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Sunday 26 January 2020

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Low birth rates in Finland will cause ‘pressure’ on pension contribution rates

Written by Natalie Tuck
25/10/19

Low birth rates in Finland will cause a “pronounced pressure” on the pension contribution rate in the long term, according to the Finnish Centre for Pensions.

According to the centre’s Long-term projections report, pension financing will remain stable for the next few decades but those following will have financing issues. The centre predicts that country’s insurance contribution under the Employees Pensions Act (TyEL contribution) can be kept below 25 per cent of the wages until the 2050s. However, in the long run, low birth rates will cause a pronounced pressure to raise the contribution rate, it said.

The projections are based on Statistics Finland’s population projection from 2018. According to that projection, the working-age population in Finland will decline throughout the projection period (2019-2085) due to low birth rates. At the same time, the share of the population aged 65 or older will continue to rise.

Despite the weakening dependency ratio, the private sector TyEL contribution can be kept below 25 per cent up to the 2050s. After that, the centre said pension expenditure relative to wages will start to grow fiercely, increasing pressure to raise the contribution by several percentage points. With the projected demographic development, the contribution will rise to more than 30 per cent towards the end of the projection period.

Commenting, Finnish Centre for Pensions states development manager, Heikki Tikanmäki, said: “The pension financing outlook is rather stable for the next few decades. The low birth rates should be taken seriously, though. Now is the time to think about how to influence the demographic development.”

The centre said there is no pressure to raise the contribution rate in the overall earnings-related pension scheme. In the public sector, pension expenditure relative to earnings will decline by mid-century as, among other things, the contribution burden caused by past higher pension benefits will lessen. Currently, the contribution income of the earnings-related pension system is slightly under 30 per cent relative to earnings. That is enough to finance earnings-related pensions also in the future.

With regards to investment returns, the centre said was downbeat about returns over the next few years.

“In the next decade, the assumption of the real return on pensions is 2.5 per cent per year. After that it will rise to 3.5 per cent. Despite the low investment returns, the pressure to raise the TyEL contribution in the near future is not significant in the baseline projection,” the report said.

The centre predicts the earnings-related pension insurance contribution will vary from 23 to 27 per cent in the 2020s. “The contribution level in the next two decades depends on the economic development,” Tikanmäki explains.

In 2017, the average monthly pension of people living in Finland was €1,656. According to the long-term projection, the purchasing power of pensions will continue to grow. For example, in 2030, the average monthly pension is expected to be around €1,850.

For a long time, pensions in payment have been at a 50-per-cent level relative to the average earnings. After 2030, the ratio will drop below 50 per cent. In 2045, the average pensions are estimated at 46 per cent of the average earnings. In 2017, the ratio was 53 per cent.

The main reason for the declining ratio is the life expectancy coefficient, which adapts the benefit level to correspond to changes in life expectancy.



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