Study: Impacts of low birthrate on pensions are primarily mitigated by funded pensions

Uku Varblane, head of research at the Foresight Centre, explained that the current low birthrate and Estonia’s population decline will primarily affect pensioners who will retire after 2050. “In 2050, the impact of fallen birthrates on net pensions will still be relatively small, as only a portion of the smaller birth cohorts will have reached working age by then, and most of the workforce comes from earlier, larger generations,” said Varblane. “After 2050, however, the negative impact of the current low birthrate on pensions will quickly grow.”

The Foresight Centre reveals in its study that when it comes to demographic factors, it is migration that will predominantly have an effect on the size of the future first pillar pension in 2050 onwards.

A smaller than projected migratory balance, meaning the difference between immigration and emigration, will reduce the first pillar pension, since there will be fewer people of working age paying social security taxes. “Eurostat predicts that the average net migration in Estonia will be about 3000 people per year in 2026–2050,” said Varblane. “If the migratory balance were to remain zero, a pension based solely on the first pillar would be about 5% lower than the basic forecast.”

Considering macroeconomic premises, future pensions are first and foremost affected by the labour productivity growth rate. Faster-than-projected productivity growth would boost pensions, but widen the gap with the average salary.

Another important factor is increasing employment. For example, if Estonia’s employment rate were to rise to the top among European Union countries, the first pillar pension would increase by more than 4% compared to the basic forecast.

The productivity of funded pensions also significantly affects future pension sizes of people who have invested in the second and third pillars. If the average return on the second pillar increases and becomes even with the historical average level of the third pillar, the portion of pension received from the second pillar will grow by about a quarter.

Later retirement would also considerably boost future pensions. Calculations by the Foresight Centre show that retiring just two years later would increase pensions by an average of 16–19%. Compared to working while receiving a pension, postponing your pension becomes financially beneficial over a longer period of time.

According to the Foresight Centre’s basic forecast, leaning only on the first pillar, a person retiring in 2050 who has had an average salary their entire working life would receive a net pension of around 2044 euros per month and a person with a median salary would receive 1901 euros per month. The second pillar would add up to a third to the pension.

Investments into the third pillar are needed to maintain the pre-pension lifestyle and spending habits. A person with an average salary should invest 5% of their gross salary, and a person with a median salary should invest 3%.

The study “Pension Size and Purchasing Power by 2050″ (in Estonian) is part of the Foresight Centre’s follow-up of the 2019 research stream “The Future Well-Being of the Elderly.” The research stream brought together existing studies and as a result, scenarios for financing old age have been prepared.