The low pension replacement rate in Estonia will not increase significantly in the future and will also be influenced by the fact that the second pension pillar will be voluntary. Rather, pensioners’ ability to cope is influenced by their contribution to pension savings.
According to a study by the Organization for Economic Co-operation and Development (OECD), one of the largest drops in income in the entire European Union awaits current Estonian workers of retirement age.
According to the OECD study, a worker resident in the European Union with an average salary will receive a pension equal to 68.1% of his current salary when he reaches retirement age. According to the OECD study, in the future the net or after-tax replacement rate of Estonian employees’ pensions will be only 34.4%. Simply put, this means that once retired a person will have to live on a third of their usual income.
The think tank Praxis specified that the OECD analysis takes into account the country’s main mandatory pension scheme, which in Estonia’s case is the first pillar. If we add the now voluntary second pillar pension, Estonia’s net replacement rate would be 54.7% (as of 2022), which is still lower than the average of OECD countries (66.9%).
So far, the effects of the second pillar reform have not yet been reflected in the replacement rate – in 2019, for example, with the second pillar the replacement rate was 53.1% – but the effects will begin to appear in the following years, he said. called Praxis ERR.
Praxis analysts Kelly Toim and Katre Pall said that due to the impact of the reform, differences in the pension replacement rate will start to appear around 2030 and will be long-term.
When the Ministry of Finance and the Ministry of Social Affairs analyzed the ratio between the average retirement pension and the average net salary in Estonia until 2070, it was found that the ratio is between 42 and 44%. If the 2nd pillar had not been made voluntary, the percentage would be higher than 45%.
By the end of 2023, around 235,000 people have left the second pillar or have asked to leave in Estonia, i.e. 32% of those who have joined the second pension pillar.
Praxis said the pension replacement rate will also be influenced by the birth rate, joining the second pillar and its performance in the future. If both the birth rate, which is part of the second pillar, and productivity remained lower, the ratio of old-age pension to net salary would probably fall below 40%.
Low pension rate = higher poverty rate
According to the analysis of the sustainability of the pension system prepared by the Ministry of Finance and the Ministry of Social Affairs, the average pension replacement rate in Estonia is decreasing. Pensions also become increasingly unequal over time, as the amount of salary earned over a lifetime increasingly impacts pensions. Pension gaps between men and women have begun to widen, and low pensions for women will be particularly worrying in the future, given women’s lower wage levels.
If the country has a low pension replacement rate, the elderly poverty rate is also higher. According to 2022 data, 52% of older people in Estonia live in relative poverty. The same figure for Europe was 17.3%.
At the same time, Estonian women find themselves in poverty much more often than men. In 2022, the poverty rate for women aged 65 and older was 57.1%, compared to 43.6% for men, Praxis noted.
To increase such a low pension replacement rate in the future, several measures have been proposed. In the analysis of the above-mentioned ministries it is proposed to significantly increase the minimum pension and create an occupational pension.
Toim and Pall noted that these would be important measures, but, for example, an increase in the minimum pension would not help the recipient of an average pension who also lives in relative poverty.
“Since reaching the occupational pension and its effects take time, the poverty of the elderly can be reduced through extraordinary increases in pensions. In the long term, knowledge of social security and financial wisdom and everyone’s active contribution to saving their pension are important ” they said.
The OECD study was based on the assumption that the employee will enter the labor market at age 22 in 2022 and will work until the country’s official retirement age. When calculating the amount of the future pension, all mandatory pension accumulation schemes were used, voluntary pension insurance was not taken into account.
2024-01-20 05:00:00
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