Estonia, the success story
Arvamus 24 Mar 2013  EWR
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PETER TABERNER, New Europe | MARCH 24, 2013
Estonia has been an economic success story in the Central Europe and Baltic region, with high levels of growth achieved through the computer, IT and automotive industries, but it’s also a country which is still developing, as reflected in its pension system.

The pension apparatus is split into three pillars, firstly the defined benefit state pension, the old age pension, that is funded through tax contributions.

The basic amount the state pension provides is €120,2069, the full amount is calculated after the length of employment, that includes the years which are deemed equal to bringing up children and compulsory military service.

Additionally there is an insurance component, where the amount received at pension age, is dependent on how much social tax has been paid from the salary of a pensioner since 1 January,1999.

The amount paid out by the component equates to the sum of ‘annual factors’ of pension insurance. An annual factor shows the ratio of the social tax paid on the individual salary, compared to the average salary nationally. For those who are not entitled to a pension that is related to work contributions, the second part of the state pension, the national pension, is invoked if they have lived in Estonia for at least five years, the amount of the national pension is €134.

Following in the footsteps of most other European countries, the ceiling on the pension age is set to increase from its current level of 63. In April 2010 the Estonian parliament adopted the State Pension Insurance Act, that raised the pension age to 65.

The transition period for this begins in 2017, and will effect citizens who were born between 1954 and 1960, where the retirement will increase by three months every year, eventually reaching the age of 65 in 2026. The second pillar of the pension system is a defined contribution mandatory funded scheme, and is labour market based, in support of the basic state pension.

It works by each participant contributing two percent of his or her gross salary to the pension fund, the state will then add four percent of the social tax paid by employees.

Employers will administrate the payments by withholding the two percent of salary, and then transferring it to the national Tax and Customs department. As it is now a mandatory system, anyone who has entered the labour market who was born in 1983 or after is to contribute, whereas before the legislative change the fund was an optional scheme.

The third pillar, or the supplementary funded pension, is also a defined contribution scheme, which remains a voluntary part of retirement contributions in Estonia.

This is the most flexible part of the three pillars of the pension system, as how much you pay can be increased or decreased, or suspended if necessary on a temporary basis, at the discretion of the individual.

If the contributor wishes, all of the money which has been invested can be taken out before retirement age, if it is desired to spend the money for now rather than tomorrow.

Andres Võrk, an analyst of labour and social policy of the Tallin based think tank Praxis, warns that the pension process has yet to fully mature: “The Compulsory and voluntary pension schemes have not matured yet, very few people receive pensions from the second and third pillar. Up to the end of 2012 about 636,000 people have joined the second pillar, from a population between the ages of 18-64 of 863,000.”

“Looking at the voluntary scheme, about 68,000 people have a third pillar insurance contract up to the end of last year. The benefits of this pension have started to filter through, with 8,627 people receiving money, and out of those 2,851 were older than 55. In general for the Estonian retirement structure, the major issue is finding the balance between adequacy and sustainability.”

As part of the modernising process, public sector pensions are likely to become more streamline and less advantageous, if the centre-right coalition government manages to get its own way.

Some of the favourable conditions that state employees enjoy include early retirement, alongside ‘top ups’, that are usually received by military personnel, judges and the police, that the government argues reduces flexibility in the labour market, obscuring fiscal obligations over a long period of time.

An interesting twist in Estonia’s pension mosaic, is the breakdown of how pension providers invest their assets on the markets. In a global culture where the safety of bonds have replaced the reliance on equities since the financial crash, according to the Melbourne Mercer Global Pension Index, that used OECD pension statistics from 2011, Estonia invests in the ‘other’ markets far more than any other country in the Index.

This is mostly due Melbourne Mercer say, to the comparatively inordinate faith in private investment funds, these usually have less than 100 investors, and are often given hedge fund status, usually member investors of huge personal wealth are included. The political discourse over the last couple of years has centred mainly around the economic crises, that has caused the pay as you go state pension system to run a deficit that may take decades to close.

This has led to the suspension of social tax transfers to the mandatory scheme last year, this followed a similar suspension for 18 months from June 2009.

Although according to an EU report, the pressure on the Estonian pension system is derived from high dependency rates, where only 30 percent of the population receive any kind of state pension.

The policy recommendations from Brussels to eradicate this are to have an effective retirement age, using current expenditures more efficiently in targeting poverty, or increasing voluntary savings.

Recently the Income Tax Act, as of the 1 January, 2012, employers can contribute to a voluntary pension scheme up to the amount of 15 percent of an employee’s annual salary, without paying the fringe benefit taxes.

Perhaps one step forward in encouraging employees to look to the voluntary third pillar in the system, as part of the development of a pension scheme that has still yet to fully evolve.

Peter Taberner has previously written for Financial News, Investment and Pensions Europe, Utility Week, EGOV Monitor, European Pensions,, PPP Bulletin, Global Pensions Weekly, Tobacco Journal International, IPS and

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