Insurance of the self-employed
UNDERINSURANCE IS COMMON among the self-employed in Finland. A recent study by economists Satu Nivalainen and Sanna Tenhunen (Finnish Centre for Pensions) examined, on the one hand, the self-employed persons’ subjective perceptions of paying adequate pension contributions and, on the other hand, under- and overinsurance among the self-employed measured via the ratio of their confirmed income under the Self-employed Persons’ Pensions Act (YEL income) and their actual income from self-employment.
The YEL income is low for many. For every fourth self-employed person, it was less than 12,600 euros. In practice, 25% of the self-employed have thus set their YEL income so low that they run the risk of not having the right to earnings-related social benefits.
Often, the YEL income is also underdimensioned in relation to the actual income of the self-employed. For half of them, the YEL income was less than 80% of their actual income. Although more than half felt that they have insured themselves adequately, an ample 40 per cent felt that they do not contribute to their pension enough.
The self-employed without employees and those without copartners more often both felt they were paying insufficient pension contributions and actually underinsured themselves based on their income. The same was true for the self-employed who felt that their workload in the past year was too high and that they were troubled by the weak income generated by their business.
Age and educational level did not explain the subjective views of the self-employed, but underinsurance based on actual income was more common among the young and the self-employed with a basic education.
A common reason for underinsurance was that the self-employed felt they couldn’t afford to pay high enough pension contributions. Another reason was the self-employed did not think they were going to get an adequate pension anyway.
Poor health or other reasons may make working in retirement impossible.
Corona and pensions
PUBLIC ECONOMY will be hit hard if the COVID-19 pandemic continues far into the future. Long-term isolation makes a significant economic impact.
In Finland, the economy is expected to dwindle by 5–12 per cent in 2020. What will happen in 2021 is uncertain.
A report commissioned by the Finnish Government and compiled by a team of economists led by Vesa Vihriälä, predicts a lost decade with serious cuts in public expenditure. If that is the case, it is difficult to imagine that the earnings-related pension system would go unharmed, says director Jaakko Kiander, (Finnish Centre for Pensions).
Weaker contribution income and lower stock prices has had a negative impact on the economy of the earnings-related pension system. This year, the contribution income is estimated to go down by 2 billion euros while pension expenses will continue to grow.
So far the strong buffer funds have helped pension providers survive. The Finnish Centre for Pensions monitors the situation and makes estimates on how the crisis will affect the long-term financial outlook of the pension system.
Investement assets: €216 billion
A STRONG SOLVENCY MARGIN helps pension insurers get through weaker investment years. 2019 offered the best return in the 2010s with a nominal pension asset investment return of 12.5%. At year-end, the earnings-related investment assets amounted to €216 billion.
Last year, the investment assets were invested as follows: 49.4% in listed equities and equity-like instruments, 33.7% in interest and money market instruments, 8.5% in real estate and 8.3% in alternative investments.
Nearly one fourth (23.4%) of the investment assets were invested in Finland and one fifth (17.6%) in the euro area. A clear majority (59%) were invested in other parts of the world. A geographically well-spread allocation answers to the basic principle of pension investing: the assets are to be invested profitably and prudently.
Over the long term (the past 23 years), the average nominal return has been 5.9% and the average real return 4.2%.
Mental disorders lead to retirement
MENTAL DISORDERS SURPASSED musculoskeletal diseases as the main cause for retirement on a disability pension for the first time in 2019. Depression has increased particularly among women.
The number of disability pensions granted due to mental disorders has grown by 25% since 2016. For the same reason, the number of persons receiving a sickness allowance has grown by 43% since 2016.
In 2019, nearly 4,000 persons retired on a disability pension due to depression. Two out of three of them were women, most of them either under 35 or over 60 years of age. “The corona pandemic may cause the figures to rise,” says statistics manager Tiina Palotie-Heino (Finnish Centre for Pensions).
At year-end 2019, a total of 134,000 persons drew an earnings-related disability pension. The number of new retirees on a disability pension took an upward turn in 2018 after a ten-year-long positive trend. Over a decade, however, the number of disability pension recipients has decreased by nearly 40%.