The Nordic Model - Embracing globalization and sharing risks

Historically, however, the share of life spent in the labour market
has (until recently) been decreasing both due to later entry into
the labour market and due to earlier withdrawal from the labour
market, typically via early retirement schemes. This trend is sooner
or later bound to resume if retirement ages remain unchanged while
longevity is increasing. Preventing this from happening is clearly
one of the steps needed to ensure the financial sustainability of
the welfare state.
Much has been done in the Nordic countries to meet the
pension challenge. In particular, the Swedish pension reform,
introducing a “notionally defined contribution system”, is widely
considered a benchmark. It promises a system that will remain
financially sustainable without any increase in pension contributions
from their present level. Denmark has recently taken steps
to increase statutory ages for early retirement and public pensions.
Once these changes have been implemented, the statutory ages
will be tied to longevity. These measures address a large part but
do not solve the sustainability problem driven by changing demographics.
Finland is not as advanced in solving the problems;
notably the earnings-related pension system of the private sector
is unsustainable in the sense that it is likely to call for significant
increases in the contribution rate in coming decades.
In recent years Finland has undertaken some reforms that
affect pensions and retirement, though these reforms are not sufficient
to solve the problems. The recent pension reform abolished
some early retirement schemes and improved the incentives for
prolonging work careers beyond the age of 63. It also introduced
an adjustment mechanism linking pensions to longevity to the
effect that pensions to be paid to a given age cohort are reduced if
longevity increases. The latter is very important and implies that an
increase in longevity combined with an unchanged retirement age
would leave the individual with a lower annual benefit. In other
words, the individual would have either to accept a lower (material)
living standard or postpone retirement alongside the increase
in longevity. If the individual postpones retirement in parallel with
the increase in longevity, the benefits received will be unchanged.
Although this contributes towards solving the problems arising
from ageing, these measures are not sufficient. Moreover, from a
The Nordic countries
have done much to
meet the pension
challenge – but more
needs to be done, notably
in Finland
74 · The Nordic Model