Serious changes in Estonian pension system
Text: Heli Lehtsaar-Karma, MTÜ Rahatarkus
Photo credit: Pixabay, Alexas_Fotos
A significant reform came into force in Estonian pension system this year: the second pension pillar which has been mandatory for most Estonian wage earners almost 20 years is not mandatory anymore. This means that about 760,000 people who have accumulated pension money for years can now decide either to stop the contributions to their second pension pillar, start investing the accumulated money themselves or withdraw all their savings from the second pension pillar.
The Estonian pension system is based on three pillars:
- I pillar: State pension (paid out of the 33% social tax calculated from salaries)
- II pillar: Mandatory funded pension (based on preliminary financing – a working person himself or herself saves for his or her pension, paying 2% of the gross salary to the pension fund. The state adds 4% from the 33% social tax calculated on the salary of the employee).
- III pillar: Supplementary funded pension
Due to the low returns and high administrative fees of the mandatory pension funds the system has been criticized for years until government decided to change the system and make the second pillar voluntary from year 2021.
New options for second pension pillar
All those saving for a pension have now the right to withdraw all the accumulated money in the second pillar if they so wish. When money is withdrawn from the second pillar, an income tax of 20 percent on the amount withdrawn must be paid.
Another option is to stop making contributions to the second pillar. When a person stops making payments to the second pillar, the money he or she has accumulated so far remains in the pension fund, where it will continue to be invested. The same applies if a person invests money in a pension investment account, i.e. if he or she stops making the payments, no new money will be added, but the amount already accumulated will remain in the second pillar.
Over 150 000 people decided to withdraw their money
About 760,000 people have joined the second pillar (population of Estonia is 1.3 million). The first period for submitting applications to leave the second pension pillar ended on March 31th and those leaving will withdraw a total of almost €1.3 billion. A total of 152,675 withdrawal applications and 2,731 applications for exemption from payment were submitted in the first quarter of this year.
Estonian Public Broadcasting mediated that significantly more people continue to collect pensions than the November 2020 survey of pollster Turu-uuringute AS showed. In November, more than half, or 56 percent of working-age people who joined the second pension pillar planned to continue with contributions and not withdraw the money.
The average person leaving the second pillar is a middle-aged pension collector with a slightly lower income than the average salary. While those who have joined the second pillar have collected an average of around €7,000, people who have decided to leave have collected an average of €8,468. If the amount collected is less than €2,000, it will rather not be withdrawn. There are also fewer leavers among those who have collected more than €15,000.
Next deadlines for submitting applications to leave the second pension pillar are July 31, October 30, December 31 etc. – applications can be submitted after every three months.