What are the earnings used for calculating pensions?

The calculation of employees’ pensions is based on their salaries for each working year and on the particular accrual rate. Self-employed persons’ pension accrual is calculated on the basis of their average earned income for each year.

When calculating pensions, the earnings from previous years will be converted to the level in effect at retirement, using a special ‘wage coefficient’. In the wage coefficient, the rise in earnings level is weighted at 80 per cent and price increases at 20 per cent . However, employee contributions are deducted from the earnings. In 2010, these were 4.5 per cent of the wage for employees under the age of 53 and 5.7 per cent for those aged 53 or over.

Payment of YEL contributions flexible

Payment of YEL contributions is flexible and self-employed persons are either to pay extra or reduce their contributions. Additional contributions and reductions affect pension accrual in full. On the other hand, for the calculation of disability and part-time pensions any extra contributions paid the year before retirement will not be taken into account.

Unpaid YEL contributions will reduce the pension

Self-employed persons’ pensions are also affected by outdated, unpaid YEL contributions.  Unpaid YEL contributions can be collected for five years after the year on which the payment was imposed. If the payment is still pending at the end of the term of payment, the YEL earned income for that year will be reduced in proportion to the unpaid contributions for the purpose of calculating pension.be taken into account.