Determining the life expectancy coefficient and retirement age
As a result of the 2005 and 2017 pension reforms, the pension amount and retirement age have been affected by a rising life expectancy. It affects earnings-related pensions in two ways:
- the amounts of starting pensions (2005 pension reform), and
- the retirement age (2017 pension reform).
When the pension earned during working life is granted, the pension amount is multiplied by the life expectancy coefficient. The purpose of the coefficient is to curb the rising pension expenditure due to extended life expectancy and to defer retirement. If life expectancy increases, the value of the life expectancy coefficient decreases. This means that, if the earned pension for different age cohorts is otherwise equal, the monthly pension of younger age cohorts is smaller than that of older age cohorts.
The aim of the 2017 pension reform was to maintain the ratio between time spent in retirement and time spent in working life. That way, the social and financial sustainability of pensions can be secured. That is why the retirement age (old-age pension) was linked to changes in life expectancy.
The purpose of this website is to offer more detailed information on what it means that life expectancy is considered in pensions.
Expected life expectancy measures longevity
Expected life expectancy means the years that a person of a certain age is expected to live as of the time of review, providing mortality remains at the same level as at the time of review.
Mortality is measured using age-specific mortality risk rates. The mortality risk rate expresses the likelihood that a person of a certain age will die in a certain calendar year before their next birthday. When mortality decreases, the expected life expectancy increases. In other words, the life expectancy increases. Statistics Finland calculates the mortality risk rates.
- For example, when calculating the life expectancy coefficient for a person born in 1947, the expected life expectancy of the person at age 62 in 2009 was 21.7 years. For persons born in 1960, it was 23.2 years. That means that life expectancy has increased, and mortality has decreased.
According to the population forecast of Statistics Finland, life expectancy will continue to grow. However, all projections concerning the future come with uncertainty. Due to this uncertainty, the level of future pensions (life expectancy coefficient) and the retirement ages have not been linked to the projection but to the already realised mortality via the expected life expectancy. The expected life expectancy does not pay any attention to the future growth in lifespan.