Pension System in Estonia
The Estonian pension system is aimed to help a person to maintain his or her previous income and life standard after retirement. Estonia has a three-pillar pension system. The First Pillar is the renewed state pension scheme, the Second Pillar, a mandatory funded pension scheme. The Third Pillar is a voluntary supplementary pension scheme that is supported by the Government through tax deductions.
The First Pillar: State pensions
State pensions are financed by a social tax paid by all employers on behalf of their employees and by the self-employed. The rate of social tax is 33 per cent of the gross payroll. The share of social tax allocated for pensions is 20 per cent of the gross payroll (13 per cent is allocated for health insurance). The state pension is based on the principle of redistribution, i.e. the social tax paid by today’s employees covers the pensions of today’s pensioners.
State pensions can be divided into two groups: employment-related (i.e. old-age pension, pension for incapacity for work, survivor’s pension) and minimum or national pensions.
Employment-related pensions have been changed from a system where pensions were based on length of service to a system based on social tax contributions. Each year of work completed before 1999, will count as equal service contribution years and contributions made from the beginning of 1999, will count towards ones pension on an individual basis.
To receive the old age pension, the recipient must have worked in Estonia for at least 15 years. Currently, men have the right to old age pension at the age of 63 and women in 2009 at the age of 60,5. The pension age for men and women will be equal by 2016 with the women's qualifying age gradually rising to 63. People working after reaching the pension age (i.e. working pensioners) are entitled to a full pension, regardless of their work income.
The national pension guarantees a minimum income for persons who are not entitled to an employment-related pension. The national pension is the right of residents of Estonia who have attained 63 years of age irrespective of how many years they have worked, if they have resided in Estonia at least 5 years before making a pension claim and if they do not receive a pension from another state.
The number of people who received a state pension as of 1 January 2009 was 382 316 (28.5% of the population), of which 241 799 were women and 140 517 men. 289 624 of them received old age pension; 14 639 – early-retirement pension and 599 deferred old-age pension.
In the second quarter of 2009, the average monthly pension was about 305 EUR which is 46,3 per cent of the average monthly net wage.
Source: Statistics Estonia
The Second Pillar: Mandatory funded pensions
The funded pension is the main support to the state pension, providing supplementary income for pensioners. It is a retirement savings plan where a working person saves for his or her own pension, contributing 2% of their gross salary to the pension fund. The state contributes an additional 4% of the 20% of the social tax used for pensions to the individual's personal account, and retains the remaining 16% for members of the first pillar.
Subscription to the funded pension is mandatory for taxpayers born in 1983 or later. The funded pension is voluntary for those born before 1983.
Once a year the individual may choose a different pension fund to which new contributions are made. They can also change units of one fund to the other. In case respective form is submitted before November 1 at any year, it becomes valid since January 1 the next year. Savings are registered in individual pension accounts, thus they are personal heritable assets.
Social tax contributions made by the employer will remain the same whether the employee joins the second pillar or not.
The funded pension system in Estonia began in 2002. As of October 2009, about 590,000 people, which is around 86% of the labour force, had joined the second pillar funded pension plan.
Due to the global economic downturn and the difficult state of Estonia’s financial situation, state contributions to funded pensions have been suspended from 1 June 2009 until 31 December 2010. In 2011 the contribution system will resume on a 1+2% basis, and at the beginning of 2012 the initial 2+4% system will be restored.
The estimates are that the payments of the state pension and the funded pension together will be the equivalent of about half of the pensioner’s pre-pension income. The same research states that a person’s pension should be 65-70% of his or her previous income in order to maintain the established life standard.
The Third Pillar: Supplementary pensions
The supplementary pension scheme is based on individual voluntary pension contributions. The third pillar has existed since 1998, when the necessary legal framework was enacted.
Participation in the supplementary pension scheme can take two forms:
- The purchase of pension insurance policies offered by licensed private life insurance companies.
- The purchase of voluntary pension fund units managed by private fund managers.
To encourage participation in the supplementary pension scheme, the following tax incentives have been introduced:
- Contributions (premiums paid on the basis of pension insurance policy or sums paid for purchasing fund units), limited to 15 per cent of the annual gross income, can be deducted from one’s taxable income.
- Income received from a private pension insurance policy or from the redemption of pension fund units are taxable at a lower rate (10 per cent) of income tax, instead of the normal rate of 21 per cent, but only if the collected money is taken out as a single payment upon retirement. In the case of purchase of a life annuity when payouts are made regularly once a month or quarterly, payouts are not taxed.
When participating in the supplementary scheme, the pension age is a matter of negotiation between the person and the insurance company, except that the minimum contractual age, in which case the tax exceptions apply, is 55 years.
In conclusion, the III pillar is characterised by the following features:
- voluntary participation
- individual flexibility
- private management
- pre-retirement savings contributions
- free choice between insurance and fund instrument
- free choice between the defined-benefit and the defined-contribution type schemes
- advantageous tax incentives provided by the state
Pensionikeskus (Pension Centre)
Ministry of Social Affairs
Health, Labour and Social Sector in 2007
National Social Insurance Board
Ministry of Finance
Statistical Office of Estonia
This information sheet was created with the kind assistance of the Ministry of Social Affairs and was amended in October 2009 by the MFA.