Funding would help, but if the payment level is not touched, it would mean that additional money would have to be found from the state’s coffers at the same time as the state would want to reduce its contribution at the expense of entrepreneurs.
If you were an entrepreneur, would you want to pay a lot or a little money into a system from which you would receive a pension sometime in the future, if you live that long. Of course, disability pensions are also paid. At the same time, however, you know that not a single penny is saved, meaning that when you retire, that money will again have to be dug out from the entrepreneurs and the state at that time. It only takes one political decision in a tight spot for those “pension savings” to be radically cut.
Okay, sorry, I thought you were commenting on the current state of the system.
I agree with you that the best solution would be to build a time machine and have pensions be based more heavily on actual existing savings and investment returns, and not just the eternal “next generation pays more” cowardice.
A month ago, I was happy that the National Coalition Party (Kokoomus) did not want to raise YEL contributions, even though it was practically recommended in the Rantala report. Fat chance. The socialist wing of the National Coalition Party, led by Pia Kauma, wants to bleed even more money from entrepreneurs into the bottomless pit of the pension system. Grahn-Laasonen has started backtracking on her statements and admits that some entrepreneurs might have to pay more.
“The government is fixing the YEL system so that it is an improvement for entrepreneurs,” Grahn-Laasonen says. Bullsh*t, I say.
In case the time machine cannot be started just yet, wouldn’t the second-best option be to stop the growth of the problem we have now identified?
This could be done, for example, by the state accepting the coverage of current self-employed persons’ pension (YEL) liabilities for as long as they persist, but from this point forward, building a funded system for future self-employed pensions. YEL contributions would also start accumulating better if financially literate entrepreneurs saw they were getting something in return.
I understand that it won’t reduce the existing state-funded pension liabilities until sometime in the distant future. But as the old self-employed pensions under current rules gradually diminish through natural attrition, we would move step by step toward a funded YEL system.
The other option is, of course, to change nothing and continue the back-and-forth over which generation should pay. That, however, leads to the already identified problem growing into an ever-larger payment liability, with no end—or even an end to its growth—in sight.
A hand-to-mouth system designed by those who can’t do the math is not worth fixing; instead, it should be replaced with a funded system designed by adults who actually have calculation skills.
There will surely be a lot of chatter about the methods, but the chatter does not change the fact that a hand-to-mouth system designed by the innumerate should still be replaced by a funded system. One way or another. I fear that the fix will not be equitable for different generations. I fear even more that the fix will be left undone.
Could it be a good compromise if the YEL contribution were based on drawn earned income as has been suggested, but in such a way that the contribution would be exactly the same amount as the TyEL contribution for an employee, and the state/taxpayers would cover the shortfall? Additionally, funding should also be started immediately and increased gradually. This way, entrepreneurs and employees would be more or less in the same position.
Well, no. The vast majority of entrepreneurs are sole traders, whose income is based on earned income. Unlike employees, their earned income is generated not only from labor input but also from the return on invested risk capital. If we want to equate pension contributions with those of employees, then let’s start collecting pension contributions from all returns on invested capital, from dividends of listed companies to rental income. A pretty crazy idea, isn’t it?
And regarding the “contribution would be exactly the same amount as the TyEL contribution for an employee” comment, it’s worth noting that percentage-wise the contribution is the same as the employee’s pension contribution when the employer’s share is included. It’s not about the percentages, but about what the percentages are calculated from.
Yes, but. It is also about the fact that compared to TyEL, the funding ratio of YEL assets is non-existent. YEL contributions all go towards pensions, and even then, they are not enough. In contrast, last year about 2/3 of earnings-related pensions could have been paid with the returns from the funds, and a total of 19.5 billion was funded from returns + insurance contributions.
The TyEL system is able to grow the funds even at the current contribution level, at least in good years, but YEL cannot (without state aid).
So, gradually growing the funds is not enough for a solution to YEL; more money is needed instead. Now, there is apparently a dispute over who should pay for it?
As far as I know, no party has presented a viable plan for the funding of YEL pensions (YEL-eläkkeet). Everyone certainly agrees that establishing a fund would be sensible, but at the same time, they realize that a large enough initial capital cannot be obtained from anywhere. It’s better, then, to just kick the can down the road and forget the whole thing.
The dispute concerns the basis for calculating the pension contributions paid by entrepreneurs.
The Hydraulic Press Guy bashes the YEL system (again). Perhaps the most interesting piece of information in this video for me was that covering the YEL deficit is only a small part of the pensions paid out of the state budget.
When entrepreneurs are criticized for “under-insuring,” it is quite strange that the criticism does not extend to farmers. Regarding pension contributions, they live even more on other people’s money. Additionally, their MYEL pension contributions are lower than those of wage earners or entrepreneurs. Farmers’ pension contributions would practically need to be increased tenfold to “fairly” close the deficit. Is there as much political will for this as there is for pushing around entrepreneurs? I doubt it.
Farmers are part of Finland’s security of supply because food is a vital necessity. If farmers’ contributions rise, the following happens: the price of domestic food increases, demand decreases, and farmers quit at an even faster rate than they do now. This would be political suicide for the government parties.
The intention is not to belittle entrepreneurs, who do truly valuable work and keep the Finnish economy afloat. However, most entrepreneurs are not part of Finland’s security of supply. Moreover, the effects of increasing YEL contributions would not be immediately visible in the everyday life of an ordinary person, making it politically a bit easier.
