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Pension reforms in Estonia: background summary

Characteristics of the Estonian system

Since the beginning of the 1990s, the Estonian pension system has gone through several reforms. Today, Estonia has a three-pillar pension system.

The first pillar, i.e. the state pension, is a compulsory pay-as-you-go system financed from current taxpayers’ social tax contributions. The pension insurance contribution makes up 16% or 20% (depending on whether the person has joined the second pillar) of the total social tax rate of 33% of the person’s gross wage. The first pillar covers three social risks: old age, loss of provider and incapacity to work (however, as of July 2016 those with incapacity to work will receive work ability allowance paid from the state budget not from the pension funds – see more under the section on labour market reforms).

Regarding the old-age pension, until 1999 the pension was calculated on the basis of a flat-rate base amount and the length of pensionable service (i.e the years worked before retirement).  As of 1999, an insurance component, which is calculated on the basis of the social tax paid, was added to the calculations, making the first pillar more dependent on a person’s income. Since 2016, the retirement age of women has been equal to that of men – 63 years. As of 2017, the retirement age will increase by 3 months with every cohort (born between 1954 and 1960), from the age of 63 to 65, up until 2026.

In addition to the general state pension insurance, the Estonian system includes special schemes: (1) old age pensions at favourable conditions and superannuated pensions, which are granted to those in specific professions where there has been loss or reduction of professional capacity for work before retirement age; (2) special pensions, which are paid at higher rates and from an earlier age to some categories of civil servants (police officers, prosecutors, members of the Defence Forces and the president of Estonia).

The pensions are increased annually through indexation. The index depends on the increase of social tax revenues (80%) and on the increase in the consumer price index (20%).

In 2002, the system was reformed to create the second pillar, i.e. the mandatory funded pension. This is mandatory for those born in 1983 and later (those born earlier could join the second pillar on a voluntary basis until 2010). The person contributes 2% of their gross wage, while the state adds an additional 4% from the social tax paid by the employer (as part of the total 20% of pension insurance contributions from social tax). The contributions are invested by pension fund managers according to the investment plan chosen by each person.

Since 1998, the third pillar, i.e. the supplementary funded pension, allows everyone to make supplementary contributions to their retirement. The third pillar can be subscribed to by: (1) concluding a pension insurance contract with a life insurance company or (2) making contributions to the voluntary pension fund. It is possible to receive a 20% income tax incentive on the contributions made during the year which do not exceed 15% of the gross income. The third pillar pension is accessible already from the age of 55.

Current reform plans:

In 2015, discussions and preparations for a new pension reform began and in 2017 the government agreed on changes which should make the pension system more flexible and solidary. The plans include:

  • actuarially neutral flexible retiring at 2021, so that people would have the possibility to choose their retirement age, with, in general, the delay of pension take-up leading to higher benefits in subsequent years such that the total (expected) pension wealth would remain unchanged; and vice versa, with earlier retirement age meaning a lower old-age pension;
  • people would also have the possibility for a partial pension;
  • the retirement age will be tied to life expectancy in 2027 (after the retirement age is raised to 65 in 2026);
  • the new entitlements of the first pillar will be tied to years worked as of 2037, with a transition period from 2020 to 2036; 50% from the insurance component (calculated on the basis of income) and 50% from the service component (on the basis of years worked) will be taken into account during the transition;
  • indexation of pensions will be fully dependent on social tax revenue and on the number of pensioners as of 2023;
  • there will be the possibility to join the second pillar for the cohorts born in 1970-1982 (about a quarter of them have not joined).

At the same time, the government is also continuing its reform of special pensions. The last special pensions (except the presidential pension) will be abolished as of 2020. There is also a plan to abolish the special schemes for workers in arduous or hazardous jobs, which currently give workers the opportunity to retire earlier, although no decisions have been made yet in this regard.