The Bank of Estonia recommends not making the second pillar of Estonia’s pension system voluntary, as that may result in lower old-age pensions in the future and bring pressure to raise taxes in the future with it.

The Ministry of Finance sent the pension reform bill that would make the second pillar optional for an interministerial round of approvals last Wednesday.

Earlier this fall, the Bank of Estonia drew up an impact analysis of changes to the system of mandatory funded pensions in which it assessed the short- and long-term impacts of the planned change.

“In our analysis, we arrived at the conclusion that the more the planned changes will reduce the accumulation of pension savings into the pension pillar, the greater the pressure will be in the future to increase the pension paid from the first pillar and to increase taxes,” Bank of Estonia Governor Madis Müller said in a letter to the Ministry of Finance.

The central bank pointed out that despite the increase in retirement age, the ratio of working people to pensioners in Estonia will start to decline in the decades to come. By 2060, there will only be 1.6 people in employment per person in retirement, down from the current 2.2.

This will put the first pension pillar under strong pressure, which will be aggravated by a growing risk of poverty in people in retirement in a situation where they lack savings accumulated via the second pillar. Withdrawal of money from pension funds as a result of the pension reform will also increase the volatility of economic growth.

“Initially, economic growth will increase as a result of a steep increase in consumption, as will property prices and imports,” the Bank of Estonia said. “When the initial effects of the withdrawal of pension savings are over, economic growth will weaken.”

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