FIVE YEARS SINCE THE ESTONIAN 2ND PENSION PILLAR REFORM: WHAT HAVE WE LEARNED?

This study by BFC expert Heidi Reinson examines Estonia's landmark 2021 pension reform, which transformed its mandatory funded 2nd pillar into a fully voluntary scheme and allowed participants to withdraw their accumulated savings before retirement. Five years on, the reform offers a rare real-world case study of large-scale pension freedom and its economic and social consequences. 

The research brings together political and economic analysis in a single publication, assessing the drivers behind the reform, its immediate fiscal and macroeconomic effects, and its emerging long-term implications. Estonia stands out internationally: unlike reforms in countries such as the UK, Chile, or Australia, it permitted full withdrawals at any working age and without caps. As a result, more than one-third of eligible participants withdrew their savings between 2021 and 2025, with payouts amounting to billions of euros and a measurable, though temporary, impact on inflation and consumption. 

The findings highlight important distributional effects. Withdrawals were disproportionately concentrated among lower-income and lower-education groups, as well as among individuals with limited alternative retirement savings and lower institutional trust. While the reform delivered immediate liquidity to households and significant tax revenues to the state, it has contributed to the emergence of a two-track pension landscape. Those who exited now face lower projected replacement rates in retirement, while those who remained — and in many cases increased their contributions — are likely to accumulate substantially higher long-term savings. 

For policymakers internationally, the Estonian case underscores how strongly behavioural responses depend on policy design. Contribution rules, withdrawal taxation, re-entry restrictions, disclosure requirements, and default settings all shape outcomes. The Estonian experience demonstrates that expanding individual choice in pension systems carries far-reaching and unequal consequences. 

The study is developed within the framework of EC Recovery and Resilience Mechanism Project No. 5.2.1.1.i.0/1/23/I/CFLA/001 “Strengthening Knowledge and Research Capacity in the Areas of Anti-Money Laundering, Financial Technologies, and Sector Analysis”.