Debt calculations under the new EU fiscal rules take the Finnish earnings-related pension scheme into account more realistically than before

This post is the second part of a blog series. Read the first part of the series: “Why does the EU fiscal framework require more extensive fiscal adjustments from Finland than from other countries? – National Audit Office of Finland?”

The new EU fiscal rules are applied in autumn 2024 for the first time. In the projections of Finland’s general government debt, the European Commission has, since spring 2024, started to take into account not only the deficit but also other debt-accumulating factors. These factors are referred to as the stock-flow adjustment, which includes, for example, net acquisition of financial assets.

In June 2024, the European Commission submitted a proposal on the need for fiscal adjustment to Finland as part of its economic governance. The European Commission and Finland as a Member State of the EU have negotiated on the need for adjustment. As the outcome of the negotiations, a draft medium-term plan (in Finnish only) was published on 23 September 2024. Based on the Commission’s calculations, Finland is required to take major fiscal adjustments in order to put the debt ratio on a downward path.

The main reason for the magnitude of the adjustment required by the EU rules is the very rapid increase in Finland’s general government debt ratio, which is why the debt sustainability safeguard is binding. There has also been debate (in Finnish only) on the offsetting of the surplus of earnings-related pension funds in debt projections by taking into account not only the deficit but also other debt-accumulating factors. Some participants in the debate (in Finnish only) emphasise the importance of the change, as it gives a more realistic picture of the accumulation of government debt.

How will the surplus of earnings-related pension funds be offset?

The offsetting of the surplus of earnings-related pension funds in debt projections gives a more realistic picture of Finland’s public finances and its increasing debt. The offsetting results from taking into account the net acquisition of financial assets by earnings-related pension funds (stock-flow adjustment).

According to the National Accounts, the Finnish earnings-related pension funds are part of general government. Their revenue consists of pension contributions and property income, while their expenditure consists mainly of payable pensions. Their revenue exceeds their expenditure. This creates a surplus, but under Finnish legislation, it cannot be used for purposes other than meeting the pension funds’ own needs – not, for example, for repaying central government or local government debt.

When examining the accumulation of earnings-related pension funds’ debt in outturn data, it is seen that the surplus of the pension funds is offset because they invest their surplus in financial assets to cover pensions payable in future. This is reflected in the stock-flow adjustment (Figure 1).

Figure 1: Surplus and stock-flow adjustment of the earnings-related pension funds in Finland. Sources: Statistics Finland and calculations by the fiscal policy monitoring function.

Realistic information to support decision-making

The offsetting of the surplus of earnings-related pension funds must also be taken into account in the calculation of future adjustment needs, and this is also what the European Commission has been doing since spring 2024. It is important to have a realistic picture of the development of general government debt in Finland. If the surplus of earnings-related pension funds is not offset by taking into account the stock-flow adjustment, the projections will systematically underestimate the accumulation of general government debt. The fiscal policy monitoring function has repeatedly highlighted this problem.

As regards the sustainability of public debt, it is good that debt projections under the new EU fiscal framework will take the Finnish earnings-related pension funds into account more realistically. This ensures that the decisions made are based on a more accurate picture.