The pension amount results from three parts
The Estonian pension system stands on three pillars. The I and II pillar are state pension, and the III pillar the supplementary private pension. The I and II pillar are mainly financed from the social tax while the III pillar contributions are made either by the individual or their employer.
The I pillar pension amount depends on the person’s pension qualifying period, formed from different life events like employment, raising children, serving in the military, studies, etc. Starting from 2021, the formula for calculating the I pillar will change.
The II and III pillar pension amounts mostly depend on the contributions by the persons themselves, or their employer, has made to the pillars, and how much the chosen funds have managed to grow the sum. To date, the II pillar has been mandatory for persons born on 1983 or later. The III pillar is completely voluntary.
The government is currently planning to reform the II pension pillar – make the II pillar voluntary, and loosen the payment conditions. You can read more about the II pillar reform on the Ministry of Finance website.
As at November 2010, people born before 1983 did no longer have a chance to join the II pillar. From the beginning of the year 2020, persons born during 1970-1982 can file an application again, regardless from the II pillar reform.
To join, one should communicate their choice at the bank or the Funded Pension centre by November 31st, at the latest, and contributions into the chosen pension fund shall start from January 1st, 2021.
The pension formula will change
The formula for calculating the I pillar pension will change from 2021.
Currently, the formula consists of three parts:
- base part which is approximately a third from the pension amount and is the same for everyone;
- years of pensionable service which is available only for persons employed before 1999, and data of which is available in employment record books;
- insurance part collected from 1999, depends on the social tax paid for one’s income.
After the end of 2020, the insurance part will no longer be collected. Starting from 2021, the fourth – joint part – shall be collected instead. The pension formula change will result in more equal I pillar pensions in the future, as opposed to the current formula outcome.
Starting from 2021, the pension amount will be formed from four parts: the base part, the part for years of pensionable service, the insurance part, and the joint part.
Example: Peter has been employed since 1986, and would like to retire in 2026.
To find out Peter’s pension, the following shall be added up:
- base part, which is the same for everyone and changes yearly, on April 1st, as the pensions are indexed;
- the part for years of pensionable service depend on Peter’s employment from 1986 to the end of 1998. This part will also include Peter’s studies during 1983–1986 (read more about what is included in the pensionable service);
- insurance part, the size of which depends on the social tax that has been paid from Peter’s salary from 1999 until the end of 2020;
- joint part, the amount of which depends on the social tax paid for Peter’s salary from the beginning of 2021 until his retirement in 2026.
The new joint part shall consist of the following:
- 50% - insurance component.
The amount of the insurance component shall be calculated based on the paid social tax. It shall be calculated like the currently collected insurance component. For example, the insurance component of a person earning the medium Estonian wage is 1.0.
- 50% - solidary component. The solidary component is 1.0, if the social tax paid for a person in a year exceeds that paid for 12 times the minimum salary. If the yearly social tax paid for a person does not exceed the minimum yearly rate, the solidary component shall be calculated proportionally.
Joint part calculation: solidary component + insurance component ÷ 2 = joint part of the pension.
Example: The insurance component of a person earning double the average Estonian salary shall be 2.0 until the end of 2020. Starting from 2021, their insurance component shall continue to be 2.0. The solidary component will be added to this, which is 1.0 if the person earns more than the yearly minimum salary during the year. This results in the components’ total of 3.0. The result will be divided by two, meaning that the joint part shall be 1.5 for a person earning double the average Estonian salary.
For reference – the insurance component of a person earning half the Estonian average salary is 0.5. The solidary component of 1.0 shall be added to this, which results in the components’ total of 3.0. When we divide the result by two, the joint part for that person will be 0.75 for that year.
Things will stay the same for a person who earns the average Estonian salary. Their insurance component shall remain to be 1.0 until the end of 2020. Their joint component collected from 2021 shall also be 1.0.