No. 3

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Comments: Painful Areas in the Continuation of Pension Reform

18 June 2001

Studies

RiTo No. 3, 2001

  • Endel Eero

    Union of Estonian Pensioners; Member of the VIII Riigikogu 1995-1999

A pension concept based on three pillars was approved by the last government and today the law provisions for two of them: a state pension (I pillar) and voluntary accumulative insurance (III pillar). The II pillar – the implementation of the principles of an obligatory accumulative insurance – has so far been held back by two painful sets of problems.

At whose expense, or what, should the compulsory resources for a future pension be saved, constitutes the first set. The second, is how to guarantee the beneficial investment of these resources. The size of the voluntary accumulative insurance (III pillar) is determined by the decision of the one who takes out the insurance. This is incentivised by income tax relief. The lawmaker has attempted to minimise the investment risk; yet risks still remain.

The author’s estimates indicate that the size of the average wage will be 5,300 kroons, of which net salary will form 4.120 kroons. Hence, the forecast for the average old age pension amounts to 36.7% of the average net salary. These comparative figures are significantly lower than the requirement laid down by the European social insurance code (40%). If we raised pensions by, say, 70 kroons from April 1st (at the expense of the 255-million kroon reserve) we would reach a comparative figure of 38.4% for old age pensions. The information contained in an article by M. Salu, regarding our demographic situation, leads us to the conclusion that without an increase in the current 20% social tax level, the average old age pension will form only ca 28% of the average net salary in the year 2045 (at the existing income tax level). The only thing left is to start saving and invest the savings.

Given that the collection of savings into pension funds is likely to be an inevitable process, the author is of the opinion that we should turn to the parties involved – the wage receivers and employers – in order to agree on the principles of organising compulsory savings and the level of saving ability.

The decisive word on assuring safe and secure retirement will invariably be said by voluntary pension insurance funds. The answer to the question of how to insure that those savings are invested at minimum risk, yet profitably, can be found from external markets. The Estonian economy is too small to allow the hedging of an investment risk of, say, a 2-billion kroon investment annually.

Full article in Estonian

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