Finnish Experience of Raising the Employment Rate of Older Workers

236 Finnish Experience of Raising the Employment Rate of Older Workers NFT 3/2005 Finnish Experience of Raising the Employment Rate of Older Workers 1. General features of the Finnish Pension System The Finnish pension scheme was established in 1962 with an idea to have a high penetra- tion, to integrate the new system to private pensions, which existed before 1962, and to build the organisation on existing insurance companies and pension funds. The scheme is compulsory: the employers have to take pen- sion insurance for their employees. Self-em- ployed must insure themselves. The contributions are shared by employers and employees. The employers take the pay- ment of an employee from his/her wage, and forward it to pension insurance company, industry-wide pension fund or company pen- sion fund. The penetration rate of the system by Jukka Rantala In Finland the development of the employment rate of older workers has in recent years been more positive than in many other European countries. This article discusses the measures taken in Finland to address the effects of the ageing work force. These measures include major reforms of the pension system. For example, employees will have a 4,5% increase in their pension for every day they stay on at work after the age of 63 until they reach 68. The article also discusses the elements which induce people to work longer. is 100 %, since the accrual of the pension does not depend on the type of the employment. The scheme is of the defined benefit type. However, from 2005 onwards the benefits are based on life time earnings making the system resemble a notional contribution defined sys- tem with index linking playing the role of investment return. The benefits include old age, disability and survivor’s pension. The retirement age is flexible between 63 - 68 years. Accrual rate is normally 1,5% up to age 53, 1,9% between 53 and 62 and 4,5 % between 63 and 68. Life expectancy coeffi- cient adjusts the pension to the observed change in life expectancy. For example, the expected Ph.D. Jukka Rantala is the CEO in the Finnish Centre for Pensions. He is the 2. vice-president of the Groupe Consultatif Actuariel Européen. Jukka Rantala jukka.rantala@etk.fi 237 Finnish Experience of Raising the Employment Rate of Older Workers 0 10 20 30 40 50 60 70 2000 2010 2020 2030 2040 2050 Ita ly Spain Greece Austria Germany France Belgium Finland Portugal Sw eden England Netherlands Ireland Luxembourg Denmark Source: Eurost at Year % value of the coefficient in 2030 is about 0.9. The scheme is partly funded (about 30 % funding rate) and partly as PAYG. The scheme is not based on individual accounts, although the funded part of the accrued pension rights is defined on individual basis. Both contribu- tion and benefits include a well-defined funded component and the corresponding money flows and book-keeping follow. Due to the fact that funded and PAYG parts are integrated, the PAYG part of benefits is the smaller the higher the returns on investments have been. Private insurance companies, industry-wide pension fundsand company pension funds handle pension insurance and they compete with each other within certain limits. They are supervised by the Insurance Supervisory Au- thority. Each institution is liable for the fund- ed part of pensions insured in that institution and manages the corresponding assets. Accrued benefits are registered at the Finn- ish Centre for Pensions (ETK), who is also the clearing house for the money-flows needed between pension providers. Each individual can check his/her accrued benefits via Inter- net. From 2008 onwards each citizen will automatically annually receive a report of his/ her accrued pension and an estimate of the final pension. The annual administration and transaction costs of the asset management are approxi- mately 0.3 per cent of the market value of the assets. Total operating expenses of the earn- ings-related pension schemes are 3.1 per cent of the premiums written. Low costs are due to the fact that the insurance is compulsory plus that it is the employer not the employee who makes the choice between insurance providers. 2. Concern about an ageing popula- tion and about employment behind the reforms The Finnish old-age dependency ratio is dete- riorating rapidly and will become the weakest in the EU by 2020 (Figure 1). The reason is the retirement of the post-war baby-boomers. During somewhat over two decades more persons will exit the labour market than young age groups will enter it (Figure 2). Figure 1. Old-age dependency ratio in EU-15 2000-2050 238 Finnish Experience of Raising the Employment Rate of Older Workers The concern about sufficient labour force and about the weakening old-age dependency ratio is justified in Finland, since people enter the labour market late and retire early. The average effective retirement age is 59 years. The share of persons aged 55-64 who have retired of the whole age group is high in Figure 3. Pension recipients by age as percentages of the age group in 2002 0 1020304050607080 16-39 40-49 50-54 55-59 60-64 Sw eden