Estonia reforms social tax system

The Baltic Times, TALLINN
Jul 22, 1999
By Kairi Kurm

The Estonian government will propose that all employers should raise their employees’ wages by 8 percent to prevent a drop in income after the obligatory endowment pension is introduced.

When the endowment pension system is implemented in 2001, the part of social tax paid by employers into the state pension insurance budget will decline from the present 20 percent to 12 percent. The remaining 8 percent will have to be paid by the employee into an endowment pension fund of his choice. The pension sums are income tax free until they are withdrawn from the fund.

The government does not intend to change the present social tax rate to carry out pension reform. At present, the employer pays the 33 percent social tax. From the social tax, 20 percent goes to the social budget and 13 percent to the health insurance budget.

After the new system is implemented, 12 percent paid by the employer will be paid into pension insurance and 8 percent paid by the employee will go into the obligatory endowment pension fund. The third pillar of the reform is voluntary pension insurance payments into pension funds which have already been founded.

The government is planning to hold trilateral talks with employers and trade unions to discuss the pension reform on Aug. 26 and it will also discuss the reform with international experts. The law may be brought before Parliament by September.

Raivo Paavo, chairman of the Central Trade Unions Association, said that the association views the new system positively, but a lot of work needs to be done before it can start to work. He said that the details of the new system will be available to the association before the trilateral talks are held.

“We have to be sure that the salaries will not decrease. We have to negotiate over the right percentage paid by the employee – whether it is 8 percent or 6 percent or even 4 percent,” Paavo said.

“The other question is what will the employer offer in return if its payment decreases? Will they offer any additional insurance like unemployment insurance for example? Can the government guarantee that the salaries of all employees will not decrease?”

Veiko Tali, a member of the social insurance reform committee, said that the 8 percent payment into an endowment pension is not a tax because the employee receives it back when he retires. The pension sum can also be inherited, said Tali.

He said private companies cannot be forced to raise their employees’ wages, but they will be forced to do it under the pressure of the labor market.

“The costs of the private company will not increase much after the 8 percent pay rise,” said Tali. “The employers have no reason not to increase wages.”

The new system also enables the government to collect more social tax from increasing payments.

“We can expect much higher pension sums in the future in absolute terms when everything will be working under the new system.” he said “The present generation is financing the present and the future generations. We are creating a more reasonable system.”