The Estonian government on Thursday approved a pension reform bill that would make the pension system more flexible from 2021, change the formula for calculating pension size as well as tie the retirement age to average life expectancy beginning in 2027.

"It is a duty of the state to provide people with a feeling of security that they will be protected against poverty in old age," Minister of Social Protection Kaia Iva (IRL) said in a press release. "While the size of wages that people earn differs, a pension must ensure sufficient income for low-income earners as well so that the poverty risk of low-income earners is not aggravated when they reach retirement age."

Equally necessary is flexibility in order for Estonia to have enough workers, and for its elderly who do not wish to or cannot work full time to have opportunities for self-realization, Iva added.

According to the minister, Estonia will get a pension system consisting of a first pillar building more on solidarity, which will depend on the number of years worked, a second pillar depending on the size of the wage, and a third pillar based on the person's voluntary contributions.

"A first pillar building more on solidarity requires that alongside it we have a second pillar depending on the size of one's wages," Iva said. "A greater link to the person's own contribution will be preserved for future pensioners through the second pillar and, for those who wish, also through the voluntary funded pension," the minister said.

The payment of pensions will become more flexible beginning on 2021, with people being given the opportunity to choose for themselves when they retire, as well as partially draw a pension or suspend pension payments without losing out financially in the end.

Top Finance Ministry official lambasts government's pension reform (4)

The transition from the current system to the new system, where the first pillar will depend exclusively on the number of years worked, will take place from 2021-2037, during which period the size of the first pillar of the old-age pension will depend on the number of years worked and the person's wage half and half. Already accumulated insurance entitlements, or the portion of the first pillar which depends on the size of wage, will not be transformed into solidarity-based entitlements.

From 2027, retirement age in Estonia will be pegged to average life expectancy to reflect changes in demographics and enable to pay pensions of similar size as now as population numbers decline. The opportunity to join the second pillar will also be reopened for those born between 1970 and 1982.

Changes to the national pension system have been in the works in Estonia since 2015, when a work group for the promotion of the sustainability of the state pension system was formed bringing together interest groups and different institutions of the state.

On Jan. 19, 2017, the Estonian government approved the principles of the pension reform and tasked the Ministry of Social Affairs and the Ministry of Finance with drawing up the relevant bill and submitting it to the government. 

The changes to the pension formula do not affect already accumulated pension entitlements. The opportunity to flexibly use one's pension, however, will become available to everyone.