Student pension coverage must also be taken care of now

Students’ livelihoods have been in a state of upheaval recently. An increased emphasis in the student financial aid system on taking out loans, the soon-to-be-introduced cuts in the housing allowance, and cuts in the indexation of several other benefits will all have an impact on students’ lives and incomes.

Students’ finances will experience significant changes in the short term, but the winds of change can be felt further out on the horizon too. As well as a better short-term future, we must also look after the longer-term future of students. And that’s what pension reform advocacy is all about.

The degree-based pension benefit, which contributes to students’ pension coverage, has been under threat of abolition in the preliminary discussions of the pension reform that are currently under negotiation. Many students are aware of this benefit, and interfering with it may even affect the motivation of some students. It is also one of the incentives to pursuing a higher education degree, and contributes to the goals of raising the overall standard of higher education in Finland.

It comes as a surprise to some that completing a degree contributes to the accrual of a pension. However, research has shown that the younger working-age generation is more aware of their rights than their parents and, of all age groups, is more likely to know about qualifications and childcare pension benefits (source: Finnish Centre for Pensions 2020).

Yes, a degree contributes to pension coverage

The roots of the student pension benefit go back to the pension reforms of the early 2000s. In 2001 and 2002, the tripartite pension negotiations between employee and employer organisations and the state led to a negotiated outcome that reshaped the employee pension scheme in a number of ways. The changes were major, and also included improvements to students’ pension coverage.

As part of the negotiated settlement, the state agreed to pay the pension benefits for studies leading to a degree and for caring for a child under three years old at home (these “VEKL benefits”, as they are called, are based on the act [634/2003] amending the employees’ pension act [395/1961]). The degree pension benefit is therefore not funded by the actual employee pension scheme, for example through employment pension contributions. Within the employee pension scheme, employee pensions are accrued for sickness and rehabilitation benefits, unemployment benefits and education benefits.

As a result of the reform, pension benefits have been accrued for studies leading to a qualification (that is, a completed degree) since 2005.

Entitlement to a degree-based pension benefit arises on completion of a basic vocational training degree or a basic higher education degree. The degree must be completed, which means that studies towards a degree that are left uncompleted due to illness or for other reasons will not contribute to the accrual of pension benefits during retirement.

Employee pension assets are funded, but not student pension benefits

In the context of the creation of a pension benefit for studies leading to a degree and for childcare, it was necessary to examine whether the funding system already used in the employee pension scheme could also be used to finance pension benefits for the aforementioned unpaid periods.

However, the idea has not been proven as a solid foundation for securing benefits. No funding has been put in place, so these benefits are and will continue to be paid directly from the state budget. Every year, the Ministry of Social Affairs and Health reimburses employee pension companies, through the Finnish Centre for Pensions, for the costs they incur related to studies leading to a degree and childcare pensions. In the 2024 state budget, this amount is estimated at €23.3 million.

The unfunded nature of benefits paid from outside the employee pension scheme is clearly a mistake. With careful, long-term and systematic funding, through other pension funds established over the years it should be possible to secure pension benefits through moderate risk and compound interest over decades.

In addition to pension funds, however, it is common in Finland to set up other future funds to ensure longer-term development, such as the Housing Fund of Finland, the State Guarantee Fund and the Finnish Innovation Fund Sitra. In the future, the funding of VEKL benefits could be used to secure the pension benefits of students and families caring for their children at home.

Securing a degree-related pension to help promote continuous learning and completion of degrees

Securing a pension from completed degrees as part of the Finnish pension system would also have other benefits, such as contributing to the attractiveness of higher education and gaining qualifications later in life. If a person has not begun their higher education as a young adult, the threshold for beginning higher education later in life may be high, due partly to the planned abolition of the adult education allowance.

For example, when someone over 40 is considering whether to pursue a university degree, they are likely to have a very different perspective than a younger adult, both in terms of lost earnings and the impact on their retirement savings.

However, the pension benefit accruing from a qualification has an impact on pension accrual for up to a year’s earned income.

You can check the amount of your own up-to-date earnings-related pension accrual and at the same time assess the significance of the benefit of around €65 for you through the työelä employee pension information service provided by the Finnish Centre for Pensions. Many people may be surprised by the financial impact of the pension that comes with a degree. The benefit is also indexed annually.

In the current pension system, a degree pension benefit of approximately €65 in today’s money affects future pension amounts in different ways.

The benefit becomes more important if the degree does not contribute to significantly improving (relative to persons in employment) the future earnings of the person covered by the pension scheme, and also does not contribute to making up for the pension accrual lost during studies.

Let’s build trust in the pension system and safeguard efficiency!

The employee pensions system is largely based on generational trust. For example, we are currently considering what our pension system will look like and how it will benefit its beneficiaries as far ahead as the 2090s.
Many policymakers have also called for a longer-term approach and a sustainability review, for example in the management of public finances.

The same approach is now being called for to ensure the pension coverage of young people. The benefits of the pension system for the students and young people of the future must not be less than for earlier generations. Without addressing the issue of intergenerational efficiency, young people will not have enough confidence in the sustainability of the system, and especially in the adequacy of their future pension.

A majority of Finns (Finnish Centre for Pensions Eläkebarometri pension survey 2023) already think that the younger generations are paying too much for pensions. Among all age groups, it is the youngest (in the 18–24 and 25–34 age groups) who show the least confidence in the Finnish pension system.

A better future for students must be ensured in pension reforms

The abolition of the pension benefit that accrues through study towards a degree is potentially on the table in the pension reforms that are currently under negotiation, as a way of rebalancing the system.

With the information circulating in the media and continuous cost-cutting measures that are detrimental to learning, it must be asked whether obtaining a higher education degree and pursuing self-development during one’s career can possibly be an attractive option in the future. Reforms can still cause a lot of harm that even legislators might not intend.

The most important thing would be to ensure continued confidence in students’ ability to make a living. We also need to be able to look further into the future and see the darker clouds that are undermining confidence in the system from students’ point of view. Currently, around two-thirds of people in Finland have confidence in the pension system. If we cannot guarantee a system that is still worthy of trust at the end of the century, this will soon start to show itself as declining credibility.

By ensuring that every generation benefits equally from it, we will guarantee more prosperous and active working decades through Finland’s 62-year-old employee pension scheme. This way, the employee pension scheme itself will not have to face retirement even as it moves into the next century.

With a high level of trust, we can secure a long life for the pension system.

Henri Kontkin
Social Policy Adviser (student health care, well-being, equality)

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