Retirement, 1st pillar

The retirement system in Estonia consists of three pillars, making it a somewhat complicated system. The first realization that the system is complicated comes from the fact that it takes me more than one lesson to teach the topic to students. The second comes from my experience of how little people know about the way the system works – how little I knew about how the system worked before I started looking up information on it.

Your future pension payments will come from a combination of three pillars. The first, which is obligatory (which I will be writing about in this post), the second, which for all intents and purposes is also obligatory and the third pillar, which is currently voluntary.

What is the first pillar?

Essentially the state is keeping track of how much you work. The first pillar is dependent on your current salary – the more money you make, the higher your future pension payment will be. At the end of the year the state looks at the amount of money that you have earned and compares it to the average national salary.

If you make an amount that’s equal to the average national salary then the pension “count” for you is 1,0. If you make the minimum salary then it takes approximately 3 years for you to gain 1 year worth of “average” benefits.

The upsides of the first pillar

In theory the first pillar is great – the state takes into account your contributions to society and you will get some money at least when you’re retired. However, this means that 1) the state has to take less responsibility for the lives of the people and 2) 1st pillar means less social support for people who aren’t doing as well as they should.

The main idea of the first pillar seems to be that it will give people enough money to survive. They won’t be rich by any means, but at least they will not be forced to steal or commit other crimes to survive. (In theory, the actual numbers show why this might still be a problem).

The downsides of the first pillar

The first pillar definitely has some problems that come with it. If you know anything about statistics then you see why the idea of basing the 1st pillar on the average salary falls painfully short. This is how statistics work  – the average salary in Estonia is close to 1000€ gross, but, about 2/3 of the people in Estonia make less than the average salary.

Currently I’m above average when it comes to the 1st pillar, but I’m realistic about the situation. The only reason why I’m above average is that fact that I’m 1) living in the capital where the salaries tend to be higher 2) because I have 2 jobs 3) because I’m working overtime. When it comes to an ordinary person then the downsides of the first pillar become apparent quite quickly.

The biggest downside of the first pillar is the logic of how it works. To get the 1,0 count of retirement you need to earn the national average in terms of salary. That’s all fine and dandy in terms of some of the areas – like IT or business. It’s quite a bit more complicated when it comes to people who live outside of the capital and who work at less than ideal jobs.

To some extent the first pillar causes a moral dilemma – if a cashier works for a full year and if a banker works for a full year, do they deserve a similar amount if retirement benefits? For now, the answer in Estonia is no. I think in the future it might be something a bit different. As the world gets more and more complicated, then it’s obvious why the more complicated jobs get paid more and more. However, I think everyone in the world would be unhappy if we didn’t have cashiers or cleaners – and we’re kind of bad when it comes to giving them credit for their work.

Looking at the future of Estonian retirement, it’s painfully obvious that most people are not saving nearly enough to be able to manage retirement. The first pillar will guarantee at best, 25% of you previous salary – that’s not a whole lot. This is the reason why people need to save money on their own – if they don’t, retirement will be a painful and sad affair.

Me and the 1st Pillar

I work as a teacher. Leaving out all of the side projects that I’m involved in, I’d be one of those people whose work “year” counts for less than the average “year”. I’m someone who would like equality to some extent, so I feel that this is truly very unfair.

Currently I’m hovering about the average salary, which gives me the 1 year of work = 1 year of benefits count, but only just. Even so, that will not be nearly enough for a comfortable retirement, which is why having passive income is so important.

It’s relatively unlikely that Estonian pensions will drastically increase in the upcoming decades. The country has such a low birthrate and we’re quite far off from the wealth levels of our Nordic neighbours. If anything, then the pensions might be reduced further or the retirement age bumped upwards. (I definitely do not want to be forced to work until I’m 75!)

