Estonia: Latest developments in working life Q4 2019

The n ational minimum wage increase and changes to the pension scheme are the main topics of interest in this article. This country update reports on the latest developments in working life in Estonia in the fourth quarter of 2019.

National minimum wage increase

In July 2019, the Estonian Trade Union Confederation (EAKL) and the Estonian Employers’ Confederation (ETTK) started negotiations on the national minimum wage for 2020. ^[1] Similar to the previous year, a methodology using labour productivity and economic growth was the basis for the negotiations. However, unlike the previous year, the negotiations were difficult in 2019. The initial agreement was concluded on 2 September, which would have raised the minimum wage by 7% from €540 to €578 per month. However, the EAKL council announced that they disagreed with the level based on feedback from members of the council and the public. The council stated that the level should be at least €600 to reach 40% of the average wage, which is a condition in the agreed methodology. The council’s announcement put the agreement at risk, because ETTK saw 7% as a reasonable offer given that the average wage has increased by 6% and the economy has been slowing. EAKL suggested the disagreement might result in the government unilaterally determining the minimum wage, which has never happened before in Estonia. In October, the parties turned to the national conciliator, whose proposal was accepted in November. The final agreement was signed on 25 November and will raise the national minimum wage by 7.6% to €584 per month (€3.48 per hour) in 2020. Moreover, it was agreed that in 2021, the national minimum wage will be 40% of the average wage, and that by summer 2021 an impact study about the minimum wage will be carried out. This should give a basis for agreeing on a formula to calculate the minimum wage level for coming years.

Second pension pillar to become voluntary

In April 2019, a new government took office and determined that the compulsory funded pension scheme – the second pillar – should be reformed due to its low return rate, high management fees and the rigidity of the pay-out system. Currently, participation in the second pillar is mandatory for persons born in 1983 or later, and up to 2010 it was possible to join voluntarily. Previously, participating in the scheme meant that 4% of social tax shifted from the state pension insurance scheme to the second pillar and employees paid 2% of their gross wages into the scheme. On 14 November, the government announced that the second pillar would be voluntary in the future. With the proposed changes, several options would be available to participants including:

• the possibility to accrue money in the second pillar
• stopping paying into the second pillar, but keeping the accrued money in the pension fund
• ceasing making payments and withdrawing the accrued money or transferring the money to a personal investment account

With the proposed changes, participants would be able to change their decision twice. After 10 years, it will be possible to opt back in and after another 10 years, to opt out again. The reform would also allow people who were not previously part of the scheme to join.

The government’s main goal with the proposed change is to improve the freedom of choice and flexibility in decision-making for those taking part in the second pillar scheme. However, many interest groups are against the reform. For example, in March 2019, EAKL, ETTK and several finance sector associations (Estonian Private Equity and Venture Capital Association, FinanceEstonia, Estonian Banking Association, Tallinn Stock Exchange) published a joint position paper with the aim of stopping the reform. They highlighted several potential future problems as a result of the reform, such as the increased risk of poverty for retired people, increased retirement age, increased tax burden, or increased share of foreign workers. ^[2] The position paper notes that for many people, especially for low-income earners, the second pillar is the only savings account they have and many could use the money when it is possible to withdraw it, instead of keeping the pension fund or investing the accrued money further themselves. In the position paper, it was also suggested that the Estonian economy would suffer as the investments to Estonian companies by the current pension funds would decrease. The Bank of Estonia has called on the government to be cautious for similar reasons and it published an impact analysis in October 2019. ^[3]

The draft legislation is being discussed by parliament and will most likely be approved during January 2020 and enter into force as of July 2020.