Economic Survey of Finland 2006: Restrict early retirement to make pension reform a success

 

Contents | Executive Summary | How to obtain this publication |  Additional information

The following OECD assessment and recommendations summarise Chapter 3 of the Economic Survey of Finland 2006 published on 4 May 2006.

Contents                                                                                                                           

A major achievement has been the introduction of a wide-ranging pension reform from the beginning of 2005. It comprised a complex package of measures that achieved a broad degree of national consensus. The government is relying on this reform to make a major contribution to raising the length of working lives by two-three years through improved incentives to work longer, especially from higher accrual rates for older workers (63-67) and the abolition of the cap on the maximum pension. While the reform package includes many innovative features, notably linking pensions to changing life expectancy, it also includes a number of features which unnecessarily add to future pension costs. Thus, while the reform will improve the financial sustainability of the pension system, contribution rates for the private sector – which are already very high by international standards – were still estimated to have to rise by 6 percentage points by 2030. Recent measures to increase the return on the pension funds are likely to alleviate this pressure by 1 to 2 percentage points. But more is needed. There is understandably little appetite to revisit this issue again so soon after a major reform, although implementing many of the changes more quickly rather than phasing them in gradually could lower pension costs. In addition, some elements of the reform – in particular the accumulation of pension rights during non-work periods (e.g. during study) and the higher rate of accumulation from age 53, only partly compensated by a higher contribution rate by employees in this age group – are costly and serve little economic purpose. They should be reconsidered.

The area which should be considered most urgently to ensure that the old-age pension reform is a success in encouraging longer working lives is alternative pathways to early retirement. Currently nearly 7 out of 10 new retirees retire early on some form of unemployment or disability benefit. Cross-country evidence suggests that, if these pathways to early retirement remain, they will blunt the increased incentives to work longer that are provided by the old-age pension reform. Indeed, Finnish experience over the past decade when the increase in the employment rate of older workers has been among the most rapid of any OECD country, demonstrates the importance of limiting pathways to early retirement. The current reform package includes a postponement of the age at which the unemployment pathway (or so-called “unemployment pipeline”) can be used from 55 to 57, but the objective should be much more ambitious: the unemployment and disability benefits should be re-focused on their original purpose. The unemployment pipeline has been moved from the pension system to the unemployment insurance. Normal activation principles should apply or even better, the scheme should be phased out.

Expected years in employment and retirement by pension scheme

Source:   Hytti and Nio (2006); Eurostat; Finnish Centre for Pensions, Statistical Yearbook of Pensioners in Finland - 2004.

The proportion of the population who are inactive and on disability benefits is among the highest in the OECD with nearly half of all new retirees retiring on a disability pension. While abolishing the previous “individual early retirement pension”, the reform still allows for “social factors” (as opposed to just medical conditions) to play a stronger role after the age of 60 when assessing eligibility for a disability pension. Concerns about this change are increased by evidence from the 1990s of switching between unemployment and disability pathways to early retirement as the relative ease of using one pathway changed. Eligibility for a disability pension should be evaluated entirely on medical grounds, and should be assessed in the first instance by an independent physician rather than one of the applicant’s choosing.

Disability pensioners by age group
Per cent of respective population groups

Source: Finnish Centre for Pensions.

Once on a disability pension there is little likelihood of regaining employment. While the activation rate among the disabled unemployed is just below that for all unemployed, the number of disabled that are classified as “jobseekers” and are thus considered for active labour market support measures is a small proportion of those on a disability pension. This is despite the fact that a large proportion of those retiring on a disability pension have less serious conditions (like back pain and less serious mental health problems). This might, with appropriate medical treatment, mean not only that work is possible but also that work might contribute to an improvement in their medical condition. The large and growing proportion of those retiring on a disability pension for reasons of mental health raises wider issues of wellbeing as the number of deaths attributed to mental health conditions (including suicide) is proportionately much higher than in any other OECD country. It also appears that those with mental health conditions make surprisingly little use of available treatments, although these are generally considered effective, free and not in short supply. In these circumstances there may be considerable gains from both an economic and wider wellbeing perspective, in activating those on disability benefits by adopting a similar approach to the successful pilot programme in the United Kingdom. Under the UK’s Pathways to Work scheme, participation in work-focused interviews and training or activities to help the person better manage their health condition is mandatory for all except the most severely disabled. In addition a back-to-work credit is paid for those taking up employment.

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.

The complete edition of the Economic Survey of Finland 2006 is available from:

 

Additional information                                                                                                  

For further information please contact the Finland Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Dave Turner, Asa Johansson and Laura Vartia under the supervision of Peter Hoeller.

 

 

 

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