Unemployment insurance premiums to rise

From 1 July 2009, unemployment insurance premiums in Estonia will increase from 0.6% to 1% of wages for employees and from 0.3% to 0.5% of the payroll for employers. The increase is necessary due to two main reasons: firstly, to manage the current economic downturn and expected further increase in unemployment; and secondly, to manage the adoption of the new Employment Contracts Act, which will lead to increased social security expenses.

Unemployment insurance coverage

In Estonia, unemployment insurance covers the risks of becoming unemployed, collective redundancy and an employer’s insolvency. Unemployment insurance is financed through unemployment insurance premiums, which are obligatory for all employers and employees until pensionable age, including people working on contract under the Law of Obligations Act and public servants. Unemployment insurance premiums are dependent on the size of employees’ wages. The Unemployment Insurance Act (Töötuskindlustuse seadus) provides for certain flexibility in the rates of unemployment insurance premiums, as they can range from 0.5% to 2% for employees and from 0.25% to 1% for employers.

The size of unemployment insurance premiums is established annually by the government through a regulation based on the proposal made by the supervisory board of the Unemployment Insurance Fund (Töötukassa). The supervisory board is a tripartite body that comprises an equal number of representatives of government, trade unions (including the Confederation of Estonian Trade Unions (Eesti Ametiühingute Keskliit, EAKL) and the Estonian Employees’ Unions’ Confederation (Teenistujate Ametiliitude Keskorganisatsioon, TALO)) and employer organisations (including the Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK)).

Changes in unemployment insurance premiums

On 27 November 2008, the Estonian government (Eesti Vabariigi Valitsus) approved the proposal of the supervisory board of the Unemployment Insurance Fund to introduce higher rates for unemployment insurance premiums from 1 July 2009. Under the proposal, unemployment insurance premiums will be increased to 1% of wages for employees and to 0.5% of the payroll for employers. At the current average wage level in the third quarter of 2008, this would amount to EEK 125.12 (about €8 as at 22 December 2008) and EEK 62.56 (€4) a month respectively. Until then, the current rates will remain in effect – that is, 0.6% for employees and 0.3% for employers.

Earlier this year, the supervisory board had stated that it would not be necessary to raise the rates of unemployment insurance premiums due to the extensive reserves of the Unemployment Insurance Fund that have accumulated during the period of economic growth and extremely low unemployment (EE0711029I). However, it reviewed its decision in light of new and more pessimistic economic forecasts for 2009 and the government’s plan to adopt the draft Employment Contracts Act (EE0802019I, EE0805029I) earlier than it had initially planned in order to respond to the current economic situation.

Impact of economic downturn

For one, the worsening economic situation points to the need to increase unemployment insurance premiums. Expenditure on unemployment benefits is expected to rise as unemployment levels have already started to increase during the third quarter of 2008, when unemployment rose to 6.2% according to the Labour Force Survey. This represents the highest level in the last two years; unemployment had remained stable at about 4% in the previous four quarters.

Furthermore, according to administrative data, the number of benefit recipients has increased steadily since the fourth quarter of 2007. In October 2008, the Unemployment Insurance Fund faced the highest number of new benefit recipients since 2003, when payment of the unemployment insurance benefits started. In addition, the number of collective redundancy benefit recipients in the first three quarters of 2008 already exceeded the total payment of these benefits in 2007 by about 50%. According to the chair of the Unemployment Insurance Fund’s management board, the number of unemployment insurance recipients may increase further to 30,000 persons in 2009, which is twice as many as in 2008, owing to the economic downturn and legislative changes.

Increased expenses due to new Employment Contracts Act

In order to manage the current economic downturn, the government has also planned to adopt the new labour law sooner than it had initially planned – that is, from July 2009 instead of January 2010. This will result in a significant increase in the expenses of the Unemployment Insurance Fund, which again requires increased insurance premiums.

The higher expenses can be attributed to a number of reasons. Firstly, a single public organisation will be created from 1 May 2009 to deal with unemployment issues (EE0805029I). Secondly, the number of persons eligible for unemployment insurance benefits and the size of the benefit will be increased, as eligibility will also be extended to persons leaving employment voluntarily or on agreement with their employer. The replacement rate of the benefit will be 70% of the previous wage for the first 100 calendar days and 50% after that, instead of the current 50% and 40% respectively. In the event of the voluntary termination of employment, the replacement rate will amount to 40% of the previous wage. Furthermore, the Unemployment Insurance Fund will start paying part of the benefits in all cases of redundancies, whereas previously this only occurred in the case of collective redundancies.

Kirsti Nurmela and Marre Karu, PRAXIS Centre for Policy Studies

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