No. 9

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The Estonian Pension System in the Light of the European Union Common Pension Objectives

14 June 2004

Studies

RiTo No. 9, 2004

  • Lauri Leppik

    Lauri Leppik

    Senior Research Fellow, Estonian Institute for Population Studies, Tallinn University

  • Ene-Margit Tiit

    Ene-Margit Tiit

    Demographer, Professor Emeritus, University of Tartu

  • Andres Võrk

    Analyst, PRAXIS Center for Policy Studies, Lecturer at the University of Tartu

The article is based on the findings of the study on compliance of the Estonian pension system with the 11 common pension objectives of the European Union. The study was commissioned by the Government Office and the Ministry of Social Affairs of Estonia and carried out by the expert team of the PRAXIS Center for Policy Studies.

The main aim of the study was to analyze the Estonian pension system in the light of the 11 EU common pension objectives, using the common indicators agreed by the EU Social Protection Committee.

The relative risk of poverty (measured using the relative poverty line of 60% of median income per household member) of persons aged 65 and over in Estonia is below the EU average. This is explained by the universal coverage of the state pension system, while the old age pension provides for the overwhelming majority of pensioners an income above the poverty line. However, the average income of persons aged 65 and over is below the average income of younger persons.

Moreover, the theoretical individual replacement rate calculated for a worker with 40 years working career and average earnings is below the respective rates in all current EU member states.

At the same time, the financial sustainability and the general fiscal context of the pension system is better than in most of the current member states. The pension reform implemented over the last years – parametric changes in the state pension insurance (e.g. increase of the pension age) and introduction of the supplementary pension schemes (so called second and third pillars) – have increased financial sustainability.

As a result, the patterns in the Estonian pension system are somewhat different than in the current member states. The main consideration is the relatively low replacement rate, which means that for the majority of beneficiaries the pension system is not able to maintain the former living standard.

Projections based on the pension simulation model indicated that the formula for indexing of pensions can be made more generous without jeopardizing long-term financial sustainability. Further improvements in the replacement rate of the state pension would however require a considerable improvement in the general employment rate. Alongside the increase of the legal retirement age, it is important that the employment rate of older (55-64) workers and the effective retirement age also increase.

Full article in Estonian

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