Incentives to Retire Imposed by Old-Age Pension Policy in Estonia

The paper analyses the incentives that Estonian state pension scheme imposes on retirement incentives. The specific focus is on actuarial neutrality and benefit equivalence of adjustments for early and late retirement.The benefit adjustments for early and deferred retirement set in current legislation are established as not actuarially neutral and they do not assure benefit equivalence. They impose an incentive to postpone retirement for too long – assuming rational behaviour the effective retirement ages should be way above statutory retirement age if current legislation is not amended. Assuming a real discount rate of 3%, the rational effective retirement ages would lie at 70 in 2016 and 72 in 2026. Not legislating benefit adjustments that assure benefit equivalence could bring along adverse effects, such as higher than expected replacement rates and thereby higher than expected overall costs.