YEL review: Actual earnings and YEL income side by side as the basis for contributions and pensions
In the pension sector, a long-awaited solution is emerging to address the challenges of entrepreneurs’ pensions. The Ministry of Social Affairs and Health has published a review by investigator Jukka Rantala, outlining the need to develop the pension system for entrepreneurs.
The review is referenced in Prime Minister Petteri Orpo’s government programme, and its full contents have now been published.
“This is something our sector has been waiting for. We are pleased that solutions are finally being explored,” says Tiina Nurmi, Executive Vice President, Insurance and Pension Services at Ilmarinen. “The government now has new tools at its disposal to tackle the challenges of the YEL system.”
Calculated YEL income draws criticism from entrepreneurs
Many entrepreneurs find the current method of determining YEL income difficult. The calculated income is based on the estimated value of the entrepreneur’s work input. This is hard to assess unambiguously and does not always reflect the entrepreneur’s actual earnings. In addition, YEL income does not adjust flexibly enough when an entrepreneur’s financial situation changes.
For some time, the earnings-related pension sector has supported a model that is based on actual earnings. Such a model would particularly benefit small entrepreneurs with lower income levels.
“Income should be clear and not based on estimates. Internationally, it is rare for social security to rely on discretionary assessments,” Nurmi notes.
A hybrid model would be a positive step towards an earnings-based system if a direct transition is considered too large a change at once. If the current type of YEL income remains in parallel use, the calculation tool should be improved and the calculation rules laid down in law. It is also essential that moving between an earnings-based model and the current YEL income model is objective and free from interpretation.
Funding to support financially sustainable pensions for entrepreneurs
Introducing funding within YEL would help address long-term sustainability challenges. Gradual partial funding would help keep contribution increases at a reasonable level over time.
Entrepreneurs have expressed a wish that part of their insurance contributions would be saved for their own future pension. This would strengthen confidence that everyone will eventually receive their pension, as some entrepreneurs are concerned about whether the state will continue to finance a growing share of pensions.
“If part of the contributions were set aside and invested for future pensions – as has been done for employees since the 1960s – the funds would grow significantly over the decades. It is better to start funding late than not at all,” Nurmi says.
The goal within the earnings-related pension sector is to make entrepreneurs’ pension security as strong as that of employees.
More information
Tiina Nurmi,
Executive Vice President, Insurance and Pension Services
Tel. +358 50 402 9275
tiina.nurmi@ilmarinen.fi
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