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Finland needs more ambitious pension reform

FINLAND – Finland needs more ambitious pension reform, says the International Monetary Fund.

“More ambitious pension reform would be an extremely helpful addition to the policy agenda,” the IMF said in a report on the country.

“The 2002 pension reform significantly enhanced sustainability,” it said, noting the raising of the legal retirement age to 68 and a sharp increase in the accrual rate after 62.

“Rapid population ageing and high unemployment pose key policy challenges,” the IMF said. It added that Finland's population is ageing faster than in euro-area countries while the effective retirement age is low.

“This depresses the supply of labour and, in conjunction with high structural unemployment, hampers economic growth with negative consequences for the public finances.”

“Combined with the inevitable rise in age-related spending, preparing for the demographic shock has important implications for fiscal policy now and in the medium term to avoid jeopardizing the public finances after the shock works its way through.

“Policies to increase the employment rate — related to pensions, and labour and product markets — would help to raise potential output and support fiscal sustainability.”

It said strong economic performance was needed – via fiscal discipline and further structural reforms to address high unemployment and population ageing. It said recent pension reforms were “a significant step in the right direction”.

But it wanted Finland to make extra efforts. It called for the elimination of the subsidized component of part-time pensions and disincentives to hiring older workers. And it seeks tighter eligibility criteria for disability pensions alongside a shorter transition periods for baby-boomers.

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