Social partners reach agreement on EMU buffer funds

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On 17 November 1997, the Finnish social partners reached an agreement on the so-called "EMU buffers", following negotiations which have been in progress all autumn. In order to balance out cyclical economic changes within EMU, a total sum of up to FIM 7 billion will be collected in two buffer funds created in the occupational pension scheme and the unemployment insurance system.

At a meeting held in Helsinki on 17 November 1997, the central social partners reached an agreement on the "EMU buffer funds" (EMU-puskurirahastoista), the purpose of which is to protect Finnish wage earners against economic fluctuations within EU Economic and Monetary Union (EMU) (FI9710135N).

Negotiations over this issue arose from worries among wage earners about the flexibility of wages in Finland in a future situation where foreign exchange policy can no longer be used to balance economic disturbances. Because of its high emphasis on wood processing, the business cycle of the Finnish economy is very different from that of much of western Europe. Some economists have claimed that under EMU, the European Central Bank (ECB) might not support Finland in recession because other European countries would not necessarily be in a state of recession at the same time. The trade unions demanded a protective mechanism for wages in such circumstances, and the November agreement creates such a buffer mechanism within the occupational pension scheme and the unemployment benefit security system.

No new systems will be created to set up the buffers, and the money - totalling FIM 7 billion - will instead be collected in existing funds. The basic idea of the buffers is that during good times employers and employees will pay slightly higher social security contributions than necessary, with the result that, during bad times, rises in these contributions can be controlled by using the buffer fund for paying social security costs. A further result of the negotiations is that the financing principles of earnings-related unemployment benefit will be totally reformed, even though this was not among the objectives when the negotiations started. However, the negotiators did not reach an agreement on a third type of buffer, using companies' personnel funds (a form of profit-sharing scheme). On this point, the organisations only made a joint statement that some local investigations must be made into the significance to employers and employees of personnel funds and systems of payment by results.

When a severe depression paralysed Finland at the beginning of the 1990s, employers' unemployment insurance contributions increased tenfold in a short period of time. The new agreement will hold down employers' contributions and, consequently, increases in labour costs can also be controlled. During periods of recession, consumer demand will be supported by restricting increases in wage earners' unemployment insurance contributions. The collection of funds for the buffers will start at the beginning of 1999 and, according to estimates, the target sum will be reached by 2002-2004.

The funds will be invested in the "unemployment insurance fund", the new name for the former "central fund of the unemployment funds". The previous fund was administered solely by the employers, but now they will have two-thirds of the seats on the fund's board of trustees, and the wage earners one-third. The expenses of the fund will be met from unemployment insurance contributions, collected from employers and wage earners, and by the profits from its investments.

Below we examine in more detail the provisions of the buffer funds agreement

Financing of earnings-related unemployment benefit reformed

At present, the shares of the expenses of earnings-related unemployment benefit met by employers, unemployment funds and the Government are prescribed by law. One part of the Government's share is financed by tax revenue and the other part by wage earners' unemployment insurance contributions, the amount of which is decided by Parliament. The November 1997 agreement makes the following changes to these financing arrangements.

  • The Government will always pay the basic daily unemployment allowance (set next year at FIM 120 per day) from tax revenue.
  • The share paid by the unemployment funds will remain at the present level - 5.5% of the daily unemployment allowances of fund members.
  • Employers and wage earners will be liable for the rest of the earnings-related benefit, from their own contributions. On a yearly basis, the social partners will agree with each other on the employer and wage earner contributions, and the Ministry of Social Affairs and Health will ratify them.
  • In 1998, the wage earner contribution will be 1.4% of pay and the employer contribution, on average, 2.8%.
  • When unemployment expenses increase or decrease, wage earner contributions will change correspondingly. However, the wage earner contribution will always be at least 15% of the share for which the social partners are together liable.
  • A new unemployment insurance fund - formed from the "central fund of the unemployment funds", presently run by the employers - will collect the employer and wage earner contributions. The social partners will run the new fund together.

Unemployment benefit EMU buffer

A buffer will be created in the unemployment insurance fund by collecting, during times of economic prosperity, a higher contribution from the social partners than would be needed for the payment of unemployment expenses. During times of recession, this buffer will be used to cover earnings-related unemployment benefit expenses, so that it will be possible to collect lower contributions than would otherwise be necessary. By this means, the rise in labour costs can be slowed down and consumer demand can be supported.

The social partners will hold annual negotiations to decide on collecting money for the buffer fund and on discharging funds from it. The target size of the buffer at its largest is FIM 3 billion and, according to estimates, it will take four to five years to collect this money.

Occupational pensions EMU buffer

A buffer against "normal" recessions will be collected in the clearing reserve of the occupational or "employment" pension scheme. Pension companies will administer the clearing reserve.

