Availability and Use of the Exit Channels

There are at least eight different retirement schemes in the Finnish public pen-sion system. These schemes mainly differ according to the reason for retirement.

The schemes with their date of introduction and the target group are listed in Table 5.

Retirement Scheme Date of Introduction Target Group

Old-Age Pension July 1962 Aged

Disability Pension July 1962 Disabled

Unemployment Pension July 1971 Long-term unemployed

Farmer’s Pension January 1974 Farmers

War Veterans’ Pension 1982 (male) Veterans of the war 1983(female)

Individual Early Retirement January 1986 Reduced work ability and/or long work history Early Old-Age Pension January 1986

Part-Time Pension January 1987

Table 5: Employment Pension Schemes

The most common retirement routes are the old-age pension, the disability pension, the unemployment pension and individual early retirement. Sometimes both the disability pension and individual early retirement are categorised as disability pensions. Flexible early retirement schemes (individual early retire-ment, early old-age pension and part-time pension) were introduced in the late 1980s.

All retirement schemes have specific eligibility criteria, as the intention is to restrict the access of a specific retirement channel only to the target group.

For the disability pensions, the main criterion is illness or reduced work ability.

For the unemployment pension, the criterion is long-term unemployment. In addition to these main criteria, all retirement schemes have age restrictions.

These age restrictions and their changes in recent years are listed in Table 6.

The old-age pension constitutes official retirement at the age of sixty-five.

Benefits can be drawn earlier with the early old-age pension. Early old-age

Pension Scheme Eligibility Age Previous Eligibility Ages (Years when in effect)

Old-Age Pension 65 public sector gradually from

63 to 65 in 1989-1999 Disability Pension 16-64

Unemployment Pension 60-64 55-64 (1980-1986), 58-64 (1978-1979), 60-64 (1971-1977) Individual Early Retirement 60-64 58-64 (1995-1999) 55-64 (1987-1994) Early Old-Age Pension 60-64

Part-Time Pension 58-64 56-64 (2000-2002) 58-64 (1995-1999) 60-64 (1987-1994) Farmer’s Pension 55-64

Table 6: Eligibility Ages for the Employment Pensions

pension, however, reduces pension benefits permanently. As it is the only pen-sion scheme with this feature, it is less popular than the other early retirement schemes.

The disability pension is the only pension scheme that is available in prac-tically all age groups. Individual early retirement is also a disability pension, but it has a minimum age restriction. Medical conditions for individual early retirement are less stringent than the medical conditions for the normal disabil-ity pension. According to the law, reduced working capacdisabil-ity and a long career are pre-conditions for individual early retirement.

Figures 3 and 4 show shares of some age cohorts in different labour market states in 1990 and 1996 respectively. As both graphs demonstrate, the bulk of the early retirees⁴⁴ receive a disability pension. Because individual early retirement is available only in the older age categories, shares of the disabled pensioners are considerably higher in the older age categories. Unemployment pensioners generally make up about a fifth of the relevant age group (even a fourth of the 62-year-olds in 1996).

All of the early retirement pension benefits are converted to the old age pension at the age of sixty-five. This explains the huge jump in the old-age retirees at this age.

Transition paths to the unemployment pension change between the two

fig-4 fig-4Early retirees are those who retire before the official retirement age for the old-age pension, age 65.

0 % 20 % 40 % 60 % 80 % 100 %

50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 age

per cent

employment active labour market programmes unemployment unemployment pension disability pension old-age pension

Figure 3: Labour Market Shares in 1990

0 % 20 % 40 % 60 % 80 % 100 %

50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 age

per cent

employment active labour market programmes

unemployment unemployment pension

disability pension old-age pension other pensions

Figure 4: Labour Market Shares in 1996

ures. The stream from unemployment to the unemployment pension (and from the active labour market programmes to unemployment) was continuous in 1996.⁴⁵ This was not so for 1990. The share of the unemployed is considerably smaller than the share of the unemployment pensioners after the eligibility age for the pension is reached. Therefore it looks as if the unemployment pensioners in 1990 do not come as directly from unemployment as they do in 1996. This is partly explained by a regulation change in 1994. Since 1994 the unemployment condition to obtain the unemployment pension has been 500 consequent days of unemployment benefit. Prior to 1994, this condition was 200 days in the previous sixty weeks. Therefore, prior to 1994, other labour market states in addition to unemployment could precede the unemployment pension.

