Distributional Effects of the Forthcoming Finnish Pension Reform : a Dynamic Microsimulation Approach

Abstract

The Finnish pension system consists of earnings-related pensions (almost 90% of the total pension expenditure) and the national pension. The earnings-related pension system will undergo a major reform in 2017. The main objective of the reform is to ease the burden on public finances by extending working lives.

The earliest eligibility age for old-age pension will gradually rise from the current 63 years to 65 years by the 1962 birth cohort. After that, the earliest eligibility age will be linked to the growth in life expectancy. The age-specific accrual rates will be unified after a transition period. The early retirement schemes will also be reformed. The level of the disability benefits will improve.

The forthcoming reform has been analysed using the ELSI microsimulation model of the Finnish Centre for Pensions. The model is based on administrative register data and it covers both the earnings-related and the national pension system of Finland. ELSI is a model with dynamic ageing without behavioural adjustments. The behavioural changes resulting from the reform have been taken into account explicitly: the age-gender-specific behaviour is obtained from our macro model using a micro-macro link. The differences in transition probabilities between educational groups are extrapolated from the register data.

The reform indicates changes in income distribution. We analyse the impacts of the reform on working lives, the pension level as well as the pension distribution. The results are presented by gender and educational level.