Mandatory funded pension
The funded pension is the main support to the state pension, providing supplementary income in retirement age.
The funded pension is based on preliminary financing – a working person himself or herself saves for his or her pension, paying 2% of the gross salary to the pension fund. In addition to the 2% that is paid by the person himself or herself, the state adds 4% out of the current social tax that is paid by the employee, and retains 29% (13% is for health insurance and 16% is for the pensions of today’s pensioners).
The employer of a person who has subscribed to the funded pension shall withhold 2% of the person’s salary and transfer it to the Tax and Customs Board. To that amount the state shall add 4% out of the social tax, retaining 29% of the social tax. Therefore, 6% of the person’s income is transferred to the pension account of the person, while the person himself or herself has paid only 2%.
The majority of the social tax paid by an employee today is spent on state pensions of today’s pensioners, the aforesaid 4% of the person’s social tax is actually set aside to ensure his or her own personal future.
The state pension insurance component of the person who has subscribed to the funded pension, is also respectively smaller (for the years when 16% was received for state pension instead of 20%).
- Subscription to the funded pension is mandatory for persons entering the labour market, i.e. persons born in 1983 or later.
- The funded pension was voluntary for those born between 1942-1983. Subscription was possible in seven years from the 1st of May in 2001 until the 31st of October in 2010.
By submission of a subscription application, person assumes a binding obligation – a person who has once subscribed will never be able to give up the funded pension.