SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Population Ageing in Finland: Consequences and...

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND

Population Ageing in Finland: Consequences and Policy Actions

Erkki LiikanenGovernor

Bank of Finland

Bank of Greece 17 January 2008

1


Population Ageing in Finland: Consequences and Policy Actions

Demographic change is a global challenge In Europe Finland is the first country to meet the steep

aging due to high post-war ( 1945- 1949) cohorts Economic consequences of ageing are fundamental The 2005 Pension Reform in Finland was designed to

ease ageing pressures for sustainability of pension system and labour markets

But challenges still remain

2


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1950-1955

1955-1960

1960-1965

1965-1970

1970-1975

1975-1980

1980-1985

1985-1990

1990-1995

1995-2000

2000-2005

2005-2010

2010-2015

2015-2020

2020-2025

2025-2030

2030-2035

2035-2040

2040-2045

2045-2050

Finland Greece Europe

Source: United Nations.

Total fertility (children per woman)

%

3


60

65

70

75

80

85

90

1950-1955

1955-1960

1960-1965

1965-1970

1970-1975

1975-1980

1980-1985

1985-1990

1990-1995

1995-2000

2000-2005

2005-2010

2010-2015

2015-2020

2020-2025

2025-2030

2030-2035

2035-2040

2040-2045

2045-2050

Finland Greece Europe


Life expectancy at birth (years)

%

4


Population is greying faster in Finland than in other Western countries

Baby-boom (1945 – 19490) cohorts larger that elsewhere But the peak in fertility rate was also shorter than in other

countries and fertility went down soon Life-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

5


Demographic Change: Ageing of Baby Boomers

0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+

Finland Greece Europe United States


1950Per cent

6



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



1955Per cent

7



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



1960Per cent

8



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



1965Per cent

9



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



1970Per cent

10



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



1975Per cent

11



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



1980Per cent

12



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



1985Per cent

13



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



1990Per cent

14



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



1995Per cent

15



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2000Per cent

16



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2005Per cent

17



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2010Per cent

18



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2015Per cent

19



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2020Per cent

20



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2025Per cent

21



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2030Per cent

22



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2035Per cent

23



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2040Per cent

24



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2045Per cent

25



0

2

4

6

8

10

12

14

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90-94

95-99

100+



2050Per cent

26


0

10

20

30

40

50

60

70

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050


The old-age dependency ratio is the ratio of the population aged 65 years or over to the population aged 15-64.Source: United Nations.

The Old-age Dependency Ratios

%

27


0

50 000

100 000

150 000

200 000

250 000

300 000

350 000

400 000

450 000

500 000

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040

20-24 years old 60-64 years old

Source: Statistics Finland.

Entry to and exit from labour market in Finland

28


Policy challenges

Pension schemes under financial stress:– Low fertility rate: Baby bust generation not able to finance baby

boom pensions => Need for pre–funding of pensions– Increasing longevity: Steady increase in oldest age group

=> Need to lengthen economically active life span

Labour force start to shrink– Labour 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 age

Spending on health and long term care expands– Demand for social and health services increases

dramatically =>Need for productivity improvement in public services

29


The Finnish Pension system: main features/1

Two statutory pension schemes– 1. National pension scheme guarantees a minimum pension– 2. Employment based earnings-related pension scheme

Public pension benefits were 11 % of GDP in 2006– Earnings-related pensions 9.5 % and national pensions 1.6 % of

GDP– National pensions paid only when earnings-related pensions are

very small

Occupational and voluntary pension schemes are negligible

30


The Finnish Pension system: main features/2

Earnings-related pension scheme is partly funded– Pre-funded scheme covers a quarter of pension outlays– The rest is financed through PAYG

Despite pre-funding, earnings-related pension scheme is of defined-benefit type– The 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

31


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 and

3) to make the pension system more equitable and internally consistent

32


The Key Elements of 2005 Pension Reform to improve the sustainability

The increase of the pre-funding– Current 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 in 2006-2013.

The benefits will be linked to life-expectancy– Life expectancy coefficient will adjust the pensions to the

changes in longevity as of 2009

33


The Key Elements of the Reform to increase labour market participation of senior employees

Flexible 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 restricted

the accrual rate has been increased for senior employees. – In age 18-52 pension will accrue at rate 1.5, in age 53-62 at rate

1.9 and from 63 to 68 at rate of 4.5 per cent.– In old system standard rate

The cap on the replacement rate has been abolished

34


Elements in Pension Reforms to make system more equitable and internally consistent

Benefits will be based on life-time earnings

Pension indexation rules have been changed– Pension 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.

35


The objectives of the reform:

Effective pension age is expected to increase about 3 years from 60 to 63

Extension of working careers of older workers is estimated to increase the overall employment rate by ½-1 percentage points

As a result, need for an increase in the contribution rate is expected to diminish by 3-4 percentage points to 25 per cent.

36


Have the 2005 pension reform been a success: What can we see from latest data?

37


0

10

20

30

40

50

1989 1991 1993 1995 1997 1999 2001 2003 2005

61–62 -years old 63–64 -years old

Source: Statistics Finland.

Employment rate by age groups

%

38

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 39

0

20

40

60

80

100

55 56 57 58 59 60 61 62 63 64

Ordinary disability pension Individual early retirement pension

Unemployment pension Old-age pension

Special pensions for farmer Part-time pension

Sources: Finnish Centre for Pensions and Social Insurance Institution of Finland.

Pension recipiency among the population aged 55–64, year 2000

% of age group

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 40

0

20

40

60

80

100

55 56 57 58 59 60 61 62 63 64

Ordinary disability pension Individual early retirement pension

Unemployment pension Old-age pension

Special pensions for farmers Part-time pension

Sources: Finnish Centre for Pensions and Social Insurance Institution of Finland.

Pension recipiency among the population aged 55–64, year 2006

% of age group


Future challenges

Pension 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 generations Lack of transparency may counteract the positive labour supply

effects

41


Conclusions

Ageing is not an issue of the future but of today in Finland

Policy responses have been a combinations of sticks and carrots. – Sticks: life-expectancy adjustment in replacement ratio and more

unfavourable pension indexation– Carrots: 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.

42

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