Pension Level and Affecting Factors
The overall pension provision consists of the earnings-related pension, the national pension and either individual supplementary pensions or occupational pensions paid for by the employer. Pensions are also paid based on statutory motor liability insurance and workers’ compensation insurance policies.
Earnings-related pension based on earnings
The purpose of the earnings-related pension provision is to ensure that the level of income enjoyed during working life remains reasonable at the time of and throughout retirement.
Since the pension reform in 2017, all employment insured under the earnings-related pension acts accrues pension after the age of 17 (after the pension reform in 2005, pension accrued as of age 18). As a result, the income during retirement of a person with an average working life consists mainly of earnings-related pension.
National pension supplements the pension provision of low-income pensioners
If the earnings-related pension is low due to a brief or split working life, the national pension complements the income of the pensioner. Under certain conditions, all persons living in Finland are entitled to a national pension.
The income of low-income pensioners is further improved by other benefits paid by the Social Insurance Institution of Finland (Kela). The benefits include, among others, the housing allowance and care allowance for pensioners. The guarantee pension that came into force in 2011 provides a minimum income for pensioners with a low income.
Voluntary complementary pension provision through supplementary pensions
Occupational pensions paid for by employers or privately funded supplementary pensions supplement income during retirement. So far, the significance of supplementary pension provision in relation to the overall pension provision has been minor in Finland. Statutory pension provision covers 94 per cent of the total pension provision.
Taxation determines the final level
The final pension level consists of the pension in hand after taxation and social security contributions. The taxation of statutory pensions is determined basically in the same way as the taxation of other earnings from work. However, the tax and contribution burden of pension income and earnings from work differ due to various tax deductions and social insurance contributions.
Different ways of measuring a pensioner’s income level
The pension provision level can be measured by, for example, reviewing average pensions. The level of average pensions has increased due to the implementation of the earnings-related pension system, an increase in wages and extended working lives.
The level of the pension provision can also be reviewed by relating the pension to the earned income before retirement. This is known as the replacement ratio.
When the perspective is extended from the pension level to the pensioner’s income level, the size and structure of the household and the form of living make a difference. A household of two pensioners get along with less money than do two pensioners living alone. It is also less expensive to live in an occupier-owned home than in a comparable rented home.