Estonia needs long-term plan to guarantee sustainability of pension system

Toomas Mattson | 2/27/2014 | 10:00 AM

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TALLINN, 27 February 2014 – The National Audit Office is of the opinion that in conditions where the number of working-age people is decreasing, the number of pensioners is increasing and people’s life expectancy is growing, the state needs a sustainable long-term plan, a reform of different pension types and further development of the second pillar fund regulation. The present system favours early retirement, which increases the pension insurance deficit. The mandatory funded pension system, however, should be implemented in a manner that leads to the desired results and creates well-functioning competition between second pillar funds.

State pension insurance expenditure will exceed tax revenue by ca 363 million euros in 2014, and according to the state budget strategy the deficit will reach 474 million euros in 2017. Pension expenditure in 2013 totalled 1.61 billion euros or ca 21% of the state budget.
The state should decide on the measures necessary to guarantee the sustainability of the pension system as soon as possible. Although the state has decided to raise the general retirement age to 65 by 2026, no further steps have been taken to guarantee the sustainability of the pension system. There are plans to analyse the implementation of automatic adjustment mechanisms in 2019. Automatic adjustment mechanisms provide the option of adjusting the pension system according to agreed statistical indicators: for example, the retirement age can be tied to average life expectancy or the size of the pension could be made to depend on the number of pensioners. The National Audit Office is of the opinion that it would be reasonable to introduce automatic adjustment systems in Estonia also, but the required analyses should be carried out sooner, in 2016. This would make it possible to open up a social discussion to find the best solution and provide time to get used to the new system.
The present pension system does not guarantee that people work until retirement age. The audit of the National Audit Office indicated that the average age at which people retire is 59.6 and this age has not changed significantly over the years. If we also include recipients of incapacity and survivor’s pensions, the average retirement age falls to 52. Early retirement is also favoured through numerous special pension schemes that allow people to retire before they attain retirement age. People may retire as early as three years before retirement age and the audit indicated that this is the path mostly chosen by those who were unemployed or incapacity pensioners before they retired. These people should be receiving help from the systems for supporting the unemployed and persons incapacitated for work, but the inadequacy of these systems means that the problems and costs transfer to pension insurance.
Superannuated pensions and old-age pensions under favourable conditions are paid to persons working in certain occupations whose jobs were considered hazardous to health in the early 1990s. Although working conditions have changed considerably over the years, there have been no investigations to ascertain whether paying special types of pensions to the representatives of these occupations remains justified. The analysis carried out by the National Audit Office indicated that the health of these people was no worse than the health of others of the same age and that the number of disabled persons and/or incapacity pensioners among them was not higher. The majority of those who started receiving a special type of pension continued working at the same time. The situation is the same regarding the special pensions introduced in the public sector around twenty years ago to guarantee the independence of people working in certain occupations in conditions where their salaries were low. Although occupational pensions are no longer paid for working in certain professions, they are still provided to police and border guard officers and members of the Defence Forces.
The National Audit Office has advised the ministers to consider abolishing early retirement, occupational, superannuated and old-age pensions under favourable conditions and, if necessary, to replace the special pension schemes in some occupations with effective personal protective equipment, to provide people with rehabilitation services or pay them higher wages as competition etc., and in the final stages of their career to offer them the opportunity to participate in national in-service training and re-training sessions in addition to working.
The gap between second pillar expectations and reality should be reduced. Although the main goal of second pillar funds is to increase the purchasing power of people’s retirement savings, the analyses carried out by the Ministry of Finance indicate that the actual returns on the funds amount to zero on average. The limited competition between funds has led to a situation where returns are poor and investments are made passively, but the management fees are large. The second pillar has also failed to meet the other goals set at the time the mandatory funded pension system was created. Second pillar funds have had little impact on the development of the Estonian economy and financial markets. The mandatory funded pension has not reduced the impact of political factors on the pension system or significantly decreased the risks that threaten the pension system.
The awareness and behaviour of Estonian people have not changed much either – they still expect to receive a sizable pension in the future. However, according to a forecast of the Ministry of Finance, the share that a pension comprises of the last wages will generally remain at the same level as today for persons who joined the second pillar, but the indicator is somewhat higher than average for men (ca 40%) and smaller for women (ca 35%).
The National Audit Office advised the Minister of Finance to initiate amendment of the legislation that concerns the activities of pension funds in a manner that makes fund management more efficient and boosts competition, which would enable the achievement of smaller fees and higher returns.
A more thorough assessment of the factors that have an impact on the achievement of funded pension goals should also be assessed and the necessary rearrangements should be made. This should include analysing options to promote domestic investments as well as increasing people’s awareness of how the pension system functions and the personal responsibility associated therewith.

Background

In 2013 there were 412,000 pensioners in Estonia.
The National Audit Office analysed whether the state has made the decisions required to guarantee the sustainability of the pension system. The following was assessed in the course of the audit:
* whether the state has developed solutions to adapt the pension system to population processes;
* whether the state has designed the pension system in such a manner that it motivates people to work for as long as possible;
* whether rules and stimuli have been created for the management of the money saved in second pension pillar funds, which would at least guarantee the preservation of the money and advisably also an increase in purchasing power;
* whether special pension schemes are justified and up-to-date.

Toomas Mattson
Head of Communication Service, National Audit Office
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  • Posted: 2/27/2014 10:00 AM
  • Last Update: 8/16/2015 12:06 AM
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Estonia needs long-term plan to guarantee sustainability of pension system.

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