Financial Sources for Earnings-related Pensions
The statutory earnings-related pension security in Finland is mainly financed through the earnings-related pension contributions paid by employers, employees and the self-employed. Pension assets accumulated from pension contributions and related profits finance the pensions. Some pensions are also paid for by the State’s share of the pension contribution, and by payments transferred to the earnings-related pension scheme from unemployment insurance contributions.
Additional pension security that supplements the statutory system is primarily paid for by the employers. Employees may also acquire individual pension insurance and pension accounts for themselves. It is possible to complement the statutory pension by way of, for example, a long-term pension savings account, known as a PS account.
The level of statutory earnings-related contributions depends on the level of pension benefits, the currently valid funding and financing principles as well as investment profit from pension assets. Development of the national economy and the age structure of the population also affect the need for pension contributions.
In addition to earnings-related pension contributions, the payment of future pensions is secured through assets in pension funds that cannot be used for any other purpose than the payment of pensions. EU-level reviews show that Finland is well prepared for pension expenditures, and that pension financing is on solid ground.
Employers and employees finance the main part of the annual earnings-related pension expenditure. Those still working also pay the pensions of previous generations, but will in time receive a certain corresponding contribution to their own pensions, just like future generations. The financing principles of earnings-related pensions in the private sector have been explained in greater detail elsewhere.
The pensions of State employees are paid from allowances reserved in the State budget. Assets collected through pension contributions are annually transferred from the State Pension Fund to the budget (40 per cent of the costs caused by pensions). The remaining 60 per cent of pensions paid are financed directly from the budget for each year.
Within the local government pension scheme, the necessary amount of pension contributions are collected for pension expenditure, and the contributions are also funded as buffers for future pensions. Funding is used to control the rise of pension contributions during the retirement of the large age cohorts. At the same time, the aim is to forecast the structural changes in the municipal sectors by monitoring the functionality of the pension contribution structure.
Up to now, the collected earnings-related pension contributions have exceeded the annual pension expenditure in the local government pension scheme. However, the financing margin has now become negative, and in the future, the payment of pensions will exceed the contribution accrual.
The self-employed and farming entrepreneurs finance their pension security with pension insurance contributions, with support from the State. The State pays a share of the annual pension expenditure of the self-employed and farming entrepreneurs, a share that cannot be covered by insurance contributions of the pension acts in question. The State also participates in the financing of earnings-related pension according to the Seafarer’s Pension Act.
Statistical tables and figures