Old-Age Pension Reform in Estonia on the Basis of the World Bank's Multi Pillar Approach

Abstract

The current literature about old-age pensions can be characterised by the numerous analyses of pension system reforms in developed countries as well as in developing ones. Although the radical change in economic and social values during the process of transition from command economy to market economy offers many special cases for economists as well as social scientists, only some of them have analysed the developments of pension systems in Central and Eastern European countries. Therefore, the purpose of the present paper is to analyse the adjustments in publicly managed pillar as well the implementation of the funded component of pensions in Estonia, described by previous analyses in general as successful reforms in comparison with the other transition countries. Firstly, in the working paper the aims and the design of the pension system as well as main factors determining pension reform are studied on a theoretical basis. Next, the general overview of the reforms and more specific assessment of the changes in publicly managed scheme and the implementation of the funded scheme in Estonia are given. Finally, the challenges of the multi-pillar pension scheme in Estonia are described and in order to cope successfully with these challenges, some suggestions are made. The study explains that the undervaluation of the social dimension in comparison with the economic one has taken place during the transition period. The pension reform has to some extent ensured the financial sustainability of the pension system, but not fulfilled the two other objectives defined in 2001 by the European Council in Goteborg as a basis of sustainability of the pension system - to guarantee safe and adequate pensions and to respond to the changing needs of society and individuals. The present old-age pensioners (as well as the pensioners in the future) are directly placed at the risk of poverty and the opportunities of elderly people to participate in the societal life are very limited in comparison to the active population. The changes in publicly managed scheme as well as the implementation of the mandatory funded system (II pillar) and supplementary funded system (III pillar) during the period 1997-2002 have not been successful in avoiding potential demographic and macroeconomic risks in the near future.