Comments on ” The pension system in Finland: Adequacy, sustainability and system design ”

1. Comments on • ”The pension system in Finland: Adequacy, sustainability and system design” • by Professor Nicholas Barr: • Seija Ilmakunnas • Director, Labour Institute for Economic Research • 7 January 2013

2. The report is warmly welcome: • Analytical evaluations are most useful in the pension field • (to disentangle the big picture from numerous details, for instance) • The current discussion on the pension reform needs fresh insights from outside • The report underlines the primary objectives of the pension system (making people work harder is not one of them!) • Good ”news” also needed: the Finnish pension system is not in crisis and many (most) of its elements are worth preserving

3. The report and the Finnish pension policy (I) • The aim of the report is to give a bird’s eye view of the Finnish pension system and to highlight its pros and cons in a balanced way • Still, most of us read it in order to find out the clear recommendations for the pension reform • Some of its recommedations are indeed directly related to core issues in the hot pension reform debate • They are also the main focus of my comments

4. The report and the Finnish pension policy (II) • The importance of raising the effective retirement age is • shared by ”every sensible person” • But there are divergent views on e.g. • - the effects of 2005 Reform on retirement age • - effectiveness of some elements of 2005 Reform (e.g. life-expectancy coeff.) • - the right pace for the future increases in retirement age • Thus, different opinions are also based on genuinely divergent analytical considerations (i.e. not only political or tactical considerations) • Unfortunately the report does not evaluate the most topical pension policy target i.e. raising the expected effective retirement (EER) age to 62,4 years by the year 2025 (from 60,4 in 2010) • Here the relevant policy questions include: • (i) is EER the proper statistical tool to be used? • (ii) is the target increase in retirement age (about 2 years in fifteen years) well motivated?

5. Indexing the pension level or the eligibility age or both to life-expectancy • The report recommends both linkages: ”Instead of adjusting to rising life expectancy only by reducing pensions at the earliest eligibility age, there should also be gradual increase in the earliest eligibility age.” • This is motivated in the report with the reference to the spike in the number of people retiring currently at age 63. • The observation is valid, but is the treatment (i.e. restricting the choice) correct?

6. Reasons to be hesitant: • Flexible retirement is desirable for its own sake. • The lower age limit for old-age pension has already been raised by three years in • less than 10 years. Further restrictions should be avoided if other means are available. • Correcting the incentives might as well be the cure: • Labour supply: • There is no longer actuarial reduction if old-age pension is taken at age 63 i.e. higher pension compared to old system at 63. • It is also less rewarding to postpone the retirement from 63 to 64 or to 65 • Barr-report criticizes this with good reason. • Labour demand: • The experience rating model (MAKSULUOKKAMALLI) is likely to hamper re-entry possibilities of older unemployed workers. • (with only minor positive effect on the prevention of disability pension risk, Kyyrä et al. ETK-Reports 4/2012) • Critical evaluation of MAKSULUOKKAMALLI would be in line with the recommendation to check that there is no unintended disincentive against employing old workers.

7. Recent changes in the lower age limits for old-age pensions

8. Total pension income during retirement by retiement age in the old and new pension system Case: full working career, yearly income 25000 euros, she will die at age 82

9. Reasons to be hesitant (cont.): • The life-expectancy coefficient has not yet an effect on retirement age, since it will come into force only gradually. • However, according to the demographic projections it will cut the new pensions remarkably in coming decades. • There is an income effect: people try to compensate its effect (or part of it) by working longer. • The current pension projections seem to neglect this effect more or less. • Life expectancy seems to rise more slowly for people from poorer backgrounds. • Comparing the lowest and the highest income quintile in Finland from 1988 to 2007 : the gap among males in life expectancy increased from 7,4 years to 12,5 years, Tarkiainen et al. (2011). The life expectancy in the lowest income group did actually not increase at all. • Linking both the pension level and the retirement age to the average increase in life expectancy is very unfair policy due to these kinds of differences in life expectancy.

10. The effect of the life-expectancy coefficient on retirement age is tiny in the current long-term pension projections Source: Data from Lakisääteiset eläkkeet - pitkän aikavälin laskelmat 2011, ETK Reports 05/2011

11. Theme: individuals and families”A good case for an option to transfer pension rights between partners at divorce or retirement”? • I miss this point: • Gender gap in employment is small in Finland • No signs that families are returning to the house-wife and one-breadwinner model • There already is a modern way to compensate for child care responsibilities: crediting so-called unpaid periods (during child care leaves) • Caring responsibilites are the issue, not to be married or not!

12. Thank you!