You might ask why any young person would need to know much about pensions or to start worrying about their earnings-related pension. Although the pensionable age seems very distant for both the student and the young person in paid employment, we are all participants in the generation agreement which forms the background for the statutory earnings-related pension scheme.
It will always be in the young person’s interest to know the principles of the current earnings-related pension scheme and how it will work in the future. It is useful to know how the scheme is funded: a distribution system is mainly applied in Finland. In practice, this means that those who are working pay for the pensions which the pensioners receive. However, approximately a quarter of the money which is annually collected for pensions, is deposited in various institutions for future use, because of the ageing of the population.
The earnings-related pension and different situations in life
The earnings-related pension credits start currently accruing from the age of 18 until 68 years of age. Since the year 2005 pension credits accrual has also been possible during unpaid periods, such as, periods of study, childcare, unemployment, job-sharing, or sickness. Studying or starting a family no longer reduces the level of the pension as much as it used to do.
The earnings-related pensions are funded by the earnings-related pension contributions which are deducted from the earned income. These contributions are paid both by the employer and the employee. In 2010 the pension contributions of those who were less than 53 years of age were 4.5 per cent of their earnings. Pension contributions amount to approximately 22 per cent of all wages and salaries, when the contribution paid by the employer is taken into account. It is pointless to be involved in moonlighting as that does not accrue any pension!
Pension contributions which are deducted from wages or salary constitute an insurance premium, not a tax. These contributions protect us in a variety of ways. Life does not always go according to plan. In addition to providing income when we are old, this system insures us for various social risks, for example, the inability to work. Many young people are forced to leave the world of work due to injury, or increasingly due to mental health problems, such as depression. Unfortunately, a young person may become familiar with a pension through this route.
Check your earnings-related pension credit statement – take care of your rights!
You can check the accrual of your pension credits from your earnings-related pension credit statement which will be annually posted to your home address. Public sector information (the municipalities and the state) are not currently shown in the statement. Remember to check that your employment information in your pension credit statement is correct, for example, regarding any summer jobs you may have held. In future both those in paid employment and the self-employed will be held increasingly responsible for keeping their employment records up to date and correct, rather than leaving this to the pension auhtorities. We will all be responsible for keeping our personal records correct and updated.
The life expectancy coefficient
The life expectancy coefficient has started to influence the monetary value of pensions from the year 2010. This will be calculated for each generation according to their life expectancy and the reason for this is the need to keep our pension costs affordable. If the life expectancy of a generation lengthens, pensions will be payable for a longer period, and this will mean that new pensions will be reduced to some extent. However, the effect of the life expectancy coefficient can be compensated by deferring retirement.
You will find further information on pensions on the following Internet sites:
Information on pensions is available on the joint earnings-related pension scheme service site Työeläke.fi . You can also check your earnings-related pension statement here by using your own on-line banking code.
You will find information on the development and realisation of earnings-related pensions and on pension research in the Finnish National Pensions Institute website:
www.elaketurvakeskus.fi
Text by the Finnish Pension Alliance TELA ,
www.tela.fi