Pensions: sheepwalking towards barren pastures

28 February 2014

«Only thanks to our decision to increase pensions by five percent during the crisis, has cohesion been preserved in our society,» Prime Minister Andrus Ansip proclaimed just before the last Riigikogu elections. «Pensions will definitely rise the next year as well!» Again, Reform Party took a solid victory at the elections.

For politicians, pensioners are important because pensioners each have a vote, and they are increasing in «market share»: in  2005–2012 (read: with Ansip in authority) ranks of pensioners grew by 29,000 to 412,000 persons.

Banks are whipping up the pension-pillar-expectations. A couple of years ago, a LHV ad towered to the top of Tallinn’s Radisson Blu hotel – piercing the brain of any beholder: in LHV funds, my savings will increase especially wonderfully. In an advertisement by Swedbank, pensioners-to-be were bathing in the Southern seaside sun.

That’s all daydreaming. Over this past week, great corrections have occurred in expectations of Estonians. The worm of doubt was let out of the can by President Toomas Hendrik Ilves, announcing in the Anniversary Speech: «The only way to secure Estonia’s existence without immigration is to work longer. Should we raise pension age? But, maybe there’ll be no overall pensions age at all, after some time?»

The day before yesterday, Statistical Office predicted that by 2040, percentage of pensioners will increase to 28, from current 18. By its report published yesterday, National Audit Office demolished the last nice hopes.

«The time that people of my age are dreaming about, to travel the globe, camera caressing the belly, enjoying the retirement years – in such a format, that time will definitely never come,» sadly stated Auditor General Alar Karis.

This year, the state pension insurance costs exceed tax revenues by about €363m. Pursuant to state budget strategy, the deficit will reach €474m in 2017. With no changes, the large-scale gap will then persist – filling it, the state will be limited in its options to invest in other areas, warns the report. No good recipe, as yet, to heal the situation.

State’s pension costs could be lowered by raising the retirement age, cutting the pensions or putting a stop to payment of certain pensions from state budget. As revealed by National Audit Office calculations: to balance pension insurance, the state should have lowered the average old-age pension from €313 to about €200, the last year but one. However: a step so nasty, no politician will date to take.

The other variant would be to raise taxes. Praxis the think-tank recons that, to reach balance, the pension insurance part of social tax should be lifted from 20 percent to 27 by 2020, and to 31 percent by 2040. Not a comfy thing either, Estonia rather desiring to be a low-tax-land.

The third option is to raise retirement age, as touched by Mr Ilves the head of state. That’s painful, too. Praxis calculates that, in the year 2060, those 70 years of age ought to work. Provided – mind you! – that no-one retires early. The current system, however, provides quite a boost to do so.

Behind the growing army of pensioners, there lies the sudden surge of work-incapacity-pensioners and those retiring prematurely. Ministry of Social Affairs is preparing a reform which should, in six years, cut the amount of incapacity pensioners from nearly 100,000 down to 80,000. Not clear, though, when the minister Taavi Rõivas will be able to push that thru.

Speaking about the second pillar funds, State Audit Office wants to see increased competition, which would make the funds try harder. «We are very critical regarding funds management and that the yields are next to nothing, essentially,» said Mr Karis.

As assessed by National Audit Office, to escape the pensions trap, the state needs a long-term plan. Right now, the state is planning for changes after five years only. «That, however, may mean too short a preparation time for the population, and inability to smoothly adjust the system to the demographic changes,» warned the office.

To that, finance minister Jürgen Ligi replied that he was supportive of initiating the discussions before 2019, while not willing to be hasty with decisions. Social minister Mr Rõivas said that the year to do the analysis (2019) was selected so that fresh data and forecasts could be used to make decisions, while still having time to apply the new system.

Source: Pensions: sheepwalking towards barren pastures, PM