Preparing for an ageing society: the case of Finland

1
Preparing for an ageing society the case of
Finland

• Vesa Vihriälä
• Estonian State Secretaries, 9 February 2006

2
An unprecedented change in sight population of
Finland in 1749 - 2040
) 5 445 554 (eniten asukkaita Suomessa)
Lähde Tilastokeskus
3
Dependency ratio 1950-2040 (people 0 to 14 years
of age and older than 65 in relation to
population 15 to 64 years of age)
4
Finland is one of the fastest ageing societies in
EU the old-age dependency ratio
Source European Economy 2005, Special Report
4/2005
5
Large differences in population growth between
different types of regions (change of population
in percent, 2003 to 2030)
Perusskenaario nykyinen syntyvyys (1,7) ja
nettosiirtolaisuus (5 000), tasaantunut
muuttoliike (2002-2003) Vaihtoehto 1 nykyinen
syntyvyys (1,7) ja nettosiirtolaisuus (5 000),
voimakkaasti keskittävä muuttoliike
(1998-2000) Vaihtoehto 2 korkeampi syntyvyys
(1,9) ja nettosiirtolaisuus (15 000), tasaantunut
muuttoliike Vaihtoehto 3 korkeampi syntyvyys
(1,9) ja nettosiirtolaisuus (15 000),
voimakkaasti keskittävä muuttoliike
6
Nevertheless, all types of regions retain
population to be cared of
Perusskenaario nykyinen syntyvyys (1,7) ja
nettosiirtolaisuus (5 000), tasaantunut
muuttoliike (2002-2003) Vaihtoehto 1 nykyinen
syntyvyys (1,7) ja nettosiirtolaisuus (5 000),
voimakkaasti keskittävä muuttoliike
(1998-2000) Vaihtoehto 2 korkeampi syntyvyys
(1,9) ja nettosiirtolaisuus (15 000), tasaantunut
muuttoliike Vaihtoehto 3 korkeampi syntyvyys
(1,9) ja nettosiirtolaisuus (15 000),
voimakkaasti keskittävä muuttoliike
7
Regional differences in dependency ratios
increase substantially between 2003 and 2030
8
The economic consequences of ageing pervasive

• Decline of labour supply
• Negative effect on labour productivity
• gt GDP growth (even per capita) will decline
• Pension expenditure up
• Health and care expenditure up
• As a consequence, a strong pressure on the
  sustainability of public finances
• A special problem in the provision and financing
  of public services in the regions with the
  weakest age structures

9
Proactive policies to tackle the problems

• A major pension reform as of 2005
• A series of measures to increase labour market
  participation of the aged in other ways
• General measures to increase employment and
  productivity growth
• Measures to increase the efficiency of the
  provision of public services

10
The pension reform

• The basic objectives
• Make the system more sustainable
• Increase labour market participation
• Make the system more equitable
• The main elements of the reform
• Linking benefits to life-expectancy
• Increase of pre-funding
• Introduction of a flexible retirement age (63-68)
• A sharply increasing accrual rate after 63 years
  of age
• Restriction of access to early retirement schemes
• Basing of the benefits on all life-time earnings
• Change of indexation rules
• Redefinition of accrual for certain non-working
  periods
• Transition rules gt a new entrants reform

11
Factors facilitating the reform

• The relevant interest groups involved
• Unions and employer organisations play a crucial
  role in the administration of the occupational
  pension system
• Tripartite preparation of the reform
• Sticks softened with carrots
• Introduction of a flexible retirement age (63-68)
• A sharply increasing accrual rate after 63 years
  of age
• Redefinition of accrual for certain non-working
  periods
• Long transition periods some cohorts avoid
  sticks
• Link to life expectancy only after 2009
• Choice between the new and the old system for
  those retiring before 2012
• Restrictions to some early retirement schemes do
  not apply to cohorts born before 1944 / 1947

