Assumptions of the projections

The data used to set the initial values for the projection come from administrative records.

The long-term projection (LTP) model based on given assumptions. The key assumptions concern the following:

  • demographic development
  • employment rates
  • retirement risk
  • growth in earnings
  • return on pension assets
  • inflation

The population forecast used is the one published by Statistics Finland in 2018. It covers the time period until 2070, so the Finnish Centre for Pensions has extended the forecast to also cover the period from 2071 to 2085.

The assumptions concerning the employment rate and the development of the earnings level and inflation in the near future follow the economic outlook compiled in January 2019.  The long-term annual growth in real earnings is assumed to be 1.5 per cent. As for inflation, the long-term assumption used is 1.7 per cent.  The employment rate is projected to rise to 73 per cent in the early 2020s. After that it will stop rising and settle below 74 per cent throughout the projection period.  The unemployment rate is 7.9 per cent in the projection.

Summary of the assumptions of the 2019 long-term projection

 2020  2030  2085
POPULATION
     Total fertility  1.45  1.45  1.45
     Net migration (1 000)  15.0 15.0 15.0
     Life expectancy, 63-year-olds (yrs)  22.3  23.8  28.8
     Old-age dependency ratio (%) *  36.8  43.3  66.1
NATIONAL ECONOMY
     Employment rate (%)  72.6  73.1  73.8
     Real growth of earnings level (%)  1.1  1.5  1.5
     Real rate of return of pension assets (%)  2.5  3.5  3.5
 * Ratio of 65-year-olds to 15-64-year-olds

By 2025, the expected retirement age is projected to rise to 62.5 years. The rising retirement ages are not expected to raise the effective retirement age in full since disability and unemployment will increase in the older age cohorts.

The cohort-specific disability retirement risk is projected to decline, based on an observed trend. The development is probably due to a change in work, a higher educational level and the population’s improved health.

The assumption of the real return on pension assets is 2.5 per cent per year until 2028. After that it will be 3.5 per cent per year. The assumed return has been derived from the expected returns of the various investment instruments and the investment asset allocation. The projected real return is lower for the first 10 years due to the exceptionally low interest rate level.

 

EXPERTS: HEIKKI TIKANMÄKI, MIKKO SANKALA