According to a recent study by the Organization for Economic Cooperation and Development (OECD), the average wage-earner in the European Union will receive a pension equivalent 68.1 percent of their current salary after they hit retirement age. However, the OECD study also shows that the net replacement rate for Estonian workers' pensions will be just 34.4 percent, the second lowest In the EU. In simple terms, this means people will have to survive on a third of their usual income after they retire.

Think tank Praxis explained that the OECD analysis takes into account countries' main mandatory pension schemes, which in Estonia's case is the first pillar. If the now voluntary second pillar pension is added, then Estonia's net replacement rate would be 54.7 percent (as of 2022), which is still below the OECD average of 66.9 percent.

While the effects of the second pillar reform have not yet been reflected in the replacement rate – In 2019 for example, the replacement rate including the second pillar was 53.1 percent –  the effects will start to show up in the coming years, Praxis told ERR.

Praxis analysts Kelly Toim and Katre Pall said that the impact of those reforms will start to be seen in terms of the pensions replacement rate from around 2030 onwards, with the differences expected to be long-lasting.

When the Ministry of Finance and the Ministry of Social Affairs analyzed the ratio of Estonia's average old-age pension to average net wages up to 2070, the ratio was found to be between 42 and 44 percent. If the second pillar had not been made voluntary, the ratio would be above 45 percent.

By the end of 2023, some 235,000 people in Estonia will have left or applied to leave the second pillar, representing 32 percent of all second pillar subscribers.

Praxis said that the replacement rate for pensions will also be influenced in future by the birth rate, along with the number of people joining the second pillar and its rate of return. If birth rates, second pillar enrolment and rates of return all remain lower, the ratio of old-age pension to net pay would in all likelihood fall below 40 percent.

Low pension rate = higher poverty indicator

According to an analysis of the sustainability of the pension system carried out by the Ministry of Finance and the Ministry of Social Affairs, the average pension replacement rate in Estonia is falling. Pensions are also becoming increasingly unequal over time, as the total amount people earn over their lifetime increasingly affects the size of their pensions. Gaps between men's and women's pensions have begun to widen, with low pensions for women likely to be a particular concern in the future, given women's lower average wage levels.

If a country has a low replacement rate for pensions, it will also have a higher poverty rate among its older people. According to data from 2022, 52 percent of Estonia's elderly population live in relative poverty. Throughout the rest of the EU, that figure was 17.3 percent.

Estonian women are significantly more likely to be living in poverty than Estonian men. In 2022, the poverty rate for women aged 65 and over was 57.1 percent, compared with 43.6 percent for men, according to Praxis.

Various measures have been proposed to raise the replacement rate for pensions in the future. The aforementioned ministerial analysis suggests that the minimum pension should be raised significantly and an employer pension also created.

Toim and Pall pointed out that these changes would be important, but that increasing the minimum pension, for instance, would not help the average pensioner, who also lives in relative poverty.

"As it takes time for an employer's pension contribution to reach a person's pension and for its effects to be felt, poverty among the elderly could be reduced through emergency pension increases. In the long term, pension awareness and financial literacy as well as active contributions by everyone to their pension savings are essential," they said.

The OECD's parameters are an employee entering the paid labor market at the age of 22 and in the year 2022, working through to the official retirement age of the country in question.

Only mandatory pension accumulation schemes were in the picture, so voluntary pension schemes are excluded.

Estonia's pension system is organized in three tiers, known as pillars, with the first pillar referring to the mandatory state pension, the second pillar to employer-employee contributions (previously mandatory, now with an opt-out available). The third pillar consists of private pension schemes.

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