Eesti Pank has prepared a detailed impact analysis of the changes to the pension system



Eesti Pank has published a detailed impact analysis of the planned changes to the pension system. It describes the methodology of the analysis and the assumptions used more thoroughly than the summary published in the middle of October did.

“More than 700,000 people in Estonia are saving for their pensions through the second pillar, and in future the second pillar is supposed to provide one third of each person’s pension. The first and second pillars do not compete with each other, they complement each other. The responsible place to start from when changing the pension system would be a description of a quantifiable aim of the changes and their expected long-term impact. It has not been explained during the current process of making changes what size of pension the government plans to ensure for the people of Estonia in the future, nor how it should be funded. Such an important issue ought to be widely agreed in society before changes are made to the current bases of the pension system”, said Madis Müller, Governor of Eesti Pank.

The impact analysis prepared by Eesti Pank in the middle of October found that making funded pensions voluntary could mean that old-age pensions will be smaller in future. It would also increase the pressure to raise taxes in future.

The approach to changing the pension system that the government has planned may lead to a short spurt of growth in the Estonian economy if a lot of people leave the second pillar. This temporary boost would be followed by slower growth or even a recession that would hurt the living standards of people in Estonia. Estonian exporters would become less competitive over the years, as the temporary boost to growth in the economy would fade, but labour costs would remain higher than before.

The Eesti Pank impact analysis found three major concerns about the changes planned by the government that need to be addressed.

  • If a lot of people leave the pension funds, it is probable that the funds will have to sell some assets that are hard to dispose of quickly. A quick sale of assets would cause both those leaving the fund and those remaining in it to lose money.
  • After the changes it would be riskier for funds to buy assets that give good returns but are hard to sell quickly. What certainty can there be that funds would in future buy assets for future pensioners that would be more profitable?
  • Pension funds have in recent years invested in Estonian companies and played an important role in funding them. How would the gap be filled for Estonian companies in the funding that they need to improve their productivity and create new jobs?

The government published the principles for its planned reform of the second pension pillar in the second half of August. At the start of September the central bank announced that it would publish an impact analysis by the middle of October at the latest, looking at how the changes would affect the economy in the short term and the tax burden and state funding over the longer term.

For further information:
Viljar Rääsk

Eesti Pank
Tel: 6680 745, 5275 055
Email: [email protected]
Press enquiries: [email protected]