3.1 Pension system

Pension systems are undergoing reform all over Europe. This is a consequence of three major factors. People are now living longer, and by 2050 average life expectancy may be as much as five years more than at present. The baby boom generation is due to retire over the next 10 to 15 years. With a falling birth rate there will be fewer people to pay future pensions. It is estimated that pension costs in the EU Member States will rise from the present 10 per cent to 13.6 per cent of gross national product by the year 2040. Over the last few years pension systems have been reformed in all of the countries covered by this study.

The average retiring age in Finland is 59 years. The corresponding age is 64 in Sweden, 63 in Britain, 59 in France and 60 in Norway and Italy, even though pension system criteria refer to other ages. Thus one remedy is to encourage people to remain longer in working life.

Another way is to extend the period when the pension accrues and lower the rate of accrual. The winning philosophy seems to be continue working for as long as the individual chooses, and then to receive a pension that varies accordingly. The old 60 per cent or 66 per cent level has thus become an outmoded way of thinking. In practise this change has already taken place. The pensions enjoyed in Finland are a little over 50 per cent of previous earnings, which is a long way below the target level.

One new approach is to calculate pensions on the basis of whole working history. This is the method used in Sweden, Germany, Italy and the UK, i.e. in all of the reference countries except Norway and France.

Industry and enterprise-specific arrangements are on the rise. In the UK enterprise-specific pensions play a decisive role in supplementing the small State pension. In Germany last year's pension reform was followed by an industry-specific agreement in the chemical industry that compensated for the cuts by increasing contributions from the employer and employee.

Modern thinking is primarily moving towards three basic pillars. The statutory and mandatory systems of the first pillar are limited. The second pillar comprises the aforesaid supplementary industry and enterprise-specific elements. The third pillar then consists of private additional insurance. In the face of financial difficulties throughout Europe, governments  are especially encouraging the development of third pillar systems.

We may now briefly examine how pension provision has recently been reformed in the countries covered by this study. Our principal source is the book Sosiaaliturvajärjestelmät [Social security systems] by Matti Kari, Sini Laitinen-Kuikka and Jari Markwort, dating from 2002.

Finland

In September 2002 Finland's largest labour confederations SAK and STTK and the employer associations agreed on a reform of the private sector statutory occupational pension system as of 2005. The third main labour confederation, Akava, opposed the negotiated settlement. Finland's Parliament approved the amendments required for the reform in February 2003.

The main points of the reform were:

• Pensions earned before 2005 are to be reckoned according to the old rules.
• From 2005 pensions will be reckoned on the basis of the entire working career. Pensions for those retiring before 2012 may be counted according to the present rules if the employment began before 2005.
• Pensions accrue for all work done after the age of 18 years. Until the age of 52 years the accrual rate is 1.5 per cent of wages, rising to 1.9 per cent between the ages of 53 and 62 years, and 4.5 per cent thereafter.
• The pension contributions of persons over 53 years of age will increase by 27 per cent. This contribution will be deducted from pay, so that older wage and salary earners will partially finance their higher rate of pension accrual.
• If the average retiring age increases, then as of 2009 the employee, according to a certain calculation formula, will have to work longer in order to attain the same pension level.
• The weighting in the pension calculation of wages and salaries, earned by younger age groups will rise.
• Pension will begin to accrue from periods of study and care of the contributor's children aged under three years.
• Over the next ten years pension funds will be increased by more than planned, in order to prepare for the retirement of the baby boom generation.
• The changes will not affect present pensions, and the full impact will not be felt for decades.
• It was already previously agreed that most early retirement schemes will be terminated.
• The agreed changes apply directly to private sector pensions. Reforms in the public sector will be negotiated separately.

The principal purpose of the reform is to increase the average retiring age from the present 59 years to 62 years. This would not only help to tackle the impending labour shortage, but also to alleviate the pressure to raise pension contributions. The old 60 per cent target level and combination limit will be abandoned in favour of a flexible model. This also means that the pension level may even exceed the 60 per cent limit as the result of a long working career.

From 2005 retirement on an old-age pension will be a flexible matter occurring between the ages of 62 and 68 years. Retirement at age 63 will provide the full pension that has accrued until this time. Every shortfall month will reduce the person by 0.6 per cent. Thus retirement at the age of 62 years will reduce the pension by 7.2 per cent. Years of work after the age of 63, on the other hand, will result in an annual additional accrual of 4.5 per cent.

