Employers propose sharing social security tax with employees

The Estonian Employers’ Confederation has issued its manifesto for the period 2007-2011. The manifesto contains their proposals regarding key developments in labour market and economic policy. The proposals to divide the social security tax burden between employers and employees, and increase the statutory retirement age to 67 years have been subject of much debate.

On 24 January 2007, the Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK) published its manifesto on key economic policy developments in the coming years. It hopes that the document will influence the parliamentary elections which are scheduled for March 2007. The manifesto formulates employers’ policy objectives in five areas: administration and macroeconomics, the labour market, taxes, education and social insurance. Below is an outline of the ETTK proposals relating to four of these areas.

Taxes

ETTK suggests reducing employers’ non-wage labour costs. The proposal is based on the fact that the Estonian tax burden for labour is relatively high by European standards.

Personal income tax should be reduced from 22% to 14% by 2011, the manifesto argues. Employers’ investments in further training and sporting activities for its employees should not be subject to fringe benefit tax. Social security tax, which is currently at 30% and paid by the employer on the payroll, should be redistributed so that half of it is assumed by employees. The resulting loss in income for employees would be compensated for by a national collective wage agreement. The aim of this change is to provide an incentive for employees to participate in discussions on social security tax levels.

ETTK also believes that the reference rate for social security tax should be increased to the minimum wage level (EE0605019I).

Labour market

The manifesto calls for greater efforts to integrate inactive people into the labour market in order to sustain the Estonian social security system. The employment rate in the 15-64 age group should increase to 70% (64% in 2005), general unemployment should be kept around 5% (7.9% in 2005) and long-term unemployment at 3% (4.9% in 2005).

In order to safeguard the competitiveness of the Estonian economy, regulations governing foreign labour should be revised. Specifically, the level of bureaucracy and the time taken to process work permits should be reduced by creating joint centres for different applications (such as work permits, visas). Moreover, ETTK demands limiting the mass immigration of cheap labour by forcing employers to pay migrant workers the average wage at least.

The manifesto is critical of the fact that wage growth in the public sector is faster than in the private sector. ETTK would like to be involved from the early stages in the scheduling of wage growth in the public sector. At the same time the manifesto states that wage policy should remain decentralised and flexible.

ETTK would also like to see the statutory minimum wage decoupled from the average wage and linked to the median wage. Since 2001 the minimum wage has been linked to the average wage by a bilateral agreement between the Estonian Confederation of Trade Unions (Eesti Ametiühingute Keskliit) and ETTK.

The manifesto also highlights the need to make labour laws more flexible in order to decrease labour costs and encourage employers to conclude employment contracts. The regulations pertaining to support strikes should be revised, and the use of support strikes should be more limited than is currently the case (EE0702049I).

Education

A knowledge-based economy depends on employees with good professional skills. ETTK would like more young people to study at vocational schools rather than at universities as is currently the case. More resources should therefore be allocated to vocational education. ETTK’s objective is for at least 20% of pupils from vocational schools to continue their studies in higher education institutions.

By eliminating the fringe benefit tax for adult education and training, and by increasing state investment into further training, there should be an increase in the proportion of adults participating in training to 12.5%.

In addition to general literacy, the education system should teach relevant computer literacy skills. Poor computer skills are a serious disadvantage to a number of people in the labour market. All schools should offer vocational information and computer technology training.

Social insurance

In order to alleviate the adverse impact of ageing on social insurance systems, the statutory retirement age should be raised to 67 years and the average age of leaving the labour market should be increased to 65 years (from 61 in 2003) by 2010. In light of this, the special pension schemes should be reformed to reduce the level of those retiring before the official retirement age to 20% (in 2004, 42% of those retiring were taking early retirement).

The manifesto also demands the creation of a work accident and illness insurance so that employers with a safe working environment would pay smaller insurance contributions. To offset the costs of the accident and illness insurance, social security tax should be decreased by the same amount, as the new scheme would reduce the sums covered by the existing social insurance system.

Commentary

The manifesto has attracted much attention from the media, trade unions and labour market experts. In particular, the proposals of sharing the social tax burden and increasing the retirement age were viewed with some reservations.

Epp Kallaste, PRAXIS Center for Policy Studies

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