Cite as: H. Tikanmäki, H. Sihvonen, J. Salonen; 2015; Distributional effects of the forthcoming finnish pension reform – a dynamic microsimulation approach; International Journal of Microsimulation; 8(3); 75–98. doi: 10.34196/ijm.00122
Abstract
The Finnish pension system consists of earnings-related pensions (almost 90% of the total pension expenditure) and the national pension. The earnings-related pension system will undergo a major reform in 2017. The main objective of the reform is to ease the burden on public finances by extending working lives.
The earliest eligibility age for old-age pension will gradually rise from the current 63 years to 65 years by the 1962 birth cohort. After that, the earliest eligibility age will be linked to the growth in life expectancy. The age-specific accrual rates will be unified after a transition period. The early retirement schemes will also be reformed. The level of the disability benefits will improve.
The forthcoming reform has been analysed using the ELSI microsimulation model of the Finnish Centre for Pensions. The model is based on administrative register data and it covers both the earnings-related and the national pension system of Finland. ELSI is a model with dynamic ageing without behavioural adjustments. The behavioural changes resulting from the reform have been taken into account explicitly: the age-gender-specific behaviour is obtained from our macro model using a micro-macro link. The differences in transition probabilities between educational groups are extrapolated from the register data.
The reform indicates changes in income distribution. We analyse the impacts of the reform on working lives, the pension level as well as the pension distribution. The results are presented by gender and educational level.
This article contains 8 figures and 3 tables.
Figures
Figure 1. Average working life by education, median length in years.Figure 2. Average time spent in retirement, by education and in years.Figure 3. Partition of the life course of the 1988 birth cohort, years on average.Figure 4. Relative changes of the percentage points of the pension levels of 75-year-olds, by birth cohort and gender.Figure 5. Relative changes of the medians of the earnings-related pensions of 75-year-olds, by gender and educational level.Figure 6. Replacement rates of the statutory pensions 2017–2060 of people moving directly from work to old-age-pension, in per cent.Figure 7. Change in Gini coefficient in 2017–2050.Figure A.1. Structure of the ELSI model. Each dark box represents a module of the model. Each white box represents an external source of information.
Tables
Table 1. Average length of expected working life in some European countries, years4.
Country
Male
Female
Total
EU 28
37.7
32.5
35.2
Denmark
40.3
37.6
39.0
Finland
37.8
36.6
37.2
Sweden
42.1
39.6
40.9
Iceland
47.2
43.8
45.5
Norway
40.6
38.3
39.5
Source: Eurostat
Table 2. Difference in working life of 75-year-olds by gender Difference of reform to baseline in years.
Gender/Cohort
P25%
P50%
P75%
Mean
Male 1960
−0.1
0.2
0.3
0.1
Male 1970
0.5
0.8
1.7
0.9
Male 1980
1.0
0.9
1.2
1.2
Male 1990
1.0
1.0
1.0
1.2
Male 2000
1.0
2.0
2.0
1.4
Female 1960
0.3
0.4
0.7
0.5
Female 1970
0.9
0.9
1.1
1.0
Female 1980
1.1
1.4
1.8
1.5
Female 1990
1.0
1.0
2.0
1.6
Female 2000
1.0
1.0
2.0
1.5
Table A.3. Earnings related pension by education, median EUR/month at 2014 prices*.
Cohort
Male
Female
25% (baseline)
50% (baseline)
75% (baseline)
25% (baseline)
50% (baseline)
75% (baseline)
1960
1,240
1,790
2,470
1,050
1,500
1,960
1970
1,440
1,960
2,650
1,220
1,640
2,140
1980
1,640
2,180
2,900
1,470
1,950
2,610
1990
1,930
2,510
3,350
1,700
2,210
2,880
2000
2,350
3,010
3,960
2,050
2,610
3,400
25% (reform)
50% (reform)
75% (reform)
25% (reform)
50% (reform)
75% (reform)
1960
1,250
1,820
2,500
1,080
1,520
1,970
1970
1,490
2,070
2,740
1,270
1,720
2,230
1980
1,780
2,370
3,110
1,590
2,110
2,780
1990
2,150
2,770
3,640
1,880
2,430
3,110
2000
2,680
3,410
4,420
2,330
2,980
3,800
Low (baseline)
High (baseline)
Total (baseline)
Low (baseline)
High (baseline)
Total (baseline)
1960
1,550
2,610
1,790
1,230
1,890
1,500
1970
1,670
2,780
1,960
1,270
2,000
1,640
1980
1,960
3,170
2,180
1,550
2,500
1,950
1990
2,250
3,670
2,510
1,820
2,720
2,210
2000
2,740
4,340
3,010
2,190
3,250
2,610
Low (reform)
High (reform)
Total (reform)
Low (reform)
High (reform)
Total (reform)
1960
1,590
2,590
1,820
1,250
1,900
1,520
1970
1,780
2,870
2,070
1,340
2,080
1,720
1980
2,130
3,390
2,370
1,700
2,660
2,110
1990
2,520
4,002
2,770
2,030
2,980
2,430
2000
3,150
4,880
3,410
2,530
3,680
2,980
Low=Secondary or lower degree, High=Bachelor’s or higher degree.