Sweden

A reformed old age pension system has been gradually introduced in Sweden since the beginning of 1999. People born in 1954 or later will be pensioned under the new system.

This new system comprises an earnings pension and an investment pension. While working, the insured may choose the pension fund in which they prefer the pension contribution to be invested. These investments will be managed by a special investment authority (PPM). Where no fund is chosen, pension contributions will be directed to the State investment fund.

The old-age pension is based on the whole life earnings of the pensioner. Contrary to the model in Finland, the Swedish system has a maximum income limit, which is currently EUR 32,000 per annum.

The retiring age is flexible, with no specific nominal age, nor any early retirement system. The pension may be taken in whole or in part from the age of 61 years, the steps being 25, 50, 75 and 100 per cent. There is no upper limit on the retiring age.

The national labour confederation LO and the employer confederation Svenskt Näringsliv (former SAF) agreed in 1996 on an extra pension payable in addition to the statutory pension. The extra pension averages 10 per cent of previous earnings. The reference unions were satisfied with the extra pension payable from the age of 65 years. In collective agreements the parties have stipulated that the cost impact of the progressive reduction in working hours may be assigned to the pension contribution.

Under the old system the target level was 60 per cent. The unions are hoping that the extra pension will bring this closer to a level of 70 per cent.

Furthermore, from the age of 65 years a guarantee pension (garantipension) is paid. This resembles the Finnish national old-age pension. The maximum guarantee pension of over EUR 8,000 per annum is reached after 40 years of residence in Sweden. Of the foregoing pensions, the statutory pension reduces the guarantee pension but the LO-SN extra pension does not.

The total pension contribution is 17.21 per cent, of which the employee pays 7 percentage points.

Norway

The general retiring age in Norway is 67 years. The full national old-age pension is EUR 6,000 per annum after 40 years of residence. The maximum additional pension is 42 per cent of incomes between the basic amount (EUR 6,000) and maximum income. This means that the maximum is just under EUR 22,000 per annum.

The labour market confederations LO and NHO agreed in 1988 on a significant system of additional pension called AFP (Avtalefestet pensjon). This scheme has a retiring age of 62 years. The size of the pension is calculated roughly according to the same rules as the national old-age pension. The additional pension is about EUR 1,500 per annum and it is tax-free.

In practise the average retiring age is 59 years, mainly for health reasons. With an impending labour shortage, there are campaigns to encourage people to continue working for a longer period.

The pension contribution, together with other social security contributions, amounts to between 7.8 and 21.9 per cent, of which the employee pays 7.8 percentage units. The contributions paid by the employer depend on geographical location.

Germany

The German pension system was reformed at the beginning of 2002. The aim was to ease cost pressures and to encourage the development of industry-specific and private additional pension insurance.

The level of full pension will fall gradually from the present 70 per cent to 64 per cent of net income by the year 2030. Experts estimate that this will keep pension contributions at a level of around 20 per cent. The government has, however, again put pension matters on the agenda, as requested by the employers, even though only a couple of years have passed since the previous agreement.

In the metal and chemical industries the unions and the employer associations agreed in 2001, immediately after the national reform, on industry-specific additional pensions that, with State assistance, compensate for the reduction. Employees in the chemical industry must pay extra pension contributions of at least EUR 480 per annum. The employer pays EUR 135 plus 13 per cent of any excess over the minimum. The agreement has been in force since the beginning of 2002.

The general retiring age is 65 years.

Total pension contributions amount to 19.1 per cent, of which the employee pays 9.55 percentage points.

France

The French Ministry of Labour and Social Affairs is currently seeking an agreement on pension reform by July 2003. According to the minister, the pension reform is the biggest political challenge of the first half of the year. When visiting Finland he wondered how it was possible to achieve unanimous social support for the reform.

As a rule, the French retiring age is 60 years, but for those who receive pension only from public systems this is 65 years. Almost all wage and salary earners belong to statutory additional pension systems. On the employee side this system is known as ARRCO.

The full pension from ARRCO is paid at the age of 60 years, after 39.5 years of service. The benefits and the insurance contributions are defined according to the pay level. In the public system a full pension is 50 per cent of previous earnings. With the ARRCO additional pension this level may rise to as much as 75 per cent.

