The ministry said indexing-related costs, excluding defense expenditures, are estimated to grow by €450–€500 million in 2025 compared to 2024.

An overwhelming 99 percent of the cost increase is related to social expenditures, with the largest share going to old-age pensions. The increase in pension costs is approximately €250 million, which means an annual rise of about 9 percent, the ministry stated.

In February, the annual price increase in Estonia was higher than forecasted, reaching 5 percent, meaning that annual inflation could also be greater than the projected 4 to 4.5 percent.

The pension index is calculated based on the previous year's inflation (accounting for 20 percent) and the growth of the pension portion of social tax (accounting for 80 percent). This means that the impact of inflation on the pension index is four times smaller than that of the pension portion of social tax. For example, if inflation were 1 percentage point higher, it would increase the pension index by approximately 0.2 percent.

Thus, a 1 percentage point increase in inflation would raise all indexed costs by about €1 million, including pension costs by €500,000.

This year's state budget allocates €4.239 billion for social benefits, which include old-age pensions.

Last year, inflation in Estonia was 3.6 percent. According to forecasts from the Ministry of Finance and various banks, this year's inflation is expected to be between 4 and 4.5 percent.

The ministry justified the higher inflation forecast compared to last year by citing the introduction of the car tax.

Officials will release the annual spring forecast in early April. This will also include an updated pension index forecast for the following year. Pension indexation takes place annually on April 1.

In January, the Estonian Employers' Confederation sent a letter to government party leaders proposing to freeze the state's cost indexing until economic growth recovers or to permanently restructure it. Employers pointed out that since 2019, social expenditures have been the fastest-growing state expense, increasing by 31 percent, largely driven by pension indexation.

To mitigate the impact of indexation, the Employers' Confederation proposed either freezing indexing costs until economic growth recovers or permanently restructuring them so that the cost increase is indexed either to the consumer price index or another index, combined with nominal economic growth, with the lower of the two being applied.

Prime Minister Kristen Michal (Reform) said in January that he does not want to interfere with the pension index.

This year, the average old-age pension will increase by 5.7 percent due to indexation, rising by €43 from €774 to €817. After indexation, the national pension will be €393.26.

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