The unemployment and the disability pensions entail a grace period prior to eligibility for the actual pension scheme. For the disability pension, the grace period is 300 days of sickness allowance.⁴⁶ This corresponds to one calendar year, as the sickness allowance is received on six days a week.⁴⁷ As explained, the grace period for the unemployment pension changed in 1994. Currently it stands at 500 days of unemployment assistance or unemployment insurance, with the possibility of extension for older workers.

Grace periods can also be viewed as extensions of the early retirement win-dow. Accordingly, in Finland it became customary to talk of the ”unemployment tunnel”. The tunnel consists of the earnings-related unemployment benefit (un-employment insurance (UI) or un(un-employment assistance (UA)), an extended unemployment benefit, and an unemployment pension that is received until the old age pension.⁴⁸ The tunnel currently starts at the age offifty-five years and one month. Hence, it is possible to stop work at this age and live on social security until old-age retirement without a huge drop in the income level.

Changes in the age criteria governing the access to the disability and ployment pensions are reflected in the time series of unemployed versus unem-ployed pensioners, and those on sickness allowance versus disability pensioners.

4 5The ”belt” of unemployment related labour market states is as thick when the unemploy-ment pension is not available as when it is available.

4 6This grace period is not required for individual early retirement

4 7This assumes that sickness allowance is received in consequent days. This is not required.

4 8Earnings-related unemployment benefit is paid for a maximum of 500 days. If the 500 day limit does not run out before the age of 57 (55 before 1997), the individual gets a right to the extended benefits until the age of sixty. At the age of sixty, the individual receives the unemployment pension.

The old-age pension also accrues while receiving unemployment benefits (työttömyyslisä,

Figure 5 plots the unemployment pensioner and the unemployment rate of the

0 5 10 15 20 25

1980 1982 1984 198

6

1988 1990 1992 1994 1996

ye a r

per cent

unem ploy m ent pens ion unem ploy ed age 60-64 unem ploy ed age 55-59

Figure 5: Share of the Unemployed and Unemployment Pensioniers of the Rel-evant Age Groups

aged. A change in the age limit for the unemployment pension changes the composition of the labour market withdrawal path for the unemployed. Accord-ingly, the number of years of unemployment before the unemployment pension is a function of the institutional features. Thefigure also shows how Finland was hit by a big recession in the early 1990s. This sent unemployment rates soaring for virtually all age groups - except for the oldest, who could obtain the unemployment pension.⁴⁹

Use of the disability route (shown in Figure 6) presents a pattern that is almost a mirror-image of the unemployment picture. In 1982, the disability pension was subjected to the maximum number of days of sickness allowance (300). Hence, the number of those receiving sickness allowance was high, in contrast to the low amount of the disability pension recipients. In 1986⁵⁰, the second disability pension, individual early retirement, was introduced. As mentioned before, this scheme did not require a preceding period of sickness

4 9The unemployment pension could be received by those who were at least sixty years of age and had received a specified number of days of unemployment benefit.

5 01986 in the private sector, 1989 in the public sector

0

Figure 6: Share of the Disability Retirees(right-hand scale)and Those Who Re-ceived Sickness Allowance(left-hand scale)- whole population

allowance. Consequently, the number of those receiving the disability pension grew, and the number of those receiving the sickness allowance fell. Individual early retirement eligibility age was raised from fifty-five to fifty-eight years in 1994. Therefore, there was a fall in the number of disability retirees.