The full pension in the energy enterprise EdF is 75 per cent. Presently there is a major dispute going on in France about the agreement between the unions and the employers, as the employees rejected this agreement in a ballot. The agreement would have reformed the EdF pension system to cover the entire deregulated energy sector. The pension level would not have been reduced. The ministry has announced that it will nevertheless enforce the new system.

At the age of between 55 and 57 years there is a right to participate in an early retirement scheme providing smaller pensions.

The total pension contribution in the public system is 14.85 per cent, of which the employee pays 6.65 percentage points. The ARRCO additional pension costs the employee 3 per cent and the employer 4.5 per cent.

Italy

The Italian pension system, reformed in the beginning of 2000, was still at the introduction stage in January 2002 when the labour minister announced the fourth reform in a decade. The cornerstone of the latest planned reform would be to encourage employees to continue working for two years after the retiring age. They would not have to pay pension contributions for these extra years.

The retiring age is currently 65 years for men and 60 years for women.

From the time before 1996 pension accrues at a rate of 2 per cent, based on the pay for the five preceding years up to a maximum of EUR 35,000 per annum. For pay exceeding the maximum the accrual rate gradually falls to 0.9 per cent. Beginning from 1996 the pension is calculated from the sum of the paid pension contributions using a coefficient that varies between 5 and 6 per cent, depending on the chosen pension system.

Under the new system both men and women may retire at the age of 57 years if they have paid pension contributions for 40 years. The full 40 years corresponds closely to a 66 per cent pension level.

In the public sector the total pension contribution is a very high 32.7 per cent, of which the employee pays 8.89 percentage points. Increased contributions are paid for amounts exceeding the maximum income.

Industry-specific voluntary systems are represented, for example, by the chemical industry's Fonchim established in 1993, which 65 per cent of the employees have joined. Fonchim is an integrated social institution of chemical industry enterprises. The pension rules are otherwise identical but the accrual rate is a little easier. The pension contribution of both employees and employers is EUR 330 per annum.

United Kingdom

The strategy of the Labour government in the UK has been to shift responsibility for pension insurance to enterprises and citizens. The State's own pension system is miserly.

The British pension system consists of three elements:

1. The basic national pension of about EUR 470 per month
2. The additional, State income-related pension (SERPS, known as S2P as of 2002)
3. Individual pension insurance (personal pension), enterprise or industry-specific additional pension (stakeholder pension, occupational scheme)

The government has offered tax benefits to promote the shift towards the private pension systems that already cover 40 per cent of the market. Only 30 per cent of employees continue to rely on the SERPS-S2P additional pension.

The shifts between systems have led to confusion and scandals. People do not know how high their pensions will be. Pension rights earned in the previous job have, in a sense, been frozen and cannot be transferred to another system. Moreover, many pension insurance schemes have been financially unsound, or have even collapsed as a result of falling stock values.

An employer-specific pension replacing a statutory pension may be based on benefits or contributions. Pensions based on benefits (defined benefits) are the most common. However, the risks involved in these schemes have significantly increased the popularity of systems based on contributions (defined contribution). A personal pension that replaces the statutory one must always be based on contributions.

The most common retiring age for men is 65 years, while women aim to retire at 60 years. There is a plan to equalise the situation by raising the retiring age of women to 65 by the end of the next decade. Opportunities to use early retiring schemes are commonly taken.

The accrual rate of the benefit-based systems varies. The most common rate is 1/60 or 1/80 per annum over 40 years, with a target level of 66 or 50 per cent of earnings. The pension is standardly defined on the basis of average income over the last three to five years. Part of the pension may be converted to a tax-free lump sum.

In contribution-based systems the insurance contribution level varies, but employee contributions are often three to five per cent of pay, while the employers contribute four to ten per cent. In the energy sector employees typically pay four to six per cent in insurance contributions with a view to a 66 per cent pension after 40 years of work.

Britain has sought to show the direction in which pension systems must be reformed. However, the scandals involved in benefit-based systems and the mess caused by the plethora of different schemes have led to much criticism and nobody has visited Britain in order to learn from its pension reforms.

Future trends

One indication of trends in the international pension market comes from countries that have recently made the transition to a market economy. In these countries the previous old-age pensions have shrunk to less than subsistence level. International consultants have rushed to these countries to argue for new, more fashionable pension models. A brief look at Estonia, a country that is not otherwise covered by this study, may inspire some thoughts.

