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"When can I retire?", Pension scheme changes raise questions

An extensive reform of Finland’s pension system has left many residents of the country confused. Yle asked pension experts to compile a list of common questions – and provide the answers.

A reform of Finland’s pension system that took effect in 2017 imposes many changes, including a new method for calculating retirement age. The changes have led to much discussion and several misconceptions.

A brief introduction

The pension system in Finland is based on two complementary pension schemes: the public plan known as the national pension, and a compulsory earnings-related pension scheme.

The national pension provides a flat-rate benefit of up to 20 percent of average wages, with a minimum guaranteed income reduced by the amount of the earnings-related pension.

The earnings-related pension is financed by contributions paid by both employers and employees. It functions as the backbone of the Finnish pension system. The administration of the compulsory scheme is decentralized, spread among pension providers such as insurance companies, company pension funds and industry-wide pension funds that are independently acting as private sector financial institutions.

Voluntary occupational schemes and private pension savings are not well developed in Finland, due to the dominance of the existing compulsory scheme.

A poll conducted last year discovered that most Finns know very little about the system and its reform. Yle has asked the Finnish Centre for Pensions, the public sector employees’ pension agency Keva and the Finnish Pension Alliance TELA to explain some of the key issues in order to try and clear things up.

When can I retire and at what age does my pension start to accrue?

People are now living longer and public finances are strained. For this reason, as of 2017, the retirement age in Finland will be raised by 3 months annually, reaching an official retirement age of 65 years by 2027.

After that, retirement age will be linked to life expectancy, on a recommendation from the European Union.

The reform has lowered the age at which employees start to accrue a pension to 17.

I have paid my pension payments for decades. Shouldn’t I be entitled to my money if I want it?

In practice, the working generation pays the pensions of those who have already retired. This means that money that has already been paid in is being used to pay pensioners now, and the pension of future retirees will be paid by future generations of workers. 

Some of the pension contributions are also invested, so this money is tied up until the future. A share is invested because the aging population has already led pension expenses to permanently surpass contributions.

Shouldn’t Finland enact a pension ceiling, to prevent disproportionate pension payments and foster better income distribution?

Finnish research has looked into the option many times. A ceiling on pensions would have several unintended side-effects.

First of all, a cap on pensions would also mean a cap on pension payments. This would cause the income of people with high salaries to plummet upon retirement. A cap would also have no effect on current high pension levels, as reforms have no effect on pension payments that have already begun.

In addition, because top earners would still want a pension to match their income, they would invest more in voluntary pension savings accounts, increasing economic inequality.

In Finland, decision-makers have generally come to the conclusion that taxes are a better tool for seeking balanced income distribution.

What are the criteria for the new ‘years-of-service’ pension that makes it possible for people in strenuous work to start retirement at age 63?

This early retirement option is only extended to people who have worked in physically or mentally demanding jobs for at least 38 years. A physician’s statement is also required to justify each case.

Why does Finland have so many pension firms with overpaid executives? Why can’t things be streamlined?

By international standards, Finland has a reasonable amount of pension providers. The number of firms active in this area has fallen in recent years. There are also far fewer pension foundations and funds now than in the past.

A global comparison (siirryt toiseen palveluun) rated Finland’s pension system the fourth best in the world last year, with the Finnish model earning the world’s top results in the categories of integrity and transparency.

Will the dismantling of ‘super accrual’ mean I get less money if I work beyond retirement?

The previous so-called super accrual system granted 4.5 percent extra in pension accrual for each year past the official retirement age a person stayed at work. The new monthly accrual system will actually award more savings for the same amount of work: at 0.4 percent per month, 12 months would bring a 4.8 increase.

Why don’t Finland’s pension providers use the giant stack of money they are sitting on to stimulate the economy and improve pensioners’ standard of living?

At last count, pension funds in Finland were worth 185 billion euros, and they continue to grow. This is largely because the amount of people who will someday be entitled to pension in Finland is growing.

Calculations show that about 600 billion euros will be needed to pay future pensions, however, which makes the 185 billion euro amount look smaller. In addition, as mentioned earlier, payments exceed contributions, so the difference is made up with investment earnings. This is taken out of the 185-billion-euro pot.

Even so, current estimates predict that Finland’s pensions will be financed sustainably without eating into funds – even if expenses outweigh revenue.

If the pension providers’ nest eggs were used to stimulate the economy, the pension contributions of today’s workers were have to be increased to keep the pension funds properly financed.

What are the advantages and disadvantages of the new partial old-age pension?

A new so-called ‘partial old-age pension’ system replaced Finland’s old system of part-time pension in 2017. 

The early retirement option lets 61 year olds take out up to 50 percent of their pension savings before the official retirement age, for a small penalty. It also allows individuals to reduce their work load.

Will the reform affect me if I’m already collecting my pension?