The Estonian pension system comprises three pillars:
- the first pillar or state pension
- the second pillar or mandatory funded pension
- the third pillar or supplementary funded pension
The state pension
The state pension should guarantee an income that covers minimum living expenses. The state pension is based on redistribution – current workers cover the pensions of future pensioners with their social tax payments. The amount of the state pension provided for future pensioners mainly depends on the number of taxpayers and the size of their income. In Estonia, the proportion of working-age people in the population is decreasing, which means that in the future there will be fewer taxpayers.
The second pillar
The second pillar is directly dependent upon your income. Upon joining the second pillar, 2% of your gross wages are transferred to your personal pension account each month. The state adds 4% to this out of the social tax paid on your wages. This is how the monthly 6% funded pension is formed. The higher the official income, the greater the contributions to the pension account are and the bigger the pension is in the future.
The second pillar is mandatory for all persons born in 1983 and later. If such persons have not chosen a pension fund by 1 January of the year following the year they turn 18 or before starting work or an internship, Pensionikeskus will draw a pensionfund for them. During the period from 01.01.2020 until 30.11.2020 persons born between 1970-1982, who have not joined second pension pillar, will get a new opportunity to join.
The third pillar
The third pillar allows everyone to make supplementary contributions to their retirement years. Additional saving is important, as the pension should make up approximately 65% of the pre-pension income, so that the accustomed standard of living could be preserved. The first and second pension pillars combined provide about 40% of pre-retirement income, so, in order to ensure a comfortable retirement, it is important to save consciously.