Uku Varblane and Magnus Piirits: Pensions Rise, but Cost of Living Rises Faster
Although future pensions will be higher in nominal terms and purchasing power, they will lag behind average wages, increasing inequality. The second pillar can significantly improve the outlook.
With the arrival of warm weather, many head to their summer cottages, inevitably facing a list of repairs. Each step improves living conditions, but the house ages, and the gap between expectations and reality widens. A similar paradox applies to pensions: even though future pensions will be higher in nominal value and purchasing power, their growth may fall behind wage dynamics and the general standard of living.
The Estonian Development Monitoring Centre recently analyzed what pensions could look like by 2050 if the system remains unchanged. A person who earned the average wage throughout their career and relies solely on the first pillar would receive a net pension of approximately €2,044 per month. Adjusted for inflation, this equals €1,223 in today's prices. Compared to the average net pension of €816 in 2025, this shows that even the first pillar alone provides significantly higher purchasing power. However, relative to the average wage, this pension will be lower: in 2025 it was 52% of the average wage, but by 2050 it will be only 43%, increasing inequality.
The second pillar, or funded pension, helps raise living standards and diversify risks. If a person contributes 2% of their gross salary with the state adding 4%, the future net pension in today's value rises by a quarter to €1,550. Increasing personal contributions to 6% would yield a projected pension of €1,726, over 40% higher than the first pillar alone. A multi-tier system also makes pensions more resilient to economic and demographic shocks.
Investing in the second and third pillars reduces current purchasing power. For instance, a 2% contribution cuts disposable income by about €33 per month, while a 6% contribution reduces it by €100. This is a tangible sacrifice, but the reward is a much higher standard of living in retirement.
Current pensioners have also benefited from the second pillar. Since its introduction in 2002, there have been complaints about fees and returns. However, calculations show that a person who joined in 2002 and retires in early 2026 has come out ahead. Without the second pillar, their pension would be €793 per month; with it, €875 in the first month. Their personal contributions were less than €6,000, and the increased pension pays back in under eight years. After that, the extra amount is pure gain.
When discussing pensions, it's important not just to cover basic needs but to maintain a normal standard of living. The state pension will remain a key support, but personal savings are crucial to prevent the future pension from lagging behind life.
