Higher pension contributions for older workers to be abolished

In February 2004, a tripartite working group including social partner representatives agreed that age-related pension contributions in large firms under Finland's private sector TEL scheme should be abolished by 2007. This reform will reduce employers’ pension contributions for older workers and its basic aim is to remove barriers to the employment of these workers.

Employers generally face two large items of expenditure in relation to their employees: wages and social security contributions. Seniority-based wage systems and high social security contribution rates for older workers may make employers more reluctant to hire older people. 'Age-earnings profiles' for both men and women are very flat in Finland compared with many other countries, while the social security contribution rate is the ninth highest in the Organisation for Economic Cooperation and Development (OECD). A particular feature of the Finnish system is that in the private sector social security contributions increase both with the age of the employee and the size of the firm, thus making older people in large firms relatively more expensive to recruit and retain. This cost is further raised by the fact that large firms are required to pay part of their workers’ disability and unemployment pensions.

The programme of the current government (FI0304202F) emphasises the need to encourage older people to stay on at work. Over the years, several initiatives have already been taken to this end (FI0204101F). A new private sector pension system will be launched at the beginning of 2005, but it has been recognised that more need to be done (FI0304201N). The government has promised to consider jointly with the social partners a possible reduction or equalisation of the 'own-risk' component in disability pensions paid out by large employers where they are the disabled worker's last employer. The government will also look into a more equitable calculation of the disability component in the private sector ('TEL employment'- see below) pension contributions made by different-sized companies.

Along these lines, in February 2004, a tripartite working group including social partner representatives, led by Kari Puro, the chief executive of Ilmarinen Mutual Pension Insurance Company, agreed that the age-related component of TEL employment pension contributions in large firms should be abolished by 2007. In 2007, TEL pension contributions will be the same for all employees independent of their age and size of the firm. This means that pension contributions will rise in respect of younger workers and fall in respect of older workers. The working group is still looking for solutions to the problem that these changes may increase pension contributions in small firms in which the share of young workers is relatively high. It has also been agreed that the employers' own-risk component in unemployment and disability pensions in large companies will be reduced.

Age-related contributions in current private sector pension system

In Finland, 98% of total expenditure on pension benefits is statutory by nature. Employers and employees are the main financiers of earnings-related pensions for employees. Pension contributions are determined in proportion to the insured person’s wage. In 2003, the employees’ share of the contribution was 4.6% of the wage, whereas the employers’ share varied between 13% and 35% of the wage, depending on the pension provider.

The earnings-related pension scheme is based on several different items of legislation. The Employees’ Pensions Act (TEL) covers about 90% of insured employees in the private sector (at the end of 2003, this was about 1,200,000 employees). It covers employees aged 14-64 years, who work under an employment contract and whose contract has lasted for at least one month without interruptions and whose earnings exceed a specific limit mentioned in the Act (EUR 224.22 per month in 2003).

The average TEL contribution to pension insurance companies was 21.4% of the wage in 2003. The employees’ share was the abovementioned 4.6 percentage points and the employers’ share was 16.8 percentage points. The total contribution is levied as a whole on the employer, and the employer withholds the employee’s share from their pay.

The TEL contribution varies both between pension providers and within the same pension provider. In pension companies handling insurance under TEL the contribution is determined according to the size of the firm. Firms with fewer than 50 employees ('small-scale employers') pay a flat-rate contribution which is proportional to the wage and independent of the age of the insured person. The small-scale employer’s contribution is set so that all small-scale employers together pay as much in the way of contributions as one large-scale employer of the size of all of them put together would pay. For companies with at least 50 employees ('large-scale employers'), the total contribution varies according to the age of the insured person and the size of the firm.

In 2003, the average pension contribution for employees of small-scale employers was 21.5%, regardless of the age of the insured. The contribution is reduced by a firm-specific reduction, which is mainly dependent on the pension provider’s investment yields. The average reduction was 0.2% of the wage in 2003.

In 2003, for large-scale employers (with more than 50 employees) the age-dependent average contribution, including the employees’ share, varied between 15.4% and 25.7%. The contribution is lowest, at 15.4%, for employees who are less than 20 years of age. Depending on the firm size, it can amount to 25.7% for those insured employees over 50 years of age.

The pension costs for older workers are further raised by the fact that large-scale employers are at least partly themselves responsible for the costs of disability and unemployment pensions. Medium-sized companies (51-799 employees) pay contributions for such pensions that are partly 'tariff-based' and partly 'experience-rated' (ie related to the number of their employees that retire on such pensions). Large companies (800 and more employees) pay the maximum experience-rating which is 80% of the cost of the incurred pensions and 20% of the tariff-rate. Whether experience-rating makes the pension contribution-age profile steeper or flatter than the tariff-rate contribution-age profile depends on the actual number of early retirements in that specific company. If there are more early retirements than the average, the contribution-age profile is steeper and vice versa.

Labour market situation of older workers

Finland’s old-age dependency ratio (the population aged 65 and over as a proportion of the population aged 20-64) is projected to increase from 25% in 2000 to 43% in 2025 compared with an OECD average of 22% in 2000 and 33% in 2025. It is widely recognised that raising employment rates, especially among the older population, will be vital to meeting these challenges.

In Finland, the employment rates of older workers started to grow in the mid-1990s after the Finnish economy began to recover from the severe recession in the early 1990s - see table 1 below. The employment rate of women grew faster than that of men due to the strong growth in service sector. Today Finland is the only country in the OECD where the employment rates of women in the age groups 50-54 and 55-59 are higher than for men. In the age group 60-64, labour force participation and employment rates are still at very low levels. Only 29% of men and 23% of women in this age group were employed in 2002.