In Estonia the old State pension has been ruined by economic reforms. Its minimum rate is EUR 57 per month, which barely covers the wintertime heating and electricity bills of an apartment. The pension system is therefore undergoing reform based on three pillars.

The State pension based on the number of years of work guarantees a minimum livelihood. Due to inadequate tax revenues the State, however, has problems in paying these pensions.

The second pillar consists of an investment-based pension. Employees pay two per cent of their incomes into the chosen pension fund. Accrual depends on the rise in the value of State's bonds and stockholdings (the proportion of these is standardly one quarter, or no more than half of the investments). Six financial institutions compete for new members in these systems. The pace has not been slowed, even by reports from the USA, where mutual pension savers have lost a quarter of the value of their investments in the 401(k) system's pension funds over the last two years. This was due to a fall in stock market prices.

The third pillar is a personal fund to which the State adds part of the tax revenues that it has received from the employee.

The only thing that is certain at this stage is the need to reform the pension system. The search continues for the best option.

3.2 Unemployment benefits

There are 200,000 to 300,000 unemployed in Finland, depending on the way in which this number is counted. Some employers and ordinary citizens claim that the unemployed are uninterested in working as - so they claim - Finland has "the best unemployment benefits in Europe".

Studies demonstrate that the persistence of unemployment is above all due to a shortage of job vacancies, and not everybody can become an entrepreneur. Often the unemployed person's education and place of residence also fails to match the requirements and location of those vacancies that do exist. Studies stress these factors far more than the level and duration of unemployment benefits.

Despite this, there are good reasons for examining the sizes, duration and financing of unemployment benefits in the seven reference countries. The summary prepared by Matti Kari in 2002 for the Unemployment Insurance Fund has been of great help in analysing the systems of various countries.

The Finnish income-related daily allowance consists of a basic daily allowance of EUR 23.02 and income-related element that is 45 per cent of the difference between the daily wage and the basic daily allowance. Increases may additionally be paid for children, and an increased income-related element may be payable where redundancy occurs after a long working career.

Thus, at average income levels the rate of income-related daily allowance varies between 40 and 62 per cent of the daily wage. The benefit percentage falls as the wage level rises. The average monthly income in industry of EUR 2,200 yields a daily allowance that is almost 58 percent of the daily wage.

This income-related daily allowance is paid for 500 days.

The employee pays a membership subscription of about 0.3 to 0.5 per cent of gross pay to the unemployment benefit fund. In 2002 the unemployment insurance contribution of a wage-earner was 0.4 per cent of pay. In 2003 it was 0.2 per cent. The employer's insurance contribution is graded according to payroll size. In 2002 it was 0.7 per cent of the payroll up to EUR 840,000 (0.6 per cent in 2003) and 2.7 per cent of the payroll exceeding the limit (2.45 per cent in 2003).

In Sweden, as in Finland, membership in trade union unemployment benefit funds is voluntary.

The daily unemployment allowance is, in principle, 80 per cent of daily pay. There is an upper limit, however. In the first 100 days the highest daily allowance is SEK 730 (EUR 80), which then falls to SEK 680 (EUR 75). Because of the upper limit, the daily allowance at the average industrial employee income level is 65 per cent of daily pay.

The income-related daily allowance is paid for 300 days.

The employer pays the 5.84 per cent labour market contribution in full, and also pays 0.2 per cent of the wage-earners' pay and 0.9 per cent of salary-earners' pay into the unemployment benefit funds. The contribution paid by the insured depends on the unemployment benefit fund. The contribution is paid together with withholding tax.

The daily allowance in Norway is 0.24 per cent of annual income or of the upper limit of such income. This amounts to 62 per cent of the pay. The maximum daily allowance of a single person is EUR 33.0. The upper limit of income is EUR 35,773 per annum.

The daily allowance is paid for 156 weeks.

Unemployment insurance contributions are included in the pension insurance contribution of 7.8 per cent for the employee and, depending on the region, between 0 and 14.1 per cent for the employer.Tax authorities are responsible for calculating and collecting these contributions.

Unemployment assistance in Germany is 60 per cent of net pay or of a maximum income of EUR 4,448 per month in the West or EUR 3,732 per month in the East.

