With the arrival of warm weather, many people head out to their summer homes. Unfortunately, this also comes with a list of tasks waiting to be done there. One year the stairs are fixed, the next summer a window is replaced, then the roof corner is repaired or a new boiler is installed.

Each job improves living conditions a little, but at the same time the house ages and new tasks emerge, and expectations about comfort also change. As a result, even though something gets done every year and living conditions improve, the gap between expectations and reality may actually widen.

Pensions face a similar paradox. Future pensions will be significantly larger in euro terms than today and will offer better purchasing power. However, if wages and the general standard of living in society move ahead faster, a pensioner may be better off than today's pensioners but still further below the average standard of living of their own time.

Eesti Arenguseire Keskus (Estonian Foresight Center) recently analyzed how large pensions could be by 2050 and what kind of purchasing power they would provide compared to today, assuming no changes are made to the pension system.

A person who earned the average Estonian wage throughout their working life would receive a net pension of about €2,044 per month relying solely on the first pillar. Since ongoing inflation reduces purchasing power, it is easier to understand if expressed in today's prices. Based on the Ministry of Finance's long-term forecast, this would correspond to about €1,223 in today's value. Considering that the average net pension in 2025 was €816 per month, the calculation shows that even relying only on the first pillar would provide future pensioners with significantly greater purchasing power than today.

However, a pensioner relying solely on the first pillar would have a lower income relative to the average wage than today, meaning relative inequality would increase. In 2025, the average net old-age pension was about 52 percent of the average net wage. By 2050, a pension based only on the first pillar for someone earning the average wage would fall to about 43 percent of that level. In simpler terms, pensions will lag further behind average wages, and perceived inequality is likely to grow.

The second pillar helps raise living standards and spread risk

The second pillar, or funded pension, increases future pensions significantly. If a person earning the average wage contributes 2 percent of their gross salary to the second pillar, with an additional 4 percent coming from social tax, their future net pension would rise by about a quarter in today's terms to €1,550.

If the person has used the option introduced in 2025 to increase personal contributions to 6 percent, the projected pension would rise to €1,726 in current value — more than 40 percent higher than relying solely on the first pillar.

A multi-pillar pension system also makes pensions more resilient to economic and demographic shocks by spreading risks between the labor market and capital markets. For example, if Estonia's migration figures or employment rate fall short of expectations, the second pillar can help mitigate these negative effects.

It should be noted that investing in the second and third pillars reduces current purchasing power and well-being. A 2 percent contribution to the second pillar reduces the disposable income of an average earner by about €33 per month, while a 6 percent contribution reduces it by about €100 per month. This is a clearly noticeable trade-off in quality of life, but the reward is a significantly higher standard of living in retirement.

Even current retirees have benefited from the second pillar

The funded pension system was established in Estonia in 2002. Over the years, it has rightly been criticized for high fees, uneven returns, complex rules, and the fact that part of the social tax is redirected into the funded pillar, leading to a smaller first-pillar pension later.

In addition, there has been significant political volatility around the second pillar, which has inevitably reduced public trust. As a result, there are justified doubts about whether it has paid off for individuals.

Using a sample calculation for a person who earned the average Estonian wage throughout their career, joined the second pillar at its inception in summer 2002, and retired at the beginning of 2026, the short answer is that it has paid off. Without the second pillar, their net first-pillar pension would have been €793 per month at the start of 2026. With the second pillar, the first-pillar pension would be lower — €757 per month. However, this is supplemented by the funded pension: by the end of 2025, the person would have accumulated over €28,000 in the second pillar, enabling monthly additional payments.

This additional pension grows over time because the remaining balance continues to earn returns. If the accumulated assets are used over 20 years, the first monthly payment would be €118, rising to €288 in the final month. This would result in a total pension of €875 per month at the start — €82 more than relying solely on the first pillar. Over time, this advantage increases.

The person's own contributions during the saving period would have totaled just under €6,000, or €8,681 when adjusted for inflation. This represents the consumption and well-being sacrificed during the saving period.

According to the calculation, the higher pension from the second pillar repays the person's own contributions in just under eight years of retirement. After that, the additional pension becomes a clear financial gain. If the worst happens and retirement lasts less than 20 years, the funds in the second pillar are not lost, as any unused balance is inheritable.

Payments can also be spread over a longer period, in which case the monthly supplement is smaller but lasts longer. Even then, the total benefit from the second pillar remains positive over a very long retirement.

When discussing pensions, we often ask whether a person can make ends meet in old age. A dignified retirement does not only mean covering basic needs, but also retaining the ability to live what is considered a normal life for that time without excessive financial strain. Just as with a summer home, it is not enough to complete a few tasks each year if the list of work and expectations keeps growing. Similarly, with pensions, it is not enough to know that pension amounts are increasing in euros.

The state pension remains an important support in old age, but maintaining one's standard of living also requires taking personal responsibility for saving for retirement. The earlier and more consistently this is done, the greater the chance that future pensions will not fall behind the pace of life.

--

Follow ERR News on Facebook and X and never miss an update!