Norw ay Iceland Denmark FinlandSource: NOSOSCO 2004 Finland from a Nordic perspective. The share is especially high for persons aged 60-64 (Figure 3). In Finland, of the persons in this age group almost three-fourths are retired, in Denmark about half, in Norway less than half, in Swe- den one-third and in Iceland only a good tenth. Figure 2: Change in labour supply potential in 2000-2030 Source Statistics Finland Age group entering the labour market (age 22) and age group leaving the labour market (age 59) according to forecast 239 Finnish Experience of Raising the Employment Rate of Older Workers Compared to the other Nordic countries the Finnish profile is a country which clearly makes the most frequent use of pre-retirement pensions. The differences between the countries can be explained by differences in the build-up of the pension schemes and benefits and also by different labour market developments. In Fin- land the high proportion of retired people aged 60-64 is in part due to the exceptionally deep recession at the beginning of the 1990s. A significant number of persons aged over 60 have retired on an unemployment pension. Every fifth person aged 60-64 receives an unemployment pension. 3. Recent trends in the retirement and older age employment The Finnish pension scheme has been re- formed over somewhat more than a decade with the aim of increasing the effective retire- ment age and restricting the growth in pension expenditure in the long term. The change from an early retirement policy to postponing retirement occurred already at the turnover between the 1980s and the 1990s. In the 1980s the pre-retirement pension schemes were ex- tended and new benefits were introduced. During the previous decade several consider- able changes were made to the earnings-relat- ed pension scheme to postpone retirement and to cut the growth in pension expenditure. The reforms were mainly carried out on the basis of the report by the pension committee from 1990. The aim of the measures suggested by the committee was to increase the effective retirement age by three years by 2020. Over the period 1990-2004 the increase has been over one year. The development work which started with the pension committee in 1990 reached its peak in the private sector in autumn 2002, when as a result of negotiations between the labour market organisations an extensive “pen- sion package” was agreed on. The aim of the pension reform is to postpone the effective retirement age by 2-3 years, adjust the scheme to the increasing average life expectancy and create the bases for a unification of the pri- vate-sector earnings-related pension acts. Par- liament approved the private-sector pension reform in spring 2003. As to its main parts the reform took effect from the beginning of 2005. The pension reform was also extended to the public sector as to its main parts with the same contents as in the private sector. The structure and the incentives of the pen- sion system are important elements in at- tempts to lengthen the working careers. It is equally important to promote work ability, especially that of older employees. Since the late 1980s employers in Finland have been encouraged to introduce so-called work abil- ity programs. Experiences of them have been very positive. Pension insurance companies usually participate in those programs, by ad- vice and also by financing. The expected effective retirement age To measure the effective retirement a new indicator is used, the expected effective retire- ment age (expectancy). The indicator is com- parable to the indicator for the life expectan- cy. It describes the average effective retire- ment age for a person of a specific age on the condition that the age-specific retirement risks and the mortality rates stay at the level of the year concerned. The Finnish Centre for Pensions has devel- oped the expectancy, because the old indica- tors (the median and the average retirement age) can not be used to measure changes which occur over time. Due to the Finnish age structure, as the population ages also the aver- age age of those retiring increases even if the incidence rate of new pensions for each age group would not change. For instance the average age of those who have retired would 240 Finnish Experience of Raising the Employment Rate of Older Workers 1986 the expectancy plum- meted because new flexi- ble retirement programmes were introduced. As a re- sult an uncommonly large number of persons aged 55- 64 retired on these new types of pension. After that the effective retirement age started increasing. Over the last six years particularly the rise of the expectancy for 25-year- olds has been quite mod- est. However, for 50-year- olds it has been favourable since the expectancy has increased by about half a year in the last five years as a result of the decrease in the retire- ment risk at ages 50 – 64 (see figure 5). The changes in employment In the early 1990s Finland experienced a deep economic recession and as a result the em- ployment rate of the elderly decreased dra- matically (table 1) from the peak of 1989. In the middle of the 1990s the recession turned into