If the security of supply argument earns a 50% discount on pension contributions, why doesn’t it apply to officers, power grid installers, or sailors? Surely healthcare professionals should be considered too? Or maybe it’s not about security of supply at all, but rather highly successful interest group politics, through which a small group has secured benefits that the pension system cannot actually afford. The issue has not been addressed in the media in any way, so no one has had to do anything about it.
I largely agree with this and your subsequent comments, but let’s check our interpretation of the bolded part before I give it a thumbs up.
When you say it’s “better to kick the can”, do I understand correctly that you mean a politically safer choice rather than the numerical superiority of a financially more advantageous solution?
I don’t know if I’m any kind of “entity”, but the only possible payers for a YEL change can be the entrepreneurs funding their own pensions or the state, which pays what has not been collected from entrepreneurs. Both have a completely rational motive to build the pension system—and why not the state’s financing more broadly—away from mere tax collection towards a funded system. Both have a financial motive to seek better pensions with a smaller amount of money.
Since entrepreneurs do not have the necessary legislative power and because the state ultimately has to be responsible for pensions, it could also solve the problem. Since the required amount of money isn’t available upfront, the solution must happen over a long period, either by opening a second funded system alongside the current one where entrepreneurs genuinely fund future pensions for themselves in an American-style 401k fashion, or like the Finnish TyEL, by funding collectively. Personally, I support the latter because it takes care of those who can’t do it themselves, and it becomes cheaper as a whole because, due to mortality, only a portion of each age group survives from working age to retirement.
The change can be made either all at once for everyone or by first opening the opportunity to the most numerate and maintaining the old system alongside it for a certain transition period. In either case, the state will have to fund the pensions paid through the YEL system for a generation, but over time the liability decreases like Mandatum’s interest-based (korkoperusteinen) policies.
This isn’t free for the state either, but it replaces the current kicking of the can and disputes over payment liabilities with ever-growing pension liabilities shifting to decreasing pension liabilities in the future. The political difficulty of implementation is that the effect is only visible after years, and thinking beyond a 4-year horizon is not part of a politician’s core competencies.
I have to say I don’t understand, but that’s probably because my understanding of the subject is very limited!
I think about it simply: if the goal is for an employee/entrepreneur to receive an amount Y/month in retirement, in my common sense it would be logical if both pay the same amount X/month in pension contributions now. Therefore, tying it to the salary would somehow be the easiest.
Thank you for the clarification. In theory, an entrepreneur’s pension contribution is based on earned income (= the value of the work input), and the idea there is exactly as you described. But it’s not quite straightforward, as earned income is assessed using very broad industry classifications and since not all entrepreneurs work the same length of workweek as employees.
Previously, entrepreneurs were able to define their earned income practically freely. There are certainly problems with that too, if the pension level remains so low that society must eventually compensate for their livelihood through Kela (The Social Insurance Institution of Finland) in due time. But an even greater challenge is if the pension insurance company gets to dictate the value of your work and, in practice, also how long a workday you actually work.
Not at all. A big problem is that entrepreneurs—or rather, we entrepreneurs—didn’t pay our share into the pension system back in the day. Juurikki also has an entrepreneurial background.
The EU is demanding savings, and the first fair targets for cuts are survivor’s and entrepreneur’s pensions. Let’s start by acknowledging that entrepreneurs are also entitled to the guarantee pension, at least €986.30/month. Let’s pay those basic pensions from the entrepreneurs’ pension fund first and distribute the remaining assets of the fund as far as they will go.
Why? Juurikki knows many entrepreneurs who have paid the minimum—meaning they under-insured themselves—and at the same time accumulated quite substantial wealth in stocks and such, using the very funds they didn’t pay into the pension system. Why should they/we be offered that slice of the pie hidden from others, plus a second slice provided by everyone else? It’s not fair, it really isn’t.
If entrepreneurs’ pensions are currently subsidized by €500 million a year from tax revenues and that figure is growing rapidly, then Juurikki, as a higher-than-average taxpayer, is already paying €600/year too much in taxes, thanks to the “screwing around” by us entrepreneurs over the last few decades. And that figure will grow if entrepreneurs continue to be given both their saved slice of the pie and a second slice from the rest of us. We don’t have to do it. It’s a political decision.
Does anyone still remember the TV commercial that visualized a shoplifter eating at your dinner table? I wonder why that just came to mind.
The problem is that today’s pensioners have been given too large a pension promise in exchange for too low pension contributions. In past decades, pension security could be obtained for a fraction of the price of what the pension contribution rate is now.
Not a single euro of the YEL (Self-employed Persons’ Pension Act) accumulation has been funded; everything that comes in goes out, and it’s not even enough. Juurikki should thank those entrepreneurs who are now retired and didn’t pay pension contributions on higher incomes. For if they had done so, the pension system’s deficit and the state’s contribution share would be even larger right now. For every euro of pension contribution collected, a pension liability is also created.
There is also the possibility that if they had been forced to pay pension insurance contributions of the current magnitude at the beginning of their entrepreneurial journey, they would have thrown in the towel before succeeding. Now, the reformed calculation model hits hard with high fees on an entrepreneur who is only just trying to get their business growing and/or profitable.
Let’s revive this dormant pension thread. Niku Määttänen, the chair of the Economic Policy Council, demands that pension expenditures must be curbed, which means pension cuts in some form. At the very least, pension accruals from university degrees and unemployment should be the first to be eliminated, if nothing else can be done.