 

7 thoughts on “Retirement, 1st pillar

  1. Interesting to read about the Estonian situation. Our countries seem to have somewhat similar systems. We have three pillars too. Triangles are popular here so instead of pillars we speak about a pyramid and our pyramid has three levels and four sections but the priniciple is no doubt the same. The first pillar over here is roughly depending on the life-time income but there are exceptions. Basically the ones having earned zero or almost zero will still get some pension (can be very expensive for the state if there are too many such people). Nowadays there’s also some kind of automatic rule connecting the first pillar to the general economy. So when the general economy goes bad the first pillar pays out less. This was promised to happen very seldom but seems to occur very often nowadays 😮 Not very fun to get lower pensions but that will probably make the whole system a bit more robust. It may also help to ‘encourage’ those who can to continue working a few extra years 😮

    1. Estonia hasn’t officially made any decisions as far as I know about having economy-based adjustments. The topic has been on the table but no politician has been brave enough to take in on because the pensions are small enough that talking about reducing them further would be political suicide at this point. It’s likely though that the retirement age will have to be pushed forward by several years by the time retirement is available to me.
      The-no income pension in Estonia is something like 150€ max if I remember correctly. Even in Estonia that’s not enough for even a terrible quality life unless the state or your kids take further care of you.

  2. Unfortunately the first pillar is the classical pension system that kind of works like a ponzi scheme and collapses once there are more people taking money out than putting it in. Which is essentially what has already been happening for the last few years and will increase in the following years.

    I myself think that by the time I reach my pension age, this pillar will have collapsed/changed/eliminated entirely so I don’t really expect anything from that one. It’s not sustainable in the long run, unless we raise taxes significantly or the money is taken from some other line in the budget, which is also unlikely (maybe some politician wants popularity and we’ll borrow it, as our debt burden is rather low…).

    1. It has been established that the first pillar will be running on state support for some time at least but from what I remember the situation is less drastic than it would have been since they implemented the 2nd pillar which will take pressure off the first.
      The first pillar will only be giving 25% at this rate, so that’s not unreasonable to support looking at the population decrease. (While people retire relatively early then Estonians still die relatively early as well which means our retirement system is much less in the hole than some other countries).

      1. Probably not the worst one indeed. However, the deficit was close to 5% of national budget in 2013 and will likely grow every year. Meaning that by my pension in 40ish years it’ll be too much for sure :)

  3. About the low-birth rate it’s probably bad for a country if it goes on for a very long time. A country without population is not much of a country. That said it’s not necessarily entirerly bad with a period of low birth-rates. It is argued by some that the world’s growing population is causing strain on the ecology. Some people, for example former US vice president Al Gore, are also worried that use of fossil fuels may cause unpleasant global warming. So far an increased population has meant increased emissions of hydro-carbons. I suggest it can be argued that low-birth-rate countries like Estonia are behaving responisble.

    An other thing to consider is the automatisation of work. It seems the work-places are needing less and less people nowadays. In my country we had an unusually large generation born in the 1940’ies (no doubt it helped a lot that we managed to escape the big war). Just a few years ago plenty of intellectuals, politicians, employer organisations and journalists argued that there was going to be a huge lack of workers when that large generation retired. Of course the employer organisations always want more people so they don’t have to offer so high salaries but the other groups ‘should’ have known better, I think.. However today almost all from that big generation are now retired and unemployement is still huge. Where did the jobs go? Some where outsourced to Asia and to former Soviet bloc. I have heard rumours you’ve got some of those jobs in Estonia too 😉 Many jobs were automated and lost that way. Like Finland we’ve also suffered from loosing quite a number of telecom jobs. They have Nokia and we have Ericsson and both have laid off huge amounts of people. though during the same time. We had our crisis earlier than Finland (very annoying to collapse while Finland/Nokia did everything right :p ). Also the rather big immigration during the period didn’t help the unemployement numbers.

    To sum it up I suggest Estonia and other countries not to panic about the low birth-rates but try to make sound policies. The replacement rate of 2.1 births per woman is proably a good goal to strive for. Easier said than done of course.

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