Earnings-related pensions as an element of social insurance
Social insurance is the statutory and compulsory insurance provided by the public authorities against social risks, such as old age, illness or accidents at work, disability, unemployment, or the death of the family’s breadwinner. It consists of sickness, unemployment, accident and pension insurance as well as group life insurance for employees.
Social insurance is mainly financed by collecting insurance premiums from the insured or their employers. This is in contrast to the last-resort social assistance and social benefits, which are covered by tax revenue.
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Whole picture of Finnish pension insurance
In Finland, pensions are mainly a benefit included in social insurance. They consist of two statutory elements: earnings-related pension, determined on the basis of earnings over the whole career; and a residence-based national pension independent of the person’s career.
Pensions can also be paid on the basis of the Workers’ Compensation Act, the Occupational Diseases Act and the Military Injuries Act, as well as motor liability insurance and accident insurance.
In addition to statutory pension insurance, there are also voluntary, private pension insurance schemes that complement the statutory scheme. In Finland, voluntary pension insurance plays a rather small role.
A pensioner’s income in various countries typically consists of several sources. The basic pension is often supplemented by labour-market-based supplementary pensions paid by a particular sector or employer. These are often based on agreements between trade unions and employers. The Finnish practice of offering the total pension from a single scheme is exceptional from an international perspective.
Both the earnings-related system and the national pension scheme include benefits for old age, 100% disability and the death of a family member. The earnings-related pension system also includes a partial disability pension and a partial old-age pension.
Earnings-related pension as the primary benefit
Statutory earnings-related pension insurance covers virtually all employees over the age of 17 and self-employed persons over the age of 18.
The characteristics of the earnings-related pension system are compulsory, collective and statutory. The earnings-related pension system consists of several pension laws, the most important of which are the Employees Pensions Act (TyEL) and the Public Sector Pensions Act (JuEL).
The rules for determining the benefits of public and private sector employees have been almost identical since the pension reform of 2005, which simplified the pension system significantly.
Earnings-related pensions represent a defined benefit system in that their size is defined in advance. The total amount of earnings-related pensions affects the level of pension contributions and other necessary financing.
National pension and guarantee pension to secure minimum income
When the earnings-related pension remains small, it is supplemented by the means-tested national pension, and at the minimum level by the guarantee pension. The national pension and the earnings-related pension are coordinated: when the earnings-related pension increases, the share of the national pension in the total pension decreases. When the earnings-related pension exceeds a certain euro-denominated limit, the national pension is no longer paid.
Earnings-related pensions account for almost 90 per cent of pension expenditure
The national pension system was created in the late 1930s, while the earnings-related pension system originated mainly in the early 1960s. The national pension remained an important source of income for pensioners for a long time: back in the mid-1990s, more than 90 per cent of pensioners received a national pension paid by the Social Insurance Institution of Finland (Kela). Since then, the number of pensioners receiving a pension from Kela has decreased, and the number of those receiving an earnings-related pension has increased accordingly.
The criteria for determining the national pension were changed in the late 1990s, when the earnings-related pension reduction was introduced. As a result, the national pension became a minimum pension paid only to those with no or little other pension income. In contrast, the statutory earnings-related pension was raised to serve as the primary security for old age.
This change has naturally contributed to a decrease in the number of Kela’s pensioners. In addition, longer careers and higher wages have led to a situation where, on average, when they begin, earnings-related pensions are higher than before. Thus there is less demand for pensions paid by Kela.
The latest statistics pertain to the year 2022. At that time, pension expenditure totalled EUR 34.9 billion, broken down as follows:
- earnings-related pensions, 31.4 billion (90%)
- Kela’s pensions, 2.5 billion (7%)
- special and non-contributory pensions totalling around EUR 1 billion (3%)
At the end of 2022, a total of approximately 1,566,000 people received a career-based pension, i.e. old-age or disability pension:
- more than 1,000,000 people received only an earnings-related pension (66% of pension recipients)
- almost 80,000 people received only Kela’s pension (5% of pension recipients)
- 450,000 people (29% of pension recipients) received both an earnings-related pension and Kela’s pension.
Source: Kela’s Pocket Statistics 2023.