Presentation on theme: "Population Ageing in Finland: Consequences and Policy Actions Erkki Liikanen Governor Bank of Finland Bank of Greece 17 January 2008."— Presentation transcript:
1 Population Ageing in Finland: Consequences and Policy Actions Erkki Liikanen Governor Bank of FinlandBank of Greece17 January 2008
2 Population Ageing in Finland: Consequences and Policy Actions Demographic change is a global challengeIn Europe Finland is the first country to meet the steep aging due to high post-war ( ) cohortsEconomic consequences of ageing are fundamentalThe 2005 Pension Reform in Finland was designed to ease ageing pressures for sustainability of pension system and labour marketsBut challenges still remain
5 Population is greying faster in Finland than in other Western countries Baby-boom (1945 – 19490) cohorts larger that elsewhereBut the peak in fertility rate was also shorter than in other countries and fertility went down soonLife-expectancy has increased fast in Finland=> An exceptionally large but also short baby-boom together with increased longevity brings in Europe the aging challenge first to Finland
29 Pension schemes under financial stress: Policy challengesPension schemes under financial stress:Low fertility rate: Baby bust generation not able to finance baby boom pensions => Need for pre–funding of pensionsIncreasing longevity: Steady increase in oldest age group => Need to lengthen economically active life spanLabour force start to shrinkLabour supply decisions of the baby boom generation critical: If they do not stay longer in work, labour shortages a big problem => Urgent need to increase retirement ageSpending on health and long term care expandsDemand for social and health services increases dramatically =>Need for productivity improvement in public services
30 The Finnish Pension system: main features/1 Two statutory pension schemes1. National pension scheme guarantees a minimum pension2. Employment based earnings-related pension schemePublic pension benefits were 11 % of GDP in 2006Earnings-related pensions 9.5 % and national pensions 1.6 % of GDPNational pensions paid only when earnings-related pensions are very smallOccupational and voluntary pension schemes are negligible
31 The Finnish Pension system: main features/2 Earnings-related pension scheme is partly fundedPre-funded scheme covers a quarter of pension outlaysThe rest is financed through PAYGDespite pre-funding, earnings-related pension scheme is of defined-benefit typeThe pre-funding is collective; it has no effect on the size of the pension.Statutory pensions are taxed as earned income.Financial position of earnings-related scheme:The system is running a surplus amounting to 2-3 % of GDP.The market value of pension fund’s assets was 66 % of GDP in 2006.Mandatory pension funds have more and more diversified their portfolios also internationally
32 The 2005 Pension Reform was designed to meet the challenges of ageing The main objectives of the reform were:1) To make the earnings-related pension system financially more sustainable,2) to increase labour market participation of senior employees and3) to make the pension system more equitable and internally consistent
33 The Key Elements of 2005 Pension Reform to improve the sustainability The increase of the pre-fundingCurrent mandatory pension funds are large in international standards, but not large enough to smooth the demographic burden in Finland,Funding of the pension schemes must be increased by 7.5 per cent of the wage sum inThe benefits will be linked to life-expectancyLife expectancy coefficient will adjust the pensions to the changes in longevity as of 2009
34 Flexible retirement age from 63 to 68 has been introduced. The Key Elements of the Reform to increase labour market participation of senior employeesFlexible retirement age from 63 to 68 has been introduced.Early pension schemes have been closed or tightened of and access to other pathways has been restrictedthe accrual rate has been increased for senior employees.In age pension will accrue at rate 1.5, in age at rate 1.9 and from 63 to 68 at rate of 4.5 per cent.In old system standard rateThe cap on the replacement rate has been abolished
35 Benefits will be based on life-time earnings Elements in Pension Reforms to make system more equitable and internally consistentBenefits will be based on life-time earningsPension indexation rules have been changedPension index is a mix: 20 % weight of wages and 80 % weight of consumer prices.Before weights were 50/50 up to age 65 and after that 20/80.
36 The objectives of the reform: Effective pension age is expected to increase about 3 years from 60 to 63Extension of working careers of older workers is estimated to increase the overall employment rate by ½-1 percentage pointsAs a result, need for an increase in the contribution rate is expected to diminish by 3-4 percentage points to 25 per cent.
37 Have the 2005 pension reform been a success: What can we see from latest data?
41 Future challengesPension contribution rate remains high even if the objectives of the reform were achieved. The reform will not be able to curb the need raise the contribution rate.Will the contribution rate be too high for the competitiveness?Does it cause efficiency losses? (According to Bank of Finland study, for example, employment losses caused by contribution hikes can be substantial.)The long transition period protects older workers. Young generations may challenge it.The reform in unemployment pensions schemes and life expectancy adjustments will be effective only starting from age cohorts 1949 or 1950.Introduction of life expectancy coefficient favour older generationsLack of transparency may counteract the positive labour supply effects
42 Ageing is not an issue of the future but of today in Finland ConclusionsAgeing is not an issue of the future but of today in FinlandPolicy responses have been a combinations of sticks and carrots.Sticks: life-expectancy adjustment in replacement ratio and more unfavourable pension indexationCarrots: generous accrual ratio for old workers.Today a general view is that pension reform will ease ageing pressures on labour market and pension financing. Is it enough?A huge challenge will be to increase productivity in social and health services.