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IPE special report May 2018

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Estonia’s PAYG system delayed

Reform of Estonia’s first pillar pay-as-you-go (PAYG) social pensions system will come into force on April 1 after a three-month delay due to tax calculation problems led to postponement of the original January 1 launch date.
This month will also see the present government coalition formulate details on the introduction of a mandatory funded second pillar, with a draft law scheduled for the first quarter of this year.
The new social pensions system, ratified by law on June 26 1998, will calculate pensions based on registers of average social tax payments from January 1 1999.
Prior to this date pension payment based on the former length of employment service method will still apply.
Lauri Leppik, an adviser to the Estonian minister of social affairs in Tallinn, says: “There were some problems concerning the calculation of pensions, which were not foreseen when the law was passed. Figures for the average amount of fiscal social tax paid over the 1999 calendar year are not available until the end of February, so we decided to shift the time frame back. Pensions will now be recalculated on April 1 every year, so the pensions cycle will not fall in line with the calendar year.”
Leppik says the primary reason for the calculation change was to establish a link for Estonian social pensions between contributions paid and benefits received.
The Estonian government and social security commission is expected to clarify its position by the end of February on contribution levels and age limits for the proposed mandatory funds.
“Contribution levels are likely to be between 5 and 8%, but the other issue is the age below which employees must start making mandatory contributions. Above a certain age, employees will have a choice to keep paying everything to the first pillar.
“The minister of social affairs will present a draft law by third quarter with the minister of finance amending the existing pension fund law, which has provision for voluntary funds only at present,” says Leppik.
Leppik notes that private fund managers of any nationality will be available to pitch for business in Estonia, although he adds that the framework for pension fund investment has yet to be decided.

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