Future Well-Being of the Elderly

We must all play a stronger role and take more responsibility in ensuring our comfortable retirement

Although Estonia’s pension system is sustainable, it does not ensure financial well-being for the future elderly, and people must take increasing responsibility in securing their future, says the study of the Foresight Centre.

The climbing average life expectancy and the consequent extension of the retirement years makes everyone increasingly responsible for their own coping during old age. It is becoming ever more important to take care of one’s health as well as to be ready to retrain or receive additional training as the labour market undergoes changes, finds the Financial Well-Being Scenarios of the Future Elderly study project of the Foresight Centre. The goal of the study was to examine various ways of ensuring the well-being of the Estonian elderly in the future.

The Head of the Foresight Centre Tea Danilov commented the research results by saying that the combined impact of several development trends will reduce the ability of the pension system to provide good pensions in the future. The interest rate environment is also not as favourable for collecting pensions as it was a mere 5 to 10 years ago. Risk-free rates of return have all but gone because the interest rates on the bonds of developed countries are negative or extremely low. At the same time, people’s expectations for their future incomes are growing and the 40% of the last salary, which has been set as the objective of the pension system, falls far short of these expectations.

In order to receive a pension that covers 70% of the salary, for example, someone who receives an average salary should invest 18% of their income monthly into the second or third pension pillar, or put that aside in any other way. “Sadly, Estonians lack the possibilities, the interest, or the ability to do this today. For example, only 2.3% of the Estonian residents received revenue from stocks, funds, or bonds in 2017, and the more elderly and less skilled groups are more passive when it comes to lifelong learning,” Danilov added.

Expert of the Foresight Centre and the head of the research group Johanna Vallistu explained that all three pillars of the Estonian pension system come with their own risks.

The permanently financed pension, or the first pillar, is mostly threatened by the increasing number of beneficiaries, because people live longer. “Raising the retirement age does help to alleviate the situation, but it expects an increase in healthy life years as well, which sadly does not grow at pace with the life expectancy,” Vallistu remarked. Other risk factors include lower social tax revenues as more and more people become self-employed, and also the risk of low economic growth.

The mandatory pension fund, or the second pillar, is threatened by the prolonged global recession in the yield on safe assets. “This is partially neutralised by the introduction of new financial technologies and more efficient asset management, which allows a reduction in the management fees of pension funds,” Vallistu explained.

The voluntary funded pension, or the third pillar, is threatened both by the prolonged global recession in the yield on safe assets, as well as the conflict between the present self and the future self, with people not acting rationally when it comes to collecting their pensions.

“In the future society, we are thus more likely to see more flexible pension options and an extended idea of old age. People will work and contribute to the society longer,” Vallistu concluded.

The Foresight Centre developed three scenarios that represent the financial situation in 2050 of people who had received an average salary and have recently retired. Every scenario uses a different pension system and different social attitudes towards the role of the elderly, which affect their opportunities to participate in the labour market. The scenarios help to put oneself in future situations and gain a better understanding of how to define old age and review one’s expectations for financial well-being in the future, in order to make better choices today. The scenarios created by the Foresight Centre can be read here (in Estonian): https://arenguseire.ee/raportid/

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