In Finland, pension system savings are counted as public sector assets, even though pension assets cannot actually be used for government spending. Pension savings are still important for the sustainability of public finances, experts say.
Vale, mother lie, statistic. That statement comes to mind now.
Congressman Kimmo Kiljunen (sd) brought up pension increases last week in the article about according to the economic organization OECD’s statistics, Finland is the western world’s net debt-free country, right after Norway.
The statistic tells what the ratio of public sector assets and liabilities is. According to it, the Finnish public sector would have significantly more assets than liabilities.
OECD statistics are generally known for their reliability, but not everything is quite right in this statistic. The background of Finland’s net worth is obviously pension assets, which of course have more in Finland’s pension funds than the state’s debt.
However, that does not explain why Finland looks much wealthier in this statistic than, for example, Sweden and the Netherlands, which have considerably less debt than Finland.
Municipalities CEO of Keva, which manages pension funds Jaakko Kiander is an experienced expert in pension matters and economics. So let’s ask him if there is any truth in this statistic.
“It doesn’t give a very accurate picture. The result is due to the fact that the pension system in Finland is fully regulated by law. That’s why pension funds have been included in public funds since the 1980s,” says Kiander.
In many other countries, pension savings, if any, are based on private pension insurance or, for example, a system agreed in collective agreements. They do not appear in the OECD public finance statistics.
In others In the Nordic countries, the pension system is a combination of public and labor market systems. That is why part of Sweden’s and Denmark’s pension savings appear in OECD statistics as public sector wealth, a large part does not.
In the Netherlands, pensions are also agreed upon in the labor market system.
Norwegian the top spot is explained by the Norwegian state oil fund. It is truly government-owned surplus money, which is intended to buffer the economy when necessary. For other countries, the statistics do not necessarily tell anything about the real sustainability of the public sector.
Statistics also cannot justify the fact that Finland can afford to liquidate pension funds, as Kiljunen claims.
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The debt is now almost 40 percent more than just four years ago.
In pension funds even in Finland, existing pension funds are not really public assets that could be used to offset government debts or that could be used to cover government expenditures. The approximately 243 billion euros of the occupational pension system’s funds are reserved for the payment of statutory and constitutionally protected occupational pensions.
The private sector’s pension assets of around 150 billion euros are in private occupational pension companies, which are owned by their customers, i.e. companies and their employees.
“Sometimes ideas are presented that the government’s indebtedness would not matter so much because we have these pension funds. But it involves the idea that pension funds could somehow be confiscated, i.e. confiscated to the state. Then you should at least honestly admit that it would mean cutting pensions linked to the level of earnings”, economics professor Niku Määttänen from the University of Helsinki says.
The OECD statistics still look comforting – especially when you know that government debt has grown very quickly in recent years. The debt is now almost 40 percent more than just four years ago. The assets of the pension funds have grown by about 20 percent in the same time.
Others however, the countries’ pension funds do not appear in the statistics. How would Finland rank if other people’s pension assets are also included?
Valued the international consulting company Mercer makes an annual comparison of pension systems. There you can find fairly comprehensive information on, among other things, the financial sustainability of pension systems in different countries and the size of pension savings.
When all savings set aside for future pensions, funded in some way, are included in the comparison, Finland ranks well in international comparisons. In Europe, Finland is at the top with the Netherlands and other Nordic countries, but not quite at the top.
Pension systems there are two types. European countries usually have a so-called defined benefit pension system, where the level of the pension in relation to the earnings of the working career is determined in advance.
In many European countries, there is practically no saving for future pensions in advance, but pensions are paid in due course with mandatory contributions from employees and companies and directly from the state budget. The funding rate is very low.
Instead, for example, the United States has a partly benefit-based and partly a so-called fee-based system. In addition to mandatory payments, occupational pensions are partly based on advance savings and voluntary funding. In addition to the low occupational pension, the amount of pension that each employee has accumulated in the funds is promised.
in Nordic countries a large part of future pensions is funded in practically mandatory systems. Part of the occupational pensions are paid for by the pension contributions of the employees at any given time.
In almost all developed countries, the state still guarantees some kind of minimum pension to all residents, which is paid for by compulsory payments collected from wages or from the state budget.
Mercer has related the amount of public and private pension savings to the gross national product and based on that gave countries a rating on a scale from zero to ten.
Denmark, Iceland and the Netherlands get the top ten in the level of funds. Sweden is very close to ten. Finland’s rating is 7.6, which is a very good number in international and European comparisons.
Proportioning the funds to the gross national product is, of course, a special choice in itself. It would be more important to compare the size of the funds with the future pension liability, i.e. with the pensions that will be paid.
The best situation in that regard is in the Netherlands. The level of pensions there is high, but they are still largely funded in advance. In Finland, the calculated future pension liability is around 700–800 billion euros, of which the funds cover about a third.
In Mercer’s comparison, the size of the funds in relation to GDP is only one component in the comparison of the financial sustainability of pension systems. The assessment also takes into account, for example, the duration of working careers and the indebtedness of the public finances.
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Pension savings will ease the pressure on the public finances in the coming years.
What So in the end, should we think about OECD statistics and pension funds? If the funds of other countries were taken into account in the comparison of net indebtedness, Finland would clearly lag at least behind Sweden, Denmark and the Netherlands. They all have less debt than Finland and also have larger pension funds.
Even in Finland, however, pension funds improve the sustainability of public finances.
Although pension funds cannot directly cover the government’s debt or expenses, pension savings will ease the pressure on the public finances in the coming years. They are also included when the future sustainability of the economy is assessed.
In Kiander’s opinion, it is clear that the funds financed especially for public sector pensions reduce the spending pressure of the public sector in a concrete way. The municipal government’s Keva and the state pension fund have a total of about 90 billion euros funded for future pensions.
But private sector pension funding also improves the sustainability of public finances.
The more that has been saved for pensions in advance, the more the national economy can afford to use, for example, to produce nursing or healthcare services in the future.
If the pensions were not funded at all, they should be covered directly by the current pension payments. They are compulsory payments of a tax nature, which are calculated in the tax burden. If the pension contributions are large, other taxes can practically be collected less.
“If pensions were not funded at all, I would be more concerned about how old age care is financed. Of course, the situation would be even better if there were funds for care too,” says Niku Määttänen.
Correction: 25.10. 1:30 p.m.: Contrary to the article, the pension systems of all Nordic countries are not defined benefit. In the United States, in addition to the contribution-based pension, there is a benefit-based occupational pension. Even in all developed countries, there is no actual national pension system.