Way clear for controversial Estonian pension reform

Freedom of choice vs. risk for Estonian workers


The Estonian pension system is facing reform. It currently consists of three pillars. The first pillar is the statutory pension. In addition, there is a second pillar, which is a funded compulsory pension. This is financed by mandatory employee contributions amounting to 2% of salary, plus 4% from social tax, which is added to the second pillar instead of the first. The third pillar is a voluntary additional pension plan.

The reform law affects the second pillar. This part of the pension plan will become voluntary.

Employees who were part of this pillar can continue to remain in it and do not have to change anything. Those who were not part of this pillar can also join. In addition, there is the possibility of transferring the previous assets of the 2nd pillar to a pension investment account to be set up without income tax. Investment decisions are now made by the owner.

It is also possible to stop paying into the pillar or withdraw the amount in full minus 20% income tax. The amount is available for free use. Approximately 20% plan to make use of it. Re-entry is only possible after ten years.

The reform is intended to promise individuals greater control over and flexibility for their finances. The fear is that this will lead to greater poverty in old age over the long term. The possibility of many simultaneous withdrawals could cause funds to lose value. In the short term, taxing withdrawals could generate higher government revenues. Moreover, free availability could stimulate the economy in the short term.  Employees must weigh up the advantages and disadvantages of entering and leaving the fund.

There are time limits in the case of desire for payouts. The first runs from 01 January to 31 March 2021, with payment being made five months later. The first payouts are thus made in September.

At the request of the President, the Estonian Supreme Court, the Riigikohus, recently dealt with the law. In constitutional terms, the main issue was violation of the basic rights to property, equality, freedom of enterprise and state assistance in the case of old age. The judges did not regard the reform law as unconstitutional. After the decision was announced, the draft law was signed by President Kersti Kaljulaid and will now enter into force. 

 

Source:

Riigikohus, decision of 20 October 2020, case number 5-20-3;

Law on Amendments to the Law on Financed Pensions and Related Legislation (mandatory reform of financed pensions)

 

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