The buffer will be built up by collecting, during good times, a higher occupational pension contribution from employers and the wage earners than would be necessary to consolidate pension funds and to pay pensions. When recession strikes, the money invested in the buffer fund will be used to pay for occupational pensions, and it will thus be possible to collect lower contributions than would otherwise be necessary. As with the unemployment insurance buffer, this means that the rise in labour costs can be restricted and consumer demand can be supported.

The social partners and pension companies will hold annual negotiations to agree on collecting money for the buffer and on discharging funds from it. According to estimates, at its largest, an adequate buffer would need to represent 2.5% of the wage sum, which is equivalent to FIM 3.5 billion at present.

In the event that a "normal" recession turns into a depression, funds reserved for future pensions and income from interest can also be used as a buffer. However, this requires an amendment of the law.

Social partners express satisfaction

At a press conference held after the agreement had been reached in November, representatives of both employees and employers expressed their satisfaction with the solution.

The Central Organisation of Finnish Trade Unions (Suomen Ammattiliittojen Keskusjärjestö, SAK), and the Finnish Confederation of Salaried Employees (Toimihenkilökeskusjärjestö, STTK), have been demanding buffers as a condition for Finland joining the EMU. After the negotiated solution, the union leaders can now take the EMU issue to the decision-making body of their organisations. Lauri Ihalainen, the chair of SAK, and Esa Swanljung, the chair of STTK, both agreed that it is now more easy to decide on their perspectives on EMU. "The framework is now clear", said Mr Swanljung at the press conference on 17 November (reported in Helsingin Sanomat, 18 November, 1997).

Tapani Kahri, the deputy managing director of the Confederation of Finnish Industry and Employers (Teollisuuden ja Työnantajain Keskusliitto, TT) expressed his contentment, especially concerning the financing of unemployment benefit. "The reorganisation of financing is important and it has been a goal for many years. The benefits and the contributions will be more equivalent to each other. The users of the benefits also pay for them, and they are not just interested in the amount of the benefit but also in the costs," said Mr Kahri (reported in Demari on 18 November, 1997).

Agreement adds momentum to incomes policy talks

At the press conference, Lauri Ihalainen, the chair of SAK, stated his belief that the continuing negotiations over a new centralised incomes policy agreement (FI9710132F) would lead to a solution at the beginning of the next week, and that the EMU buffers agreement has had "without any doubt a positive impact on the incomes policy negotiations" (reported in Taloussanomat on 18 November).

According to Mikko Viitasalo, the chair of the Confederation of Unions for Academic Professionals in Finland (Akateemisten Toimihenkilöiden Keskusjärjestö, AKAVA), the buffers deal has created opportunities for making progress in the incomes policy negotiations. As far as the timetable is concerned, he was not as optimistic as Jarmo Pellikka, the managing director of the Employers' Confederation of Service Industries (Palvelutyönantajat, PT) who estimated that an agreement would be reached during the next weekend (Kansan Uutiset, 18 November).

When the central organisations have reached an agreement, their recommendation is presented to the trade unions for their approval, and it should take about two weeks for the unions to sign the forthcoming incomes policy deal. However, the Government will present its tax proposals to Parliament once the central organisations have reached their recommended agreement, giving Parliament enough time to deal with them.

Commentary

SAK announced in November 1995 that it would not approve of EMU membership without any national buffers to balance economic fluctuations and prevent a decrease in workers' wages during depression. SAK tried to create new company-related funds, like the "trade-cycle" and training funds. However, the November 1997 agreement does not provide for any new buffers, with all the solutions based on existing funds. In fact, wage earners will be obliged to finance their own income security more than before, as the share met by the Government diminishes. One reason why SAK signed the agreement is that it wants to support the Government's EMU policy (FI9706120N), and now the Government is expected to make concessions by reducing wage earners' taxes. Nevertheless, the employee side obtained significant concessions, such as representatives in the administration of the unemployment insurance fund. The previous central fund of the unemployment funds has been run solely by the employers.

The employer side has taken a positive view of EMU right from the start. In the negotiations, it obtained almost everything it wanted, notably changes to the system of financing unemployment benefit even though this topic was not initially an issue in the buffer negotiations. The employers' share of financing was supposed to rise back to its former level, but now it will be stabilised at the present level.

Both the employer and the employee side have expressed their satisfaction at reaching an agreement. Despite the defiance which continued all autumn, the final negotiations did not include any dramatic developments and, after the buffer negotiations, prospects for a quick centralised incomes policy solution seem rather promising. The Finnish consensus approach has won through once again. It remains to be seen for how long the atmosphere will stay this friendly, because the employer and wage earner contributions to the buffer funds will have to be agreed on a yearly basis, starting from the beginning of 1999. We must also bear in mind that the amount of the funds which will be collected in the buffers is rather modest, and that there would not be enough money if Finns had to relive an economic crash similar to the one which occurred at the beginning of the 1990s. (Juha Hietanen, Ministry of Labour)

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