economic boom and since then the em- 54 55 56 57 58 59 60 61 62 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Expectancy for 50-year-old Expectancy for 25-year-old Age Source: Finnish Cent re f o r Pensions Figure 4. Expected effective retirement age (i.e. expectancy). Persons retired from the private sector in the period 2005 – 2010 increase by about one year with no change in the incidence rate. This is primarily a consequence of the post- war baby-boomers nearing retirement age. The Finnish Centre for Pensions calculates the expectancy for both 25-year-olds and 50- year-olds. The expectancy for 25-year-olds reflects mainly the whole population which is insured for earnings-related pension benefits. Of those retiring, about 15 percent are less than 50 years old. Illnesses and injuries in this group often pre- vent working. Cal- culating the ex- pectancy for 50- year-olds is need- ed because pension policy is most ef- fective beyond this age. Figure 4 shows, how the expectan- cy has changed in the last 20 years in the private sector of the Finnish earn- ings-related pen- sion scheme. In 0 5 10 15 20 25 30 35 40 45 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 2000 2004 % Age Source: Finnish Cent r e f o r Pensions Figure 5. The retirement risk at ages 50 - 64 in 2000 and 2004. Persons retired in the earnings-related pension scheme 241 Finnish Experience of Raising the Employment Rate of Older Workers ployment rate of older workers has clearly risen. For 55-59-year-olds the improvement has been particularly good and nowadays the employment rate is even higher than before the recession. A similar growth can also be seen in the age groups 60-64. Table 1. Employment rates in Finland by some age groups, % Age / year 1989 1994 2000 2004 45-9 90788483 04 83747980 5-9 58495966 604 26172329 15-64 74606767 Source: Labour Force Survey The main reason for the rise in the employ- ment rate of older workers is the decreased exit rate from employment. An important explanation for this is the strong economic growth and demand for labour. However, there is also good reason to believe that two pension reforms that took place in the second part of 1990s as well as the increasing popu- larity of the work ability programs have had a significant influence. Table 2 gives the employment rate of older workers and its recent changes in the EU-15. Finland has experienced the largest increase in the employment rate during 1997-2002. Long-term scenarios The Finnish Centre for Pensions publishes regularly reports presenting long-term sce- narios of the development of the Finnish stat- utory earnings-related pension scheme. The latest report extends to the year 2075. In the baseline scenario the total employ- ment rate is expected to rise modestly from the current approximately 67 per cent by about 3 percentage points by 2025 and by about 4.5 percentage points by the end of the calculation period. The expected effective retirement age for employees is assumed to increase from the current approximately 59 years by 2 years by 2025 and by 3 years by 2050. Increase in life expectancy and in expected effective retire- ment age means that in 2050 the average time in retirement is a good 3 years longer than currently. This can be characterized as a cau- tious rather than as an optimistic scenario. 4. Features of the finnish pension system affecting the retirement age One of the most important factors for a person to improve and maintain work ability is to have possibility to develop his or her profes- sional and vocational qualifications and keep them up to date. This possibility will be under- mined if the change of an employer is hin- dered by disincentives in the pension system. There are several features in the Finnish pen- sion system, which promote the mobility of the workforce: • the pension accrues from all work and at the same rate irrespective of the employer (pri- vate or public, small or large) • eligibility and vesting period are both zero (practically taken each euro earned gives you a pension accrual) Table 2. Employment rate of older workers (55-64 years) and recent changes in the European Union 2002 Cap below Change Change 2010 target 2001-2002 1997-2002 S 68.0 1.3 5.4 DK 57.8 -0.1 6.1 UK 53.5 1.2 5.2 P 50.9 0.9 2.7 IRL 48.1 1.9 1.2 7.7 FIN 47.8 2.2 2.1 12.2 NL 42.3 7.7 2.0 10.3 EL 39.7 10.3 1.8 -1.2 E 39.7 10.3 0.5 5.6 D 38.4 11.6 0.5 0.3 F 34.8 15.2 2.9 5.9 A 30.0 20.0 1.0 1.7 I 28.9 21.1 1.0 1.0 L 28.3 21.7 2.7 4.4 B 26.7 23.3 1.6 4.7 EU 40.1 9.9 1.4 3.7 2010 Target 50 % Source: European commision 242 Finnish Experience of Raising the Employment Rate of Older Workers • the accrual of the pension is independent of structure of the working carrier (public or private employer, short or long working contracts, part-time or full time etc.) • index-linkage of the accrued benefits more than preserves the purchasing power (index is the mixture of 80 % earnings index and 20 % of CPI) There are incentives to the employers to pro- mote work ability: • The earnings related pension system in- cludes disability benefits. The contribution for them is experience rated for larger em- ployers in order to get