The Finnish Pension Reform of 2005
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The Finnish Pension Reform of 2005* Jukka Lassila and Tarmo Valkonen ETLA, Lo¨nnrotinkatu 4 B, Helsinki, FI-00120, Finland. E-mails: [email protected], [email protected]
A major reform in the Finnish private-sector earnings-related pension system came into effect on 1st January, 2005. It was negotiated in 2001–2002 between the central organisations of employers and trade unions and representatives of the central government. This paper describes the reform and analyses its effects on selected macroeconomic variables, on the pension system and on the position of different birth cohorts and different educational groups. The reform appears to be successful in many respects. It simplifies the private-sector pension system and makes it a model that other pension systems in Finland will converge to. The reform rewards postponing retirement. It curbs the increase in contribution rate without endangering the adequacy of replacement rates. The increase in labour supply will have beneficial welfare effects. The new system also responds rather well to uncertain future demographics. Despite this apparent success of the reform there remains a serious doubt of its adequacy, as contribution rates are still expected to rise by several percentage points. The Geneva Papers (2007) 32, 75–94. doi:10.1057/palgrave.gpp.2510108 Keywords: pension reform; population ageing; stochastic population simulations JEL classification: H55; J11
Introduction A major reform of the Finnish private-sector earnings-related pension system was agreed on in 2001–2002. The agreement was justified by the need to mitigate rising pension costs due to population ageing, similar to arguments spurring many other recent reforms in Europe. The large reform package consists of an interesting combination of measures that were expected to improve both the economic and social sustainability of the pension system. The main aims of the reform are to postpone the average retirement age, curb the expected increases in contribution rates and to support ageing workers’ ability to cope with their work. A further initial and widely supported target was to simplify the pension rules and make them both more transparent and more actuarial. The first aim is promoted by rewarding continued participation in working life and by restricting
* The paper is part of the European Commission’s research project ‘‘Demographic uncertainty and the sustainability of social welfare systems’’ (QLK6-CT-2002-02500). We also acknowledge the financial support from the Ministry of Social Affairs and Health and the Finnish Centre for Pensions. We are grateful to Heikki Palm for the advice and support. We also thank Peter Bistro¨m, Anthony de Carvalho, Seija Ilmakunnas, Niku Ma¨a¨tta¨nen, Juha Rantala, Ismo Risku, Eila Tuominen, Reijo Vanne and an anonymous referee for comments and Eija Kauppi for the model programming.
The Geneva Papers on Risk and Insurance — Issues and Practice
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access to early retirement schemes. In addition to the benefits gained from later retirement, the reform strengthens financial sus
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