Transcript Population ageing in Finland

Population Ageing in Finland:
Consequences and Policy Actions
Erkki Liikanen
Governor
Bank of Finland
Bank of Greece
17 January 2008
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Population Ageing in Finland:
Consequences and Policy Actions
 Demographic change is a global challenge
 In Europe Finland is the first country to meet the steep
aging due to high post-war ( 1945- 1949) cohorts
 Economic consequences of ageing are fundamental
 The 2005 Pension Reform in Finland was designed to
ease ageing pressures for sustainability of pension
system and labour markets
 But challenges still remain
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Total fertility (children per woman)
%
3.5
Europe
Greece
Finland
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2045-2050
2040-2045
3
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2035-2040
2030-2035
2025-2030
2020-2025
2015-2020
2010-2015
2005-2010
2000-2005
1995-2000
1990-1995
1985-1990
1980-1985
1975-1980
1970-1975
1965-1970
1960-1965
1955-1960
1950-1955
Source: United Nations.
Life expectancy at birth (years)
%
90
Europe
Greece
Finland
85
80
75
70
65
60
2045-2050
2040-2045
4
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2035-2040
2030-2035
2025-2030
2020-2025
2015-2020
2010-2015
2005-2010
2000-2005
1995-2000
1990-1995
1985-1990
1980-1985
1975-1980
1970-1975
1965-1970
1960-1965
1955-1960
1950-1955
Source: United Nations.
Population is greying faster in Finland than in
other Western countries
 Baby-boom (1945 – 19490) cohorts larger that
elsewhere
 But the peak in fertility rate was also shorter than in other
countries and fertility went down soon
 Life-expectancy has increased fast in Finland
=> An exceptionally large but also short baby-boom
together with increased longevity brings in Europe the
aging challenge first to Finland
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Demographic Change: Ageing of Baby Boomers
1950
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
1955
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
1960
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
1965
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
1970
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
1975
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
1980
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
1985
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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13
Demographic Change: Ageing of Baby Boomers
1990
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
1995
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2000
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2005
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2010
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2015
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2020
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2025
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2030
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2035
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2040
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2045
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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Demographic Change: Ageing of Baby Boomers
2050
Per cent
14
Finland
12
Greece
Europe
United States
10
8
6
4
2
0
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Source: United Nations.
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The Old-age Dependency Ratios
Finland
70
Greece
Europe
United States
%
60
50
40
30
20
10
0
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
The old-age dependency ratio is the ratio of the population aged 65 years or over
to the population aged 15-64.
Source: United Nations.
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Entry to and exit from labour market in Finland
20-24 years old
60-64 years old
500 000
450 000
400 000
350 000
300 000
250 000
200 000
150 000
100 000
50 000
0
1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040
Source: Statistics Finland.
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Policy challenges
 Pension schemes under financial stress:
– Low fertility rate: Baby bust generation not able to finance baby
boom pensions => Need for pre–funding of pensions
– Increasing longevity: Steady increase in oldest age group
=> Need to lengthen economically active life span
 Labour force start to shrink
– Labour supply decisions of the baby boom generation critical:
If they do not stay longer in work, labour shortages a big problem
=> Urgent need to increase retirement age
 Spending on health and long term care expands
– Demand for social and health services increases dramatically
=>Need for productivity improvement in public services
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The Finnish Pension system: main features/1
 Two statutory pension schemes
– 1. National pension scheme guarantees a minimum pension
– 2. Employment based earnings-related pension scheme
 Public pension benefits were 11 % of GDP in 2006
– Earnings-related pensions 9.5 % and national pensions 1.6 % of
GDP
– National pensions paid only when earnings-related pensions are
very small
 Occupational and voluntary pension schemes are
negligible
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The Finnish Pension system: main features/2
 Earnings-related pension scheme is partly funded
– Pre-funded scheme covers a quarter of pension outlays
– The rest is financed through PAYG
 Despite pre-funding, earnings-related pension scheme is of definedbenefit type
– The pre-funding is collective; it has no effect on the size of the pension.
 Statutory pensions are taxed as earned income.