them to promote the work ability • Employers with less than 50 employees pay a flat-rate contribution which is proportion- al to the wage and independent of the age of the insured. For companies with at least 50 employees the total contribution varies ac- cording to the age of the insured and the size of the firm. In firms with exactly 50 em- ployees the contribution is determined as an average contribution on the basis of age, but as the firms become bigger the experience rate based part of the contribution increases so that employers with more than 800 em- ployees pay fully their own disability costs. Incentives for the employee to continue in the work include: • Part-time pension is meant to make possible for older people to continue in the work in part time. The age limit for part-time pen- sion has been raised to 58 from 56 for employees born in 1947and later. • Vocational rehabilitation became in 2004 a personal right for people at risk of becom- ing disabled. After pension reform voca- tional rehabilitation is the primary alterna- tive to a disability pension. The rehabilitee receives full or partial rehabilitation allow- ance, and the allowances are always higher than plain disability pensions • The accrual rate increases with age. Pension accrues at the rate of 1.5 per cent on the annual earnings until the age of 53, at 1.9 per cent between the ages of 53 and 62 and at 4.5 per cent between the ages of 63 and 68. • In the new scheme it is possible to retire on an old-age pension flexibly between the ages of 63 and 68 instead of at the previous fixed retirement age of 65. On the other hand, the possibilities of retiring early were weakened as the age limit for the early old- age pension was increased from 60 years to 62 years. Taking the old-age pension early reduces the pension permanently. • In the future the decreasing effect of the life expectancy coefficient on the pension amount can be compensated by working longer. The possibilities to use different forms of early retirement have been reduced: • The unemployment pension will be gradu- ally phased out, and the income of unem- ployed people born after 1949 will be en- sured through unemployment security. • Individual early retirement pension (a re- laxed form of disability pension) has bee abolished and instead, the occupational dis- ability of people over 60 will gain emphasis in assessment of their right to disability pension in cases where they have had a long working career and continued work would be unreasonable. The employers in Finland have been encour- aged to introduce so-called work ability pro- grams as well. Pension insurance companies usually participate in those programs, by ad- vice and also by financing. There are also several government sponsored programmes, which give both general and employer specif- ic support to work ability. 243 Finnish Experience of Raising the Employment Rate of Older Workers 5. What induces people to work longer? Economic incentives have an effect The Finnish Centre for Pensions and the Finn- ish Pension Alliance TELA have made sur- veys and opinion polls to clarify the employ- ers’ and the oldest employees’ views to con- tinue at work and to ask their opinions on the pension reform also more generally. According to the employee survey “Flexible Retirement Age”, about a quar- ter of the oldest pri- vate-sector employ- ees thought they would continue working beyond the age of 63 in order to get a higher pension. The interest in con- tinued work increas- es with age. A partial explanation for this is that the employees with the best work capacity and with the strongest willingness to work have stayed on in working life (Figure 6). Good health is an important precondi- tion in order to be able to consider con- tinued work in order to get a higher pen- sion. Also the per- son’s education and training has an effect. Highly educated per- sons think more fre- quently than less ed- ucated persons that they will continue working after having reached the age of 63. Realising these intentions to continue work- ing would mean an increase in ageing peo- ple’s participation in working life in Finland. However, we are not talking about a very significant increase in employment rates. The cautiously positive evaluation can also be explained by the employers’ view of the sig- nificance of the accelerated accrual rate. Par- 0% 20% 40% 60% 80% 100% 58 59 60 61 62 63 Total Age Do not know Yes No Source: Finnish Cent re f o r Pensions Figure 6. Does the accelerated accrual rate of 4.5% increase the willingness to continue working beyond the age of 63 0% 20% 40% 60% 80% 100% Private sector Municipalities Central government Total Do not know Completely disagree Quite disagree Quite agree Completely agree Figure 7. Employers' answer to the argument: continuing at work will increase at our workplace due to the accelerated accrual rate of 4.5% Source: Finnish Centre for Pensions 244 Finnish Experience of Raising the Employment Rate of Older Workers ticipation in working life among ageing per- sons is expected due to this factor to increase in about a third of the establishments (Figure 7). In large