12
Other reforms to lengthen working file and to
increase employment

• Several smaller reforms in the unemployment
  benefit system in the recent years
• Activation of labour market policies 2006-gt
• Associated measures to help people remain fit and
  competent for staying in the labour market
• National programme for ageing workers 1998-2002
• Veto continues the above programme health, work
  safety
• Tykes development of working communities
• Noste re-education of the least educated (over
  30 years of age)
• Reduction of employer contributions for low wage
  jobs 2006-gt
• Reforms in the secondary and tertiary education
  to make it more efficient and to lower the age of
  leaving the educational system

13
Measures to increase employment and productivity
in general

• In the midst and immediate aftermath of the
  economic crisis of the early 1990s
• Restoration of price competitiveness
  depreciation, wage moderation
• Restructuring of the banking sector with heavy
  costs to the tax payers
• Cuts in overall public expenditure, tax
  increases, reform of corporate and capital
  taxation
• Reductions ion social benefits, welfare services,
  subsidies other than RD
• Substantial and sustained increase in public
  spending on RD particularly ICT
• EU and EMU membership
• Later on
• Reduction of labour taxation
• Primarily taxes on earned income
• Somewhat also employer contributions
• Continued emphasis of
• RD expenditure and
• Educational standards

14
Measures to increase public sector efficiency

• Central government spending limits for the whole
  Government period
• Already 1999-2003
• More rigorous 2003-2007
• Central government productivity action programme
• Municipal and service structure reform
• Under preparation currently
• The main lines of the reform to be decided by the
  summer 2006

15
Many achievements,

• GDP 30 percent higher in 2004 than before the
  crisis, led by booming exports
• A major structural transformation of the economy
  ICT emerging as the leading sector of the economy
• Finland at or very close to the top in many
  competitiveness comparisons
• WEF, IMD, PISA,
• Labour market situation much improved
• ER 60 -gt 68 , UNR 17 gt 8,5
• New jobs disproportionately skilled ones
• Recently especially employment of elderly workers
  up

16
GDP/capita in Finland and OECD Europe(at 2002
prices PPP)
Sources OECD, Penn World Tables.
17
Nevertheless some serious questions remain

• Finland is not attracting very much investments
• Structural unemployment is declining only very
  slowly
• People are not entering the labour market earlier
• Productivity growth not as good as it should,
  particularly as the prices of many important
  export goods decline (and fast)
• The pressure on public finances not sufficiently
  reduced by the reforms implemented so far

18
Employment in the provision of basic welfare
services in municipalities in the absence of
productivity growth (1 000)
1) Väestörakenteen muutoksen vaikutus kuntien
peruspalvelujen henkilöstötarpeeseen, kun
tuottavuuden kasvun oletetaan olevan nolla
vuodesta 2005 lähtien. Lisäksi oletetaan, että
eri ikäiset käyttävät peruspalveluja samalla
tavalla kuin vuonna 2005.
19
General government expenditure and net lending,
percent of GDP

2010
2020
2005
2030
2050
Lähde Valtiovarainministeriö, Suomen
vakausohjelman tarkistus 2005
20
The increase in age-dependent expenditure,
percent of GDP
Lähde Valtiovarainministeriö, Suomen
vakausohjelman tarkistus 2005
21
Means of increasing understanding for reforms

• Ad hoc expert reports
• The report of the Finland in the global economy
  project, 2004
• Taxation in an international framework, 2003
• Employment working group, 2003
• Government reports on the future to the
  parliament
• Once each electoral term
• 2004 Finland for people of all ages
  demographic trends, population policy, and
  preparation for changes in the age structure
• Parliamentary committee for the future
• futures policy dialogue with the Government and
  with society at large
• following up the results of research in the field
  of future studies
• Regional future forums
• Dialogue with regional policy makers and the
  civic society
• 2005 based on the 2004 report on the future

22
The contents of the 2004 report on the future

• The main demographic trends
• Consequences of the demographic trends
• Current policies and their adequacy
• A call for population policy
• Promoting health and functional ability
• Taking care of children and the young
• Strengthening the potential for economic growth
• Reform of benefit schemes
• Safeguarding regional development and welfare
  services
• Supporting and utilising the resources of the
  older people