New tax for welfare services

This Thursday, the government is set to discuss Minister of Social Affairs Tanel Kiik’s (Center Party) proposal for a welfare insurance premium to help cover expenses.

The premium could be set at 2 percent of salary contributed in equal parts by the employee and the employer. Kiik said it would constitute a premium collected specifically for welfare purposes. Just as the health insurance fund is used to fund medical care.

“It would have to be a welfare insurance fund with a separate budget, with agreements in place for what it would finance and in what volume, as well as the extent of cost-sharing,” Kiik said, describing the instrument as a solidarity-based tax.

The minister explained that the state and local governments contribute a total of €100 million to social welfare annually, meaning that additional sums needed are greater than the existing level of funding. Home care is the biggest problem in terms of availability, while general welfare needs the most money.

Cost-sharing growing

The part of nursing home fees people have to pay themselves has been growing from one year to the next. If the client and their loved ones were expected to cover 60 percent of the fee in 2010, the cost-sharing component has grown to 80 percent by today. Estonia has 65,000 people taking care of loved ones at home, with over 10,000 being unable to work as a result.

“This means that people and their loved ones end up paying for almost all of it. At the same time, we know that the average pension falls well below the average nursing home monthly fee,” Kiik added. The average old age pension is under €500 today, while a place at a nursing home costs €800-900.

Another fact speaking in favor of a welfare insurance premium is Estonia’s very low general tax burden when compared to the rest of Europe: 33-34 percent of GDP in Estonia versus 40 percent of GDP in Europe on average.

Even though the government is yet to discuss the proposal, Center’s coalition partner Isamaa is against the premium, having promised tax peace in its elections platform. The Conservative People’s Party (EKRE) has said it will not take a stand before seeing the proposal in more detail.

Aivar Kokk (Isamaa) said that the social domain will be short on funding no matter the tax rate. He added that a new state tax will not solve the problem of population aging and that people should have the chance to contribute to a voluntary welfare insurance.

“It would be a flexible approach that would consider people’s different capacity. The state would still help people who cannot help themselves,” he added.

Opposition parties and employers saw the proposal as a chance to criticize the government’s funded pension reform – money in the so-called second pillar of pension could be used in welfare. Analysts fear people will be tempted to spend second pillar savings on everyday expenses.

The Reform Party described the idea to use a new labor tax to solve welfare problems as a slippery slope. “At the same time, the government is busy dismantling the pension reform or effectively cutting pensions, while smaller pensions equal less money for welfare services,” Jürgen Ligi said.

Ligi explained that the current system of three pension pillars was created with the problem of population aging in mind. “First of all, the government needs to stop taking money out of the pension system that all forecasts suggest will result in lower pensions,” he said.

Employers critical

The Social Democratic Party (SDE) is willing to discuss a welfare premium, while it’s position today is that a tax hike is not the solution. Helmen Kütt said that an insurance system would help people years or even decades from now, while the problem is acute today.

“This means that we need solutions that would have an immediate effect. If the second pillar of pension is dismantled and the Family Act remains unamended, future pensioners and their grandchildren will find themselves in ever bigger trouble,” the SDE MP said.

Analyst for the Estonian Employers Confederation Raul Aron said that the greatest challenge in economic policy is to develop the economy in a way that would allow all employers and employees to keep up. “Starting with a higher tax burden on labor is very painful,” Aron said, adding that it would hike labor expenses and hit competitive ability.

He added that hiking taxes would not match the coalition’s promise of maintaining a so-called tax peace the government has described as one of its greatest achievements. Uncertainty impacts new foreign investments and local investments into innovation and competitiveness.

Aron said that if the system has problems, solutions should be sought from within, instead of just charging the taxpayer more. “By hiking the tax burden, we risk having more people the taxpayer needs to support. Social welfare expenses are set to grow as it is with the abolition of mandatory funded pension,” he added.

Kiik will present two alternative options to the government, the first of which would see the state adopt greater responsibility for welfare services. The second model would see it achieved in state and local government cooperation.

However, the minister finds the welfare insurance premium plan to be the most promising. “If we want to ensure sustainable support, having a separate revenue base is the only solution. Whether it’s a tax or an appropriation from the state budget, but looking at the state’s financial capacity and the fact we have 11 ministries, all with their own desires, no other measure (than a premium – ed.) can offer revenue able to keep up with price advance.”