Public finance sustainability gap and raising the retirement age, abstract and full summary

The purpose of this study is to investigate a pension reform in which the old-age pension entry age will be increased significantly: first by five years over the next ten years, and will then be linked to the projected increase in life expectancy. This needs to be examined in order to obtain a more comprehensive view of available policy options. By increasing the retirement age, pension contributions can be reduced while still providing adequate pensions.<br><br> The agreement signed by the central labour market organisations on 26 September 2014 will only lead to a moderate increase in the retirement age. The ratio between the number of years spent in retirement and years at work will not decrease but rather still increase a little. Approximately the current level of pension contributions would be required to finance pensions. There are grounds for raising the retirement age more than targeted by the said agreement because the current level is relatively low. This constrains potential production and therefore the tax base. The tax base needs to be expanded, in order for example to meet the expenditure pressures of other publicly financed age-related items.<br><br> The public finance sustainability gap has been much discussed recently, but its actual meaning has remained vague and the gravity of public finance problems has generally not been fully understood. Over the ten years 1999?2008, Finland?s general government budget was in surplus and there was no sustainability gap. After 2008 the international financial and economic crisis hit Finland hard. Production per capita is now at the 2005 level, the gross tax rate has increased, and due to the country?s high production costs overall economic projections are gloomy. Financing expanding age-related expenditure by increasing taxation may prove to be difficult in practice. Increasing taxes would in any event have significant negative impacts. <br><br> The required entry age for old-age pensions can be expected to guide on-the-job training and recruitment already well before the expected retirement age. The signal indicating that the pension age will increase should be strong enough for there to be a clear change in the personnel policies of employers and in the plans of employees in their 50s and 60s, so that people would stay longer in productive work. <br><br> The government has set a target of removing the sustainability gap, which was estimated at 4% of GDP in August 2014. The contribution of the pension agreement between the labour market parties was set at one percentage point, and the outcome of the negotiations met this target. In addition, the government aims at removing the rest of the gap by increasing the participation rates in other age groups and improving the efficiency of public administration and services. For the most part, these measures are yet open. <br><br> Regarding the pension reform being prepared, there will be regular evaluations from 2019 onwards. These evaluations will benefit from studies analysing a wide range of available policy options.<br><br> Key words: pensions, retirement age, sustainability gap, public finance.<br><br> <a href="http://www.vatt.fi/file/julkaisut/t177_summary.pdf">Read the full summary (PDF)</a><br><br> <a href="http://www.vatt.fi/file/vatt_publication_pdf/t177.pdf">Publication (PDF, in Finnish)</a><br><br>