Tuesday, October 23, 2012

Finland Station

We Americans sometimes tend to lump European countries together when it comes to matters of economics and the role of government. The reality is that there are substantial differences in these areas between the various countries. During the recent spate of crisis’s in the Euro zone, there has been a tendency to divide the region between the easy spending, laid back south and the frugal, hard working north. But that too paints with too broad a brush for within the countries of the north and even within the Scandinavian states there are significantly approaches to fiscal and financial policies.

One such example was highlighted by an article in today’s WSJ. Northern European Investors Steer Clear of Needy South:

Finns are savers. Helsinki is a prosperous but reticent capital. Its stern stone buildings are modestly adorned. The subway is fast but more dated than, say, the shiny Athens metro. Finland's modern retirement-savings system began in the early 1960s as a joint effort between the government, unions and employers to put aside cash.

Today, the government fixes benefits and determines contribution levels, which now average about 23% of salary. Unusually, the money is kept out of the government's hands. Employers can elect to manage it themselves, but many turn it over to professional pension managers, like Varma or Ilmarinen.

The Finnish pension system is a so-called first-pillar scheme, which means retirees are entitled by law to a defined pension payment. The first-pillar systems operated by European countries are at the heart of the European welfare state.

"The exception is, we have a lot of money," says Reijo Vanne, director of economic analysis at the Finnish Pension Alliance, a trade group. "Most first-pillar systems have none."

A government supported retirement system where people are allowed to manage their own money? And even to turn it over to private firms? And it’s actually sound? I didn’t know that was even possible.

Finland is indeed an interesting place that defies common stereotypes of Europe. The progress they have made in education in recent years is remarkable and is even being touted by some as a possible example of a ”third way” between the competing views of how to improve American’s education system. Maybe they’re onto to something with their retirement system as well.

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