Social partners seek cut in unemployment insurance contributions

In October 2004, Estonia's central social partner organisations called for unemployment insurance contributions to be cut in 2005. The board of the Estonian Unemployment Insurance Fund thus made a proposal to the government to decrease the employers’ contribution from 0.5% of gross payroll to 0.35% and the employees’ contribution from 1% of pay to 0.7%. It is possible that the decrease will not be implemented until 2006.

The Estonian Unemployment Insurance Fund (Eesti Töötukassa) collects unemployment insurance contributions (since 1 January 2002) and pays unemployment insurance benefits in the event of unemployment, collective termination of employment contracts or service relationships, and insolvency of the employer (since 1 January 2003). According to the Unemployment Insurance Act, the insurance contribution consist of two parts: employees have to pay 0.5%-2% of their pay; and employers 0.25%-1% of their gross payroll. Every year, the board of the Estonian Unemployment Insurance Fund makes proposals on the contribution rate for the following year to the government by 1 November. The board consists of two representatives of government, two representatives of the Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK) (EE0310102F) and one representative each from the Confederation of Estonian Trade Unions (Eesti Ametiühingute Keskliit, EAKL) (EE0308101F) and the Estonian Employees’ Unions’ Confederation (Eesti Teenistujate Ametiühingute Keskorganisatsioon, TALO) (EE0308101F). The government then decides whether to change the rate by 1 December.

At present, both parties have to pay half of the maximum unemployment insurance contribution rate - employees 1% of their pay and employers 0.5% of the payroll. The rates have been the same for the past three years. In 2003, the board proposed to the government not to change the rate and the government agreed. The board proceeded from the principle that the contributions should be kept stable over a longer period of time. In addition, there was no sufficient comparison basis to change the contributions, because the system had been effective for only nine months.

In October 2004, ETTK argued that the Fund's board should propose to the government a reduction in the unemployment insurance contributions for 2005. ETTK argued that, considering the expenditure of the Fund, it would not be reasonable to increase its reserve, and that the unemployment insurance contribution should be such that the reserve of the Fund would remain at its present level. ETTK proposed that the total contribution should be reduced by 0.3-0.4 percentage points, suggesting that the premium for employers should be 0.3% and for employees 0.7%.

EAKL also called for the employees' contribution to be reduced. It argued that that the contribution in 2005 should be 0.7% of pay because the inflows from unemployment insurance contributions have been exceeding the outflows of unemployment benefits and as a result, the Unemployment Insurance Fund has gathered a sufficient reserve. In addition, the union confederation made some suggestions concerning the amendment of Unemployment Insurance Act - to extend the coverage of unemployment insurance and to increase the level of protection of employees.

Following the declarations by EAKL and ETTK, the board of the Unemployment Insurance Fund proposed on 22 October that the government should decrease contributions for 2005. The proposed new contribution rates should be 0.7% of pay for employees and 0.35% of gross payroll for employers. The reduction was opposed on the board by the Minister of Social Affairs and the representative of the Ministry of Finance. The government should make a final decision by 1 December.

While the board of the Fund proposed that contributions should be cut in 2005, it is likely that the decrease will not take place before 2006. According to the Minister of Social Affairs, such a delay is likely because there is not enough time to make changes in 2005’s budget. A councillor at the Ministry of Finance states that the reduction of contributions may cause a deficit in the Fund’s budget in 2006. As the Fund is still in its starting period, its expenditure is increasing continuously and besides, some supplementary functions may be allocated to it. In addition, it is argued that the reserves should be increased while economic growth still continues, as these will be necessary in the event of a downturn in the future.