Finland’s employment pension system explained

In Finland, one’s pension includes an earnings-related pension from gainful employment and self-employment and the national and guarantee pensions (minimum security). The national pension and guarantee pension are intended for elderly people living in Finland without an earnings-related pension due to a short occupational history. 

How is earnings-related pension calculated? 

The following accrue earnings-related pension:  

• employment and self-employment (entrepreneurship) 
• education, training, and studies for a degree or qualification 
• certain social benefits and childcare leave. 

All pay contributes to your earnings-related pension. The amount of earnings-related pension is determined individually according to occupational income. The longer you have been fully employed and the higher your pay, the better your earnings-related pension.  

Brief interruptions in working will not completely stop you from accruing your earnings-related pension: social benefits such as pregnancy allowance, parental allowance, earnings-related daily allowance, rehabilitation allowance, sickness allowance, and loss of income compensation (Workers’ Compensation Act, Motor Liability Insurance Act) also contribute to your pension. Education for a degree or qualification also counts towards earnings-related pension. How much a social benefit contributes towards your earnings-related pension varies – some contribute more, some less. 

If your earnings-related pension is too small, Kela will supplement it with the national pension or guarantee pension. 

What is the source of our pension funds? 

Finnish earnings-related pensions are funded by the insurance contributions of employers, employees, and the self-employed, as well as investments. The national pension and guarantee pension paid by Kela are funded by taxes only. 

There are many options for funding pensions and determining pension benefits. In Finland, our pensions are funded by a partial funding system and the pension benefits are defined. 

What is a partial funding system? 

In a partial funding system, some of the pension insurance contributions paid by employers and employees are placed in reserve (a fund) for investment. The invested funds are used to prepare for future pensions. The remaining contributions are used to pay the current pensions. 

What is a defined benefit? 

A defined benefit means that the benefit, in this case a pension, is paid as promised until death. The amount is predetermined. Sufficient funding is particularly important in this regard, and the pension insurance contributions will be raised, if necessary, to account for changes. 

How will Finland’s demographics and their development affect the funding of the pension system? 

The benefits of pensioners are primarily paid by the pension insurance contributions of those who are currently employed. This means that the younger generations pay for the pensions of the older generations. It is therefore necessary to have a sufficient number of employed people to cover the cost of pensions. The population’s development and age distribution are therefore critical for the functioning of the pension system. 

Finland’s current age structure suggests that the number of children and working-aged people will shrink while the number of retirees will grow as life expectancy increases. This means that retirees will receive old-age pension for longer because people will live longer in general.  

The population’s life expectancy has been accounted for in the latest pension reform that tied the retirement ages of younger generations to changes in life expectancy. As life expectancy increases, the life expectancy coefficient reduces the amount of monthly pension payments. The coefficient is used to motivate people to keep working for longer than they do now. 

The partial funding system’s role will be significant in providing the promised pensions in the long term. The funds in reserve and their return on investment will secure future pensions and the maintenance of the entire system. 

See also  

• Pensions secure the income of retirees 
• Pension system description (Finnish Centre for Pensions)