Bill to allow saving more in second pension pillar

Money.
Money. Source: Christian Dubovan/Unsplash

The funded pension contribution rate has stayed at 2 percent since the so-called second pillar instrument was first introduced. The Ministry of Finance has now sent out for coordination a bill to allow people to save more in the future.

The bill would amend the Funded Pensions Act by allowing people who have joined the second pillar to hike their contribution rate from the current 2 percent to 4 percent or 6 percent.

"Hiking the rate could prove necessary if the person has decided to stop contributing for a period of time. Making up the lost time once saving resumes requires a higher contribution," the bill's explanatory memo reads.

The recent base rate of 2 percent will remain in effect, with people free to decide whether to hike their contribution. To do so, a request needs to be filed with the pensions register (AS Pensionikeskus) or account manager. The new rate will remain in effect without a term but can be changed once a year, with changes taking effect on January 1.

The ministry finds the changes will help grow Estonians' pension savings that fall well short of the OECD average. Pension assets made up of 90 percent of the GDP of OECD countries in 2019, while the figure was just 18 percent for Estonia.

Estonia also has one of the lowest pensions to salary ratios. At the same time, surveys suggest Estonians want their pension to be 60-80 percent of salary.

"The more additional saving options people seize, the smaller the difference between the pension they want and the pension they will eventually receive," the memo reads.

The ministry gives simplicity as the reason for fixed rates – a completely unregulated contribution rate would make it very difficult for employers to make payments and the Tax and Customs Board to exercise supervision.

The bill only concerns the currently 2 percent contribution from salary and does nothing to change the 4 percent social tax share in funded pension. This means that the changes will not affect the first pension pillar.

The first and second pillars should ensure a pension of 40 percent of salary in Estonia. The rest should be saved in the third pillar, while few people still seize the possibility.

The average old age pension made up of the first and second pillars was €528 a month in late 2020.

Ministries have until mid-June to send in proposals or approve the bill. The law would enter into force on January 1, 2024.

Estonia made the second pillar voluntary in 2021, meaning that people can leave the scheme and withdrawn existing assets, with the possibility of returning in ten years' time. Previously, joining the second pillar fund had been mandatory for all people born in 1983 or later.

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Editor: Marcus Turovski

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