The duration of the benefit is determined according to a complex table that allows for the age of the claimant and to completed insurance periods. In practise the daily allowance is paid for between 6 and 32 months.

Both the employee and the employer contribute 3.25 per cent to the sickness insurance society as an insurance contribution.

The daily allowance in France varies according to the completed insurance period. It is 57.4 per cent of the pay for an insurance period of between 3 and 6 months, followed by 40.4 per cent plus EUR 9.38 per day. The minimum daily allowance is EUR 22.86 and the maximum is 75 per cent of pay.

The income maxima are EUR 2,241 per month and EUR 8,964 per month, which means that the upper limit is very high.

The daily allowance is paid for no longer than 60 months (5 years).

The employee pays 3.01 per cent of pay falling below the lower income maximum and 3.60 per cent of pay falling between the income maxima. The corresponding employer percentages are 5.13 and 5.26.

The daily allowance in Italy varies between 30 and 80 per cent of average pay, up to a maximum of EUR 894.92 per month.

The daily allowance is paid for 180 days per year.

The employer pays the entire insurance contribution of 1.61 per cent of pay.

Unemployment benefit in the UK is EUR 67.30 per week for persons aged between 18 and 24 years of age and EUR 85.00 per week for older job seekers. This is clearly less than in the other reference countries. Compared to average income in industry, this assistance is only 12 to 15 per cent of previous earnings.

Depending on the system, the maximum income is about EUR 3,400 per month, but this matters only with respect to insurance contributions.

Insurance contributions are collected with taxation as part of a package that also includes the pension and sickness insurance contributions. The employee pays about 10 per cent of pay or of the income maximum for the entire social insurance package, while the employer pays between 3.0 and 12.2 per cent of the pay with no maximum limit.

In sum, it may be noted that the average daily unemployment allowance is about 60 per cent of daily pay. Most of the benefits paid are at about this level with respect to the industrial average wage. Only the UK, with its level of 12 to 15 per cent, shows any radical deviation from this norm. This means that, with the exception of the UK, Finland does not coddle its unemployed more than the other reference countries.

Various countries have sought to manage unemployment through more imaginative solutions than cutting unemployment benefits.The means range from the active labour force policy of Sweden to working hour reduction in France. Nothing seems to help in Germany, where unemployment continues to rise and increasingly radical proposals are entertained. At this point it may be proper to present a brief review of the much-discussed work of the Hartz task force. After this the government published a second expenditure cuts programme in March 2003 seeking to reduce the duration of unemployment benefit payment.

Germany seeks to avoid mass unemployment

Unemployment is a serious problem in Germany. There are more than four million unemployed, meaning an unemployment rate of over nine per cent. Studies indicate that only 50 per cent of the unemployed actively search for work. Two employers in three complain that they cannot find the labour force that they need. Over one million jobs are vacant.

Presently the unemployed receive between 60 and 67 per cent of their previous net pay in benefits. Such unemployment benefitis paid for up to 32 months. Thereafter the level falls for an unlimited time to between 53 and 57 per cent. The employment task force nominated by Chancellor Gerhard Schröder and led by Volkswagen personnel manager Peter Hartz intended to propose such measures as a reduction in unemployment benefits and shortening of the period of eligibility for benefit. However, this was not politically possible for the Social Democrats before the elections.

However, the election winning government of the Social Democrats and the Greens, intends to implement the other proposals of the Hartz task force. Under threat of loss of benefit, job seekers will have to accept work at lower rates of pay. Young people without family will be obliged to accept work offered to them at any location in Germany. Furthermore, it will be up to the job seeker to show that a certain job is individually unsuitable, instead of requiring the labour authority to show the contrary, as at present.

Encouragement to search for work would come from personnel service bureaux located in new work centres replacing the labour force bureaux. These service bureaux would hire long-term unemployed persons and lease their services to enterprises for temporary work. Any refusal to comply with this arrangement would lead to loss of unemployment benefit. Pay for the first six months would correspond to unemployment benefit, and thereafter would comply with the collective agreement. The idea is to give the unemployed a degree of security while retaining a low hiring threshold for employers.

The Hartz task force also proposes the promotion of "mini jobs", resembling the position of domestic helpers. Monthly income would be tax-free up to EUR 500 and the social security contribution would be only 10 percent instead of the standard 22 per cent.