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Report: Current contributions not enough to cover future pensions

Finnish occupational pensions are managed by insurance companies. 

Kasvomaskia käyttävä henkilö aurinkoisena syyspäivänä Pasilassa 15. syyskuuta.
The Finnish Centre for Pensions says the current system in Finland might hit funding problems in three decades' time. Image: Silja Viitala / Yle
Yle News

Finland's pension system works well, but it is not yet funded on a sustainable basis. That's the conclusion of a new report on pensions in Finland by Danish professor Torben M. Andersen, which was ordered by the Finnish Centre for Pensions.

The report says that the system effectively prevents poverty in old age at the moment, and gives a moderate income to pensioners.

Low birth rates are one issue as Finland tries to ensure there are enough workers to fund pension payments, according to the report.

There may be funding issues in thirty years' time which would force steep increases in contributions or reductions in pension payments, the report says.

There could be other problems with the pension system if employment, earnings or the global economy do not develop as expected.

"If there are difficulties with those, thirty years is not enough — we'll be in difficulties sooner," said Mikko Kautto, Managing Director of the Centre for Pensions.

Current rules not enough

Kautto said that the main takeaway from the report is that current rules will not be sufficient to deal with the challenges presented by lower birth rates, or a new shock to the economy.

The report says that Finland has, however, adjusted its system comparatively well to account for rising life expectancy.

Adjusted retirement ages do not quite compensate for the increased outgoings due to people living longer. The report suggests Finland can either wait until funding problems hit and then consider solutions, or agree measures to take now, in case things get worse.

"In my opinion Andersen clearly says it's better to agree rules, because it removes uncertainty and there is understanding of what awaits different generations, and inter-generational differences can be recognised in advance," Kautto says.

Delaying solutions would hurt younger people more, as they will eventually have to shell out more of their pay packets.

If adjustment begins immediately, more of the burden is shared between older generations who might already be collecting their pensions before contributions increase.

"Delaying the measures is not neutral in terms of distributing the proceeds, and that's why we should discuss funding challenges even though they are not an acute problem," Andersen states in the report.

In Finland the average wage-earner gets a gross monthly salary of 3,600 euros, according to Andersen. Pension contributions run at 24.4 percent of that, with employers paying the lion's share.

If there is a delay in raising contributions, in 60 years' time 30 percent of wages would go to pension contributions. If funding issues are tackled in advance, a rise to 26.4 percent would be sufficient to cover outgoings until 2085, according to Andersen.

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