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20 June 2018

Estonia: the government has approved a bill to reform the pension system

Changes to Estonia’s national pension system have been in gestation since 2015 when a working group for the promotion of the sustainability of the state pension system was formed. The government has brought together different stakeholders and governmental institutions and a draft pension bill proposes to relate the retirement age to average life expectancy (as from 2027). The much criticised second pillar scheme will be reinstalled.

The government has approved the reform of certain aspects of the country’s pension system. The planned pension reform bill will make the pension system more flexible from 2021, change the calculation method of the pension size and relate the retirement age to average life expectancy from 2027. In a statement to the press, the government stated that pensions must ensure sufficient income for low-income earners, who should not face a risk of poverty when they reach retirement age. Interestingly, the finance minister reacted in public and said that he and his collaborators oppose the planned bill. 

The idea is to continue with a three-pillar system, consisting of a first pillar built on solidarity, which will depend on the number of years worked, a second pillar depending on the size of the wage, and a third pillar based on a person's voluntary contributions. A stronger link to the person's own contribution will be preserved for future pensioners through the second pillar. The transition from the current system to the new system, where the first pillar will depend exclusively on the number of years worked, will take place from 2021-2037. During this transition, half the size of the first pillar will depend on one's income level and the other half of the number of years worked. The opportunity to join the second pillar will be reopened for those born between 1970 and 1982.

The second pillar has been under debate for a long period. Every month, citizens pay 2% of their gross wage into the second pillar pension fund. The contribution is topped up by the government to a total of 6%, thus, an additional 4% is paid from the public budget. Following the weak financial situation after the 2007-2008 financial crisis, a law was passed in 2009 that allowed the government to suspend its contributions to the second pillar. At the same time, residents were given the option to continue their contributions voluntarily. The government promised to compensate the contributors with higher contributions from 2014 to 2017. It has been calculated that this compensation has cost the state 227 million euro between 2014 and December 2017. Since 1 January 2018, the normal situation has returned with citizens paying 2% of their gross wages and the state topping up these contributions with the normal level of 4%.

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