of €2,160, pensioners had another €2,832. Since 2018, everyone is subject to the same system, with an annual exemption of up to €6,000.”