Estonia’s government should ensure contributions for the second pension pillar are higher in the near future, according to an OECD economic survey published today.

Overall, the report finds that Estonia’s economy is bouncing back, after a ‘precipitous’ decline in 2008 and 2009 brought a period of ‘record-breaking’ growth to an end.

The small northern European state went to considerable effort to prevent ballooning fiscal and public debt and satisfy the criteria for Euro entry, including sizeable one-off and temporary measures such as the diversion of state contributions to the mandatory funded second pension pillar to the general government budget.

“Public finances came under severe strain during the economic crisis, but the remarkable fiscal consolidation implemented during 2009 averted a confidence crisis and paved the country’s way into the Euro area,” the report said.

Fiscal policy in Estonia is now confronted with “three overlapping challenges”, the OECD said. These are: establishing a new balance between revenues and expenditure to ensure a durable improvement in the underlying fiscal position; protecting fiscal balances in the upswing; and preventing an erosion of contributions to the second pension pillar.

The report warns that protecting the second pension pillar is important to ensure the sustainability of old age income replacement, and urges the government to increase contributions to the second pension pillar in the near future to counterbalance the suspension of contributions over the last two years.

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