The pension paradox: future retirees richer but relatively poorer

With the arrival of warm weather, many people head to their summer homes, where tasks always await: one year fixing stairs, the next replacing a window. Each improvement raises living quality, but the house ages and new demands emerge. Pensions face a similar paradox: they will grow in euro terms, but if wages and societal standards rise faster, future pensioners may be better off than today's but still fall behind the average living standard of their time.

The Estonian Foresight Center recently analyzed potential pension levels by 2050, assuming no system changes. A person earning the average Estonian wage throughout their career would receive a net first-pillar pension of about €2,044 per month, which after inflation corresponds to €1,223 in today's money. In 2025, the average net old-age pension was €816; thus future pensioners gain significantly more purchasing power. However, relative to the average wage, this pension would drop from 52% in 2025 to 43% by 2050, increasing relative inequality.

The second pillar (funded pension) significantly boosts future pensions. If an average earner contributes 2% of gross salary (with 4% from social tax), the net pension in today's value rises to €1,550. Increasing contributions to 6% yields €1,726 – over 40% more than only the first pillar. But this reduces current disposable income: a 2% contribution costs about €33 per month, while 6% costs about €100.

The funded system, launched in 2002, has faced criticism for high fees and political volatility, but calculations show it pays off. For a person who joined in summer 2002 and retired in early 2026, without the second pillar their pension would be €793; with it, the first-pillar pension drops to €757, but the accumulated €28,000 in the second pillar provides monthly supplements starting at €118 and rising to €288, making the total pension €875 initially – €82 more. Their own contributions (inflation-adjusted €8,681) are recouped in under eight years of retirement. Unused balances are inheritable.

Discussions about pensions often ask whether one can make ends meet in old age. A dignified retirement means not only covering basic needs but also maintaining a normal life without financial strain. Just as with a summer home, completing a few tasks each year is insufficient if expectations grow. The state pension remains crucial, but maintaining living standards also requires personal responsibility for savings.