 Financial position of earnings-related scheme:
– The system is running a surplus amounting to 2-3 % of GDP.
– The market value of pension fund’s assets was 66 % of GDP in
2006.
– Mandatory pension funds have more and more diversified their
portfolios also internationally
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The 2005 Pension Reform was designed to
meet the challenges of ageing
 The main objectives of the reform were:
1) To make the earnings-related pension system
financially more sustainable,
2) to increase labour market participation of senior
employees and
3) to make the pension system more equitable and
internally consistent
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The Key Elements of 2005 Pension Reform to
improve the sustainability
 The increase of the pre-funding
– Current mandatory pension funds are large in international
standards, but not large enough to smooth the demographic
burden in Finland,
– Funding of the pension schemes must be increased by 7.5 per
cent of the wage sum in 2006-2013.
 The benefits will be linked to life-expectancy
– Life expectancy coefficient will adjust the pensions to the
changes in longevity as of 2009
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The Key Elements of the Reform to increase
labour market participation of senior
employees
 Flexible retirement age from 63 to 68 has been
introduced.
 Early pension schemes have been closed or tightened of
and access to other pathways has been restricted
 the accrual rate has been increased for senior
employees.
– In age 18-52 pension will accrue at rate 1.5, in age 53-62 at rate
1.9 and from 63 to 68 at rate of 4.5 per cent.
– In old system standard rate
 The cap on the replacement rate has been abolished
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Elements in Pension Reforms to make system
more equitable and internally consistent
 Benefits will be based on life-time earnings
 Pension indexation rules have been changed
– Pension index is a mix: 20 % weight of wages and 80 % weight
of consumer prices.
– Before weights were 50/50 up to age 65 and after that 20/80.
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The objectives of the reform:
 Effective pension age is expected to increase about 3
years from 60 to 63
 Extension of working careers of older workers is
estimated to increase the overall employment rate by ½1 percentage points
 As a result, need for an increase in the contribution rate
is expected to diminish by 3-4 percentage points to 25
per cent.
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Have the 2005 pension reform been a success:
What can we see from latest data?
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Employment rate by age groups
61–62 -years old
63–64 -years old
%
50
40
30
20
10
0
1989
1991
1993
1995
1997
1999
2001
2003
2005
Source: Statistics Finland.
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Pension recipiency among the population aged 55–64, year 2000
100
Ordinary disability pension
Unemployment pension
Special pensions for farmer
% of age group
Individual early retirement pension
Old-age pension
Part-time pension
80
60
40
20
0
55
56
57
58
59
60
61
62
63
64
Sources: Finnish Centre for Pensions and Social Insurance Institution of Finland.
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Pension recipiency among the population aged 55–64, year 2006
Ordinary disability pension
Unemployment pension
Special pensions for farmers
% of age group
Individual early retirement pension
Old-age pension
Part-time pension
100
80
60
40
20
0
55
56
57
58
59
60
61
62
63
64
Sources: Finnish Centre for Pensions and Social Insurance Institution of Finland.
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Future challenges
 Pension contribution rate remains high even if the objectives of the
reform were achieved. The reform will not be able to curb the need
raise the contribution rate.
– Will the contribution rate be too high for the competitiveness?
– Does it cause efficiency losses? (According to Bank of Finland study, for
example, employment losses caused by contribution hikes can be
substantial.)
 The long transition period protects older workers. Young generations
may challenge it.
– The reform in unemployment pensions schemes and life expectancy
adjustments will be effective only starting from age cohorts 1949 or
1950.
– Introduction of life expectancy coefficient favour older generations
 Lack of transparency may counteract the positive labour supply
effects
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Conclusions
 Ageing is not an issue of the future but of today in
Finland
 Policy responses have been a combinations of sticks
and carrots.
– Sticks: life-expectancy adjustment in replacement ratio and more
unfavourable pension indexation
– Carrots: generous accrual ratio for old workers.
 Today a general view is that pension reform will ease
ageing pressures on labour market and pension
financing. Is it enough?
 A huge challenge will be to increase productivity in social
and health services.
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