Finnish welfare state facing “demographic shock”
FINLAND – The resources of the Finnish welfare state are under pressure from a rapidly ageing population, says the International Monetary Fund.
“The Finnish population is…ageing rapidly,” the IMF said in a new report on the country. It says the old-age dependency ratio will rise to 40% in 2020 and 50% in 2030 - “almost double the ratio today and among the highest in the EU during that time”.
“The demographic shock puts downward pressure on the labour force and thereby lowers potential economic growth, with consequences for Finland's ability to generate the resources to maintain the welfare state,” it warns.
“In the face of a rapidly aging population, the key challenge is to support medium-term growth and employment while securing long-run fiscal sustainability.”
It called for further pension reform to make a longer working life more attractive and thereby increase the effective retirement age.
It says that the low effective retirement age has been one of the factors depressing the supply of labour. And it estimates the unemployment rate is really around 16.5%, compared to the official rate of nine percent, when early retirement and other labour programmes are taken into account.
It said that benefits paid to pensioners will need to be cut unless there is a build-up of fiscal surpluses and a corresponding cut in debt – if large increases in taxes and contributions are to be avoided.
“Alternatively, or possibly in addition, other parameters of the pension system may need to be adjusted, such as delaying further the time of retirement.
“In any event, with increasing the employment rate at the forefront, further pension reform is needed to further raise the low effective retirement age.”
The IMF said while the reform of 2002 “has improved the outlook, it has not resolved ongoing tensions”. It added that baby-boomers are largely shielded from the effects of the reform.
The IMF report mirrors comments from the Organisation for Economic Cooperation and Development earlier in the year which called the reform “overly generous”.
The Finnish Centre for Pensions, formerly the Central Pension Security Institute, has said that most people would benefit from the reform.
The need for labour market reform was borne out by Eurostat statistics released today which showed that Finland had the fastest-rising labour costs in the euro zone in the first quarter.
The news comes as prime minister Anneli Jaatteenmaki resigned yesterday amid a scandal over leaked foreign policy memos.