Is saving in pillar II really worth it? Some argue that the pillar I is more beneficial. Others even warn that contributing to pillar II could be harmful. So how do they actually compare?
For most people, saving in pillar II is beneficial, because:
- pillar II belongs to you – you decide how and when to use it;
- it comes with important tax advantages;
- your pillar II assets can be inherited;
- it’s an automatic way to build long-term savings.
Some say that pillar II is harmful for people with lower incomes. It’s true that saving in pillar II slightly reduces your pillar I pension. But across all income levels, people still benefit more by saving in pillar II. I’ll explain below why that is. First, let’s compare how the two pillars work.
Pillar I is state-funded. Pillar II is your savings, boosted by the state.
This is the most important difference.
Pillar I, the state pension, is financed through the state budget. Each month, working people pay 33% of their salary as social tax. Of that, 13% goes to health insurance, and 20% is used to pay pensions to current retirees. In return, people get health insurance and the right to receive a pension in the future.
The size of the pillar I pension depends on three parts:
- Base amount – the same for all retirees, set by law.
- Earned pension components – currently based 50% on your years of work and 50% on your salary. You can also earn components for things like raising children
- Pension index – this index increases pensions each year to keep up with price growth. 80% of the index is based on social tax revenue, and 20% on inflation.
In pillar II, we save for our own future and that of our loved ones. When you save in pillar II, you have a personal pension account where contributions from your salary are deposited each month. When you retire, you can use the money you’ve saved.
The size of the pillar II pension depends on three parts:
- Contributions – you can choose whether 2%, 4%, or 6% of your gross salary goes to pillar II. You can adjust the contribution once a year. In addition to your own contribution, the state adds 4% from your social tax.
- Fund returns – the more your chosen pillar II fund earns over time, the more pension you’ll receive.
- Fund fees – funds charge fees for managing your investments. The lower the fees, the more money stays in your account.
How does joining pillar II affect your pillar I pension?
When you save in pillar II, the state contributes 4% of your social tax to your pillar II account. In addition, 0.44% of your gross salary comes from income tax. For example: if your monthly salary is €2,000, then a total of €2,000 × 4.44% = €88.80 is contributed to your pillar II each month. Over a year, that’s €1,065 in contributions from taxes.
Because part of your social tax is redirected to pillar II, you earn slightly fewer pension components in pillar I. With a monthly salary of €2,000, your annual pillar I pension would be €2 lower than if you weren’t in pillar II. (1)
Which is more reasonable: saving €1,065 over a year, or gaining the right to €2 more in annual pension? Without accounting for returns, €1,065 would be enough to fund an additional €2 per year for around 44 years. So the state pension would only be more beneficial if you lived to at least 109. In reality, most people’s retirement period is much shorter. (2)
Because pillar I is redistributive and pillar II is not, higher earners benefit even more. But pillar II is beneficial at any income level.
Here are our calculations:
| Gross salary/month | €1,000 | €1,500 | €2,000 | €3,000 | €4,000 |
|---|---|---|---|---|---|
| Annual pillar I reduction | €1.5 | €1.75 | €2 | €2.5 | €3 |
| Annual pillar II contributions | €533 | €799 | €1,065 | €1,598 | €2,131 |
| Years until pillar I becomes more beneficial | 29 | 38 | 44 | 53 | 59 |
Which performs better: pillar I or pillar II?
The previous calculation does not take into account the indexation of the state pension or the investment returns of pillar II. It is expressed in today’s money. In practice, state pensions are adjusted every year on 1 April according to the pension index. 80% of this index depends on social tax revenue, and 20% on inflation. Pension funds, on the other hand, earn investment returns.
Some argue that inflation and the pension index have outperformed pension fund returns. (3) I don’t know whether, in the future, the pension index will grow faster than fund returns or the other way around. What we do know is that over long periods, global stock markets have historically delivered higher returns than inflation. Not every year, but over time. That’s why one of the most reasonable ways to protect your savings from inflation is to regularly invest a part of your salary into a pension fund, so that your savings grow together with the value of companies around the world.
I’ve seen this on my own pillar II account: despite prices rising by 19.4% in 2022, my savings still grew faster than inflation. (4)
It’s also important to keep in mind that past performance does not predict future results. On one hand, stock markets may not continue growing as strongly as they have in the past. On the other hand, the state pension may also grow more slowly going forward. For example, the Ministry of Finance forecasts that over the next 25 years, the pension index will grow at just 3.6% per year – about half the rate of recent years. (5)
Finally, it’s worth noting that state pension indexation is based on the principle of solidarity. The index increases the base amount more than the earned components. For instance, if the pension index is 10%, the base amount increases by 11%, while the earned portion increases by only 9%. Since saving in pillar II only affects the earned portion, not the base, this means that for the state pension to outperform pillar II in returns, it would have to grow even faster.
In conclusion, I can’t say whether the long-term return of pillar I or pillar II will be higher. I don’t have a crystal ball to predict the future. But I do strongly question the confident claims that pillar I will outperform pillar II. There is no support for that idea in historical data, expert analysis, or the structure of the state pension itself. Based on the best available knowledge today, saving in pillar II is more beneficial than relying on the state pension alone.
Pillar II is money that belongs to you. Pillar I is a promise made for the future.
- Each year you save in pillar II, you earn 20% fewer pension components in pillar I. This reduction does not affect the base amount. Your total pension is calculated based on the number of components you’ve earned over the years. In 2025, one full year of components was worth €10, so with a salary of €2,000, your pension would be €2 lower for each year you contribute to pillar II.
- In 2024, life expectancy at retirement age was 19.2 years.
- For example, Raul Eamets, Chief Economist at Bigbank, has written: “The idea that the second pillar guarantees a worry-free retirement for today’s young or middle-aged people is, from an economic standpoint, ill-informed. We are in a situation where inflation either matches or outpaces the long-term returns of pension funds. Since average wages grow with inflation, the ‘return’ of the first pillar tends to grow faster than that of the second.”
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Not all savers have seen strong results. According to the Ministry of Finance, the average real return of pension funds between 2002 and 2023 was just 0.1%. Barely ahead of inflation. However, this figure reflects an earlier system. At the time, pension funds faced restrictions on equity holdings: initially capped at 50%, later at 75%. These limits have since been removed. In addition, low-cost index funds have been available in Estonia since 2017. That’s why global stock market indices offer a more meaningful benchmark for long-term comparisons. You can compare your personal pillar II return to inflation at pension.tuleva.ee.
- Ministry of Finance long-term economic forecast to 2070 (published April 16, 2025) (in Estonian)
Photo by Timo Arbeiter
