^aETLA, Lönnrotinkatu 4 B, Helsinki, FI-00120, Finland. E-mails: jla@etla.fi, tv@etla.fi

^*The paper is part of the European Commission's research project "Demographic uncertainty and the sustainability of social welfare systems" (QLK6-CT-2002-02500). We also acknowledge the financial support from the Ministry of Social Affairs and Health and the Finnish Centre for Pensions. We are grateful to Heikki Palm for the advice and support. We also thank Peter Biström, Anthony de Carvalho, Seija Ilmakunnas, Niku Määttänen, Juha Rantala, Ismo Risku, Eila Tuominen, Reijo Vanne and an anonymous referee for comments and Eija Kauppi for the model programming.

Abstract

A major reform in the Finnish private-sector earnings-related pension system came into effect on 1st January, 2005. It was negotiated in 2001–2002 between the central organisations of employers and trade unions and representatives of the central government. This paper describes the reform and analyses its effects on selected macroeconomic variables, on the pension system and on the position of different birth cohorts and different educational groups. The reform appears to be successful in many respects. It simplifies the private-sector pension system and makes it a model that other pension systems in Finland will converge to. The reform rewards postponing retirement. It curbs the increase in contribution rate without endangering the adequacy of replacement rates. The increase in labour supply will have beneficial welfare effects. The new system also responds rather well to uncertain future demographics. Despite this apparent success of the reform there remains a serious doubt of its adequacy, as contribution rates are still expected to rise by several percentage points.