National Audit Office: pension system not sustainable

5 November 2013

Work incapacity pensions, the ranks of receivers thereof reaching a whopping 100,000 level, have become hopelessly burdensome for the Estonian pensions system. The state keeps promising reforms, but the «what and when» remains undecided.

Yesterday, National Audit Office presented its traditional overview of Estonian state assets use. The topics ranged wide and far, from state budget balance to taxation of shale oil. A vast amount of attention, however, was paid to problems in Estonia’s pension system.

Right now, «unsustainable pension system» will not mean that, at a certain point in time, the government may not be able to make payments any longer; neither is it moralising about «pensions too small». Rather, this is a statement regarding the financing of pensions: the pensions pot is in the red, the red is ever «deepening», and the state must increasingly reach into other areas/activities for money.

In a way, one might say that National Audit Office (NAO) is just pointing to the bookkeeper-style deficit (with overly keen focus, perhaps) and as long as additional money can be gotten from elsewhere, where’s the problem – what’s the difference, this being state money all of it. At the same time, economical sustainability still counts, as finally one comes to the question: where is the level the Estonians are able to pay for, and willing to pay for?

«In the next 40 years, pension system will not reach the balance,» states Liisi Uder, performance audit head at NAO. That’s a fact. Meaning that, in near future the deficit will increase, stabilising in more distant future thanks to 2nd pillar. For instance: while the current pension insurance deficit is €370m a year, then in four years’ time the number will be minus €474m.

System overload

The pension system lacking money, the state «finds» money at the expense of other areas. It cannot be claimed that the money comes straight from salary fun for teachers, policemen and doctors; or from sums meant to built roads and schoolhouses, but basically that’s the way money is «found».

Putting it plainly, this is part and parcel of what Auditor General Alar Karis says: «In the longer perspective, both the state and local governments will have an increasingly hard time making it.»

The main and the most talked-about issue is, naturally, the decrease of our population and the changing worker/pensioner ratio – the former decreasing, the latter increasing in number. For this, there is no fast and immediate cure. Raising the retirement age helps, but it takes time. Furthermore, as shown by these past years, a large problem is looming elsewhere.

Namely, as pointed out by NAO, official retirement age is one thing – and when people really retire (read: start drawing pensions) is another matter. Regarding the latter, statistics say the average retirement age is 59 – over the years, this has remained much the same. And, also considering survivor’s pensions and work incapacity pensions, the average retirement age is a shocking 52 years of age – stably so.

This would mean that, in Estonia, there are increasing numbers of men and women who, at about 45 years of age, start drawing work incapacity pensions. In a dozen years or so, their numbers have doubled (!) and will be reaching 100,000 for the first time, this year. For the pension system, this means €227.5m of expenses. Should the same system continue, we will be having 175,000 persons receiving work incapacity pensions by 2020, the costs for the state reaching half a billion euros.

As shown by current practice, a person going for the work incapacity pension will be receiving it till the end of his life – who cares that, in reality, work incapacity ought to be reassessed every few years. For instance, to a person falling into the incapable category at 45 (this is the age when such pensions are most often awarded) the state will be stuck paying his work incapacity pension for an average of 33 years.

Still no law

In the retirement age problem, work incapacity pension is the main issue. Still, there are the other factors – like: a certain percentage of the unemployed will decide to take early retirement pension (the law indeed allowing for the step to be taken three years early; true, in such cases, the pension will be somewhat smaller).

All told, all kinds of «special pensions» and «special schemes» swallow about a quarter of the pension pot money. The above being the view from the top, the so-called systemic view where the system’s faults and weaknesses can be discussed. However, there’s the grassroots approach, as offered by Andres Võrk, an employment and social policy analyst at Praxis, a political research centre.

«No direct blame can be laid on the pension system,» says he. «All the pension system does is receive the blow by something left undone, some other place.»

By this, Mr Võrk means the underfinancing of labour market policy, or problems with public health. Simply put: Estonian men (for instance) drink too much, drink heavily for couple of decades straight, lose capacity to work and go for the work incapacity pension.

«There comes the time when all these issues will show in costs, for the society,» adds Mr Võrk. And, one of the places where it shows happens to be the very pension system – people joining it too early, or opt to draw pensions instead of working.

The overall sum total being: no quick fix to be bound. The more so we should hurry with things the state could actually do; still, even with this we have failed. In April, 2012, it was decided by the government and allowed by social ministry to have a new work incapacity insurance act in place, within a year. This, actually, revealing that both government and ministry are aware of the problem in the current system. For the state, this is an increasing cost, on the other hand – as also said by then social minister Hanno Pevkur – the goal should be bringing as many [incapable] people back to the labour market as possible. These were the promises and words from April 2012; now, a year and a half being passed – no new law…

Aim: shrink the passive army

Even today, social ministry will say that things are bad and, surely, the new work incapacity system is high priority with social minister Taavi Rõivas. A change currently considered by the ministry is separating work incapacity costs from the pension system. This, however, is the book-keeper solution: the numbers will appear on another row, the big picture stays the same. A weighty change, however, will be placing the entire incapacity issue under Employment Insurance Fund (Töötukassa). For the people totally incapable for work, nothing much would change (maybe, the status would be harder to obtain) and money-wise they would not lose out.

On the other hand, persons partially incapable for work will be under greater scrutiny. In order for them to draw work incapacity pension, they ought to either work, study, or register as unemployed and actively participate in Töötukassa programmes. Thus, the following scenario should come to its end: I sit at home as my back hurts, sip my beer and draw out incapacity euros. Other change is also in the pipeline, from support for healthy lifestyles to improvement of working environment. The first definite steps might be evident in 2015 and 2016. But, well… let’s wait and see.

Source: National Audit Office: pension system not sustainable, PM