09 June 2008

Finland must adjust pension system - OECD

The OECD has warned Finland to address further pension reforms in the short-term, IPE reports. There will be serious difficulties ahead if the country’s government does not enact quick reforms.

The OECD has warned Finland its medium-term fiscal policy challenges need to be addressed with further pension reform and tighter fiscal policy in the short-term.

In its 2008 economic survey of Finland, the organisation says there will be serious difficulties ahead if the country’s government does not enact quick reforms.

Despite hailing the 2005 pension reform in Finland as “an important first step” towards addressing concerns about an ageing population and its implications for medium- and long-term fiscal sustainability, the report states without further pension reform, social security contribution rates will have to rise in the future.

Since higher contribution rates would push up the labour tax wedge and worsen employment-creation conditions, the report argues additional measures should be taken to avoid such an outcome.

“In the short term, the government should take steps to ensure that the fiscal target set out in the government programme – a target of 3.5% of GDP for the general government surplus – is met,” said the report, while arguing additional steps are needed to improve the long-term sustainability of the fiscal accounts.

One of the measures the OECD proposes is returning unemployment- and disability-related benefits to the purpose they were originally designed for, rather than allowing them to be used as alternative pathways for early retirement.

Other changes should entail eliminating the higher pension accrual rate at age 53, and phasing out the unemployment pension more quickly rather than waiting until 2009.

Finland should also abolish the compensation for reduced earnings available under the part-time pension, according to the OECD, and instead consider greater flexibility to combine a part-time pension with work.

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