Social Policy and Development Programme Paper 25: Pensions and Pension Funds in the Making of a Nation-State and a National Economy: The Case of Finland

Finnish experience shows how social policy can be used successfully as a developmental strategy, and raises a number of issues that may serve as learning strategies for developing countries.

First, the national pension scheme was introduced in a predominantly agrarian and poor society.

Second, social policy programmes may create and fortify solidarity and a sense of belonging among the populace. The way in which social security is constructed has important ramifications for social solidarity. The Finns were successful in this area: they trust each other and their institutions, and Finland is the least corrupt country in the world.

Third, social policy may be used to promote national economic goals; this is given particular attention in this paper. The first national pension scheme of 1937, based on individual savings accounts, was a kind of obligatory saving, or confiscation of consumption, for investments purposes. National pension funds were used to help the country through the turmoil of the Second World War and post-war rebuilding. National pension funds were also used to establish the basic infrastructure of the country. In that sense, the savings-based, totally funded scheme was a success. In the beginning of the 1960s employment-related pensions were legislated. These employment pension funds, which are now among the highest in the European Union, were invested to accelerate the industrialization of the country and a lion’s share of the funds were loaned back to, or invested in, Finnish industry. Thus, where national pension funds were of utmost importance in providing electricity for the country in the 1950s, the employment-related pension funds helped to establish an industrial society.

The history of Finnish pension policy indicates that it is possible to unify social policy and economic development in such a way that a more or less just and stable society, decent social security and strong economic growth can be achieved simultaneously.

The paper also discusses the present-day situation, where such national “meta-projects” no longer seem possible because pension capital is invested according to where the highest possible profits can be earned—regardless of national goals. The author analyses this as a classic collective action problem: pension funds are collected from Finnish employment but they are, to an increasing extent, being invested in projects outside the country. This in turn means fewer jobs in the Finland, which in turn squeezes the base for collecting pension premiums. Kangas provides elements of a response to the crucial questions of whether and how this vicious circle might be broken.

Olli E. Kangas is Research Professor at the Danish National Institute for Social Research, Copenhagen, Denmark. He was previously Professor in the Department of Social Policy, University of Turku, Finland.

Order SPD PP 25 from UNRISD, 15 pages, 2006; US$ 12 for readers in industrialized countries and US$ 6 for readers in developing and transitional countries and for students.