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!)