Finns opting for partial old-age pension based on parents’ lifespan

Finnish people estimate their longevity based on their parents’ lifespan, which influences their choice on taking a partial old-age pension, according to the Finnish Centre for Pensions (ETK).

The shorter they believe their life expectancy to be, the more likely it is that they will claim a partial old-age pension. In particular, this is influenced by the lifespan of the parent that is the same sex as the person.

ETK author of the research and economist, Satu Nivalainen, said: “In this sense people are clearly exercising their human capacity for rational decision-making. This result is unique and an international first. There is no earlier research that has linked individual decision-making on pensions with register data on parental lifespan.”

Introduced in connection with the 2017 pension reform, the partial early old-age pension is available from the age of 61. An earlier study by the Finnish Centre for Pensions found that the most common reason for applying is uncertainty about the future and life expectancy. The latest results lend further support to this observation.

Men have a shorter life expectancy than women, and they also claim a partial old-age pension more often. ETK data indicates that in 2019, almost 14 per cent of 61-year-old men claimed a partial old-age pension. The corresponding figure for women was less than 9 per cent.

The popularity of the partial early old-age pension seems to have stabilised. According to Nivalainen some 10 per cent of each age group apply for a partial old-age pension at age 61.

Claimants can choose to take payment of one-quarter or half of their accrued pension benefits. The decision to take early payment of their pension, before reaching the lowest retirement age, will permanently reduce the amount of pension payable, however.

The results from this research have important implications for the pension system in that individual decision-making on the partial old-age pension will be reflected in future payments of pensions.

“If people who expect to live shorter lives decide to take up their pension early, pension payouts may be higher than the figures shown by financing calculations,” Nivalainen explained.

Pension financing calculations are based on the average life expectancy. They assume that people will not make their decisions on pension take-up based on their projected life expectancy. Therefore, people who live shorter lives will receive less in pension payments during their lifetime and people who live longer will get more. This keeps the system in balance. But if shorter lifespan individuals systematically take up their pensions as early as possible, pension payments will be higher than assumed in the calculations, ETK stated.

Although this behaviour is less than ideal from a pensions policy point of view, it makes perfect rational sense for the individual, Nivalainen noted.

“People with a shorter life expectancy benefit from taking payment of a partial old-age pension as early as possible. This means they will receive more pension benefits during their lifetime than they would otherwise,” Nivalainen concluded.

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