FINLAND - Research published by the OECD suggests proposals to increase the lower boundary of the Finnish earnings-related pension age range from 63 to 65 years of age would increase pension wealth for low to average earners until the age of 66.

The organisation stated the proposals are "very promising", and follow a request by Matti Vanhanen, prime minister of Finland, asking the OECD to assess the proposals put forward by the Ahtela working group on working life, to reform the country's old age and disability pension schemes. (See earlier IPE article: Finland mulls reforms)

The assessment covered proposed measures to increase working life through strengthened work capacity and wellness at work, alongside the existing retirement incentives embedded in the pension system and the impact of proposed changes. These include abolishing early retirement at age 62 and increasing the lower pension age to 65. Finns can currently retire between the ages of 63 and 65 without any reduction to their pension.

In a letter accompanying the assessment, Angel Gurría, secretary general of the OECD, stated while the proposals were "very promising", experience in other OECD countries had shown that reducing the number of workers retiring on disability pensions required restricted access to entitlements as well as improving working conditions.

That said, Gurría added the OECD had calculated the proposed changes to the old age pension "would greatly improve the incentives to work longer".

In particular, the report showed employees currently have a strong incentive to stay in work until age 63, although after this point workers face a "high implicit tax on staying in the workforce longer". This is because the increase in pension accrual from 1.9% of earnings for each contribution year between the ages of 53 and 62 to 4.5% from age 63 is "not high enough to compensate for the discounting of future benefits and an increasing death risk at higher ages".

The OECD said its modelling had suggested that by raising the minimum retirement age to 65 and abolishing early retirement at the same time, "the effect would be an increase in pension wealth for both average and low earners until around age 66". Although it would decline steeply after this point, the OECD argued workers would face a strong incentive to stay in the market until the normal pension age.

The report admitted this is not surprising as there would be no possibility of accessing a pension before the age of 65, because even if employees retire early they would have to wait to draw a pension which would be reduced because of missing contribution years.

The OECD therefore argued that the impact of the changes on the effective retirement age of Finns, which was 59.8 years in 2009, would be "large", although it warned this would be limited if other routes out of the labour market such as disability or unemployment pensions "were still left open".

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