Discussion on improvements to the financial sustainability of the Finnish earnings-related pension system

The aging demographic in developed economies makes the funding of pension systems a current topic, and the decrease of contribution incomes relative to the pension benefits to be paid an inevitability. The prevailing low-interest rate regime increases the present values of pension provisions and forces pension funds to undertake riskier and less liquid investments. The existing literature on the funding sustainability of the Finnish and other earnings-related pension systems makes several suggestions of more or less significant overhauls of the systems. However, fewer direct comparisons to practices in use in other pension systems are made, or suggestions of quick yet sustainable fixes. Significant overhauls to pension systems are slowed down by countries’ respective political systems and the passions arising from social partners. Smaller updates could be easier and faster to implement while possibly leading to real increases in the sustainability of pension systems.

This thesis compares the Danish, Dutch and Finnish occupational pension systems with the aim of making suggestions of updates to improve the long-term financial sustainability of the system in Finland. The pension systems in each country are described in detail, and the realized and forecast figures are then compared to infer best practices. The existing literature is comprehensively reviewed and, against the mainstream of the literature, a speculative calculation on the effects of increasing the contribution rate in Finland as a means to improve the long-term financial sustainability of the pension system is performed. Suggestions and calls for action are made regarding six areas: efforts to increase employment; efforts to increase total fertility; cases for either decreasing the level of funding of contributions or increasing the contribution rate; to compile pension agreements on the sectoral or industry levels; to update and limit the solvency capital requirements; and to implement a pension ceiling.