establishments, belief in the effect of economic incentives is slightly more fre- quent than in small ones. Good chances for longer work histories The employers find the ageing employees’ possibilities of continuing work for a long time as fairly good: at about half of the estab- lishments most employees could well contin- ue working until the age of 65 and at about a fifth of the establishments to the new upper age limit of 68 years for the old-age pension (Figure 8). At present only about 15 per cent of the age group continues working until the age of 65. In view of these results there are clearly more possibilities of continuing work than there is an interest among the oldest employ- ees to continue working until the age of 65 or 68 (Figure 9). A fifth of the oldest employees estimate, that they will continue working to the age of 65 and only some two or three per cent to the age of 68. Thus there seems to be more problems on the supply side than on the demand side as regards the labour force. Figure 8. Proportion of establishments who agree with the argument: at our workplace in most duties employees can very well continue at work until the age 65 / 68 0 102030405060 Central government Munic ipalities Private sector Total until the age of 65 until the age of 68 % Source: Finnish Centre for Pensions Figure 9. Retirement intentions by gender, oldest employees in the private sector 0% 20% 40% 60% 80% 100% Men Women Total Before age 63 At age 63 At age 64 At age 65 Later Do not know Source: Finnish Cent re for Pensions 245 Finnish Experience of Raising the Employment Rate of Older Workers 28 33 30 10 43 49 62 63 18 31 28 34 48 63 67 77 22 32 34 40 56 68 71 82 0 102030405060708090 Increase in pay More flexible w orking hours Rehabilitation opportunities Increase in training opportunities Possibility to control over one's ow n w ork Good management Good w orking environment Good w orking atmosphere All establishments Establishments in the private sector Oldest employees in the private sector Source: Finnish Centre for Pensions % Figure 10. The propotion of those who consider measures very important for coping at work for as long as possible Factors related to wellbeing at work are very significant According to the employer and employee studies, more important than economic incen- tives are factors related to the workplace com- munity. Topping the list of important factors related to the working conditions are a good atmosphere at work, a properly functioning work environment and good management (Figure 10). The possibility to influence one’s own work is also found to be important. It is worth noting the similarity of the views of both employers and employees. On only two issues the view- points somewhat differ. Further vocational training is clearly more appreciated among employers than among employees. On the other hand, the employees more generally than the employers emphasise increases in the wage or other rewards. Still, also in the em- ployees’ ranking the remuneration is listed among the issues that are not very important. The importance of the work ability pro- grams is clear from the studies. According to the employer study, in more than half of the establishments the employees are encouraged to continue working until the retirement age. Strong support is given in about a tenth of the establishments (Figure 11). The same ques- tion was also posed in the employee study and the viewpoints were similar also here. How- ever, a slightly smaller proportion of the em- ployees than of the employers were of the opinion that the employees were supported to continue at work. 246 Finnish Experience of Raising the Employment Rate of Older Workers 0% 20% 40% 60% 80% 100% Oldest employees in the private sector Establishments in the private sector All establishments Strongly To some extend Not particularly Not at all Do not know Source: Finnish Cent re f or Pensions Figure 11. Do the practices at the workplace support employees' continuing work until retirement age? 6. Conclusions The prospects for the aim of longer work histories and postponed retirement are good. According to the employers’ assessment there are fairly ample possibilities to continue work- ing compared to the current participation in working life of the oldest employees and the employees’ intentions to continue working between the ages of 63 and 68. Economic incentives including those of the pension system are important but still increas- ing the attractiveness of working life is the key to longer work histories. It is also important to care for the ageing employees’ work capacity and to develop the working conditions while taking into account the ageing workforce. In this respect the work ability programmes are a useful tool. Despite the need for and the importance of these measures whether the work histories will become longer depends ultimately on a favourable economic and employment devel- opment. Acknowledgements I thank Jari Kannisto, Juha Rantala, Ismo Risku, Eila Tuominen and Mika Vidlund from the Finnish Centre for Pensions for valuable help in compiling this paper. For more thorough information please visit web page: www.etk.fi