The Finnish Old Age Security System in 2020

By Kati Kuitto, Marjukka Hietaniemi and Mika Vidlund, Finnish Centre for Pensions

The first Finnish national pension scheme (kansaneläke) was introduced in 1937. Initially, the scheme was based on funding and individual accounts, but was completely reformed in 1956 providing a flat-rate public old age pension for the entire population. The development of the earnings-related pension (työeläke) followed at a slower pace and was implemented separately for different employment sectors. In 1962, a comprehensive statutory earnings-related pension scheme for all private sector employees was introduced featuring a unique decentralised scheme in which statutory earnings-related pensions are administered by private insurance companies and pension funds. Public sector employees had had separate schemes already for decades, and these schemes were reformed later in the 1960s to be on par with the one for private sector employees. In 1970, a separate pension scheme for the self-employed was established. The decision-making process in developing the earnings-related pension followed, from the beginning, a corporatist rather than a purely parliamentary approach, as central labour market organisations of employers and employees actively participated in the process. Social partners still participate actively in the ongoing development of the Finnish pension system. Overall, the Finnish pension system has seen several reforms, with the latest having been enacted in 2005 and 2017. These reforms have led to uniform and simplified rules across sectors and different acts and have improved the system’s sustainability, while the principles of a pay-as-you-go (PAYG) system have largely been preserved. As of now, the Finnish statutory earnings-related pension system consists of five sector-specific pension schemes which offer ‘standard protection’ against financial risks in old age. Supplementary occupational and private pension plans are voluntary and only play a modest, nearly negligible role in ‘topping up’ public pension benefits. This is mainly due to the strengths of the statutory earnings-related pension schemes, which cover practically all types of employment, mainly operate without any ceilings and provide a reasonably high income replacement in old age. A ‘minimum’ level of protection in old age is ensured by the national pension and the guarantee pension to persons who do not have any other pension income or whose earnings-related pension is too small.

Standard Protection in Old Age

Statutory earnings-related pension (työeläke) consists of five sector-specific schemes which are based on different legal acts. These are the scheme for private sector employees (Työntekijän eläkelaki, TyEL), the scheme for public sector employees  (Julkisten alojen eläkelaki,  JuEL), the scheme for the self-employed (Yrittäjän eläkelaki,YEL), the scheme for seafarers  (Merimieseläkelaki,  MEL), and the scheme for farmers (Maatalousyrittäjän eläkelaki, MYEL). Despite the different legal bases, differences in pension rights between these acts have mostly been abolished with the pension reforms of the 1990s and the 2000s. Insurance is mandatory for nearly all persons in gainful employment as soon as the income exceeds a certain limit (with EUR 60.57 per month for employees and EUR 7,958.99 per year for the self-employed). Although the earnings-related pension schemes are statutory and guarantee a coordinated public pension provision, they are decentralised in management. They are managed by private pension companies, funds and special pension providers and financed by contributions from both employers and employees. The schemes are mainly financed on a PAYG basis, but some are also partly funded and tax-financed. All pensions are defined benefit (DB).

Top-Ups

To top up public pension benefits, persons can be enrolled in occupational and/or private pension schemes.¹ Possibilities for insurance in occupational pension schemes (työnantajan ottamat lisäeläkevakuutukset) can be provided by the employer voluntarily either in the form of a group pension insurance – offered to all or specific subgroups of employees – or in the form of individual insurance contracts offered on an individual basis. While group pension insurance can be used to supplement public pension benefits, it may also allow the individual to retire early. Participation in individual pension schemes (yksilöllinen eläkevakuutus) forms another alternative to supplement public pension benefits. Independent of the employment relationship, individuals can take out voluntary pension insurance or sign a long-term savings contract. Conditional upon the pension plan arrangement, the state supports participation in occupational and private pension schemes by granting tax deductions for insurance contributions.

Minimum

Within the public pension system, the national and guarantee pensions aim at ensuring a minimum level of protection for elderly persons living in Finland who fulfil certain requirements for residence. The national pension (kansaneläke) directly complements the earnings-related pension. It is pension-tested (against 50% of the total pension income) and granted if any other pension income of the person falls below a certain income threshold (i.e. EUR 1,368.21 per month for singles and EUR 1,226.13 per month for married or cohabiting retirees in 2020). The full national pension (EUR 662.86 per month) is granted to persons with a low personal pension income and with 40 years of residence in Finland since the age of 16, with pro-rata adjustments for shorter periods of residence. The guarantee pension (takuueläke) was introduced in 2011 and guarantees a minimum level of pension income for elderly persons (EUR 834.52 in 2020). As such, the guarantee pension aims to fill the holes in coverage of the national and earnings-related pensions, for example for immigrants. The guarantee pension is withdrawn against any other pension income of the person in full. The national and the guarantee pensions are tax-financed and are administered by the Social Insurance Institution (Kela) under the supervision of the Parliament.

¹ The extensive statutory earnings-related pension schemes have crowded out the occupational and private pensions in Finland. The premium income, funds and pension expenditure are very low compared to statutory pensions.