Pensions and pension funds in the making of a nation-state and a national economy

Abstract

"The aim is to study and describe the development of Finnish pension schemes. Special focus is given to the use of pension funds in national policy making. The Finnish case offers useful material for the study of two latent functions of social policy: how to create a unified nation (after a severe civil war) and how to invest pension funds in a way that makes national developmental projects possible. The paper looks at the first national pension programme of 1937 that was fully funded and accumulated in individual accounts. Those funds were used to provide the country with electricity. The role of employment-related pensions, implemented in 1961, is also considered. The 1961 scheme funds were used to industrialize the country. The municipal pension scheme that was introduced in 1966 and is partially funded, is also of particular interest. The communal pension funds were partly invested in the production of housing, which in turn helped in the transformation from an agrarian to an industrial and urban society. Finally, the paper discusses the present-day situation, where such “national meta-projects” do not seem to be