Pension Reform Amendment Increases Risk of Envelope Wages
The Chamber is against the amendment of the National Pension Insurance Act according to which the future first pillar of pension will depend on the length of employment and not previous salary of the person.
In the letter sent to the Social Committee of the Parliament, the Chamber highlighted that in its opinion the change will increase the motivation of the employees to receive at least a part of the wages as envelope wages. The risk of envelope wages is increased due to the fact that in the future the salary of the person has no influence on the first pillar. For example, the pension received from the first pillar will be the same for the person earning minimum wages and for the person who earns triple the average salary of Estonia.
At the moment, employees are well aware that agreeing with envelope wages decreases their pension, but in the future, partial envelope wages will have no effect on the size of the first pillar. Although in the future pension will still be dependent on the person’s salary through the second pillar, it might not be motivating enough to refuse to accept envelope wages. This is due to the fact that the person can place a part of the revenue earned as envelope wages into the third pillar and as a result the pension might not decrease, but rather increase. Thus the amendment will remove one reason why many employees do not accept envelope wages.
Additionally, the planned amendment will send the public two messages with a negative impact. First, you will receive pension from the first pillar even if a part of labour taxes has not been paid on your salary. At that, receiving envelope salary does not even decrease the pension received from the first pillar. Secondly, due to the fact that the first pillar depends only on the years worked, not on the salary earned during that time, people are encouraged to work more years, instead of motivating them to develop themselves and thereby increase their salary level.
Decreased motivation to receive salary officially will also decrease tax revenues in terms of the social and income tax, which in turn will increase budget pressure and works contrary to the need to find additional funds for the growing social security costs. Due to the fact that the materialising of the aforementioned risks is real, decreased budget tax revenues can be projected. In such case, financing of the pensions is not the only thing that will be under pressure, it will also affect the health insurance and medical services part as a whole.
The Chamber proposed to the Social Committee of the Parliament to leave the planned amendment out of the draft and keep the current principle according to which the pension received from the first pillar is dependent on the person’s salary. This will help to ensure that people will be more motivated in the future to reject the envelope wages.
Furthermore, the Chamber informed the Parliament that in the Chamber’s opinion, the planned amendments of the National Pension Act do not solve one of the main problems of the current pension insurance system – how to ensure sustainability of the pension system and sufficiency of finances in the system. Making the pension age dependant on the lifetime is positive and decreases pressure on growing expenses, but it is even more important to motivate employees to earn more and contribute more to receive more. We also need to deal with levelling the decreasing number of the contributors to the social security system through increased inclusion of people with smaller capacity for work, more efficient offering of retraining or alleviating the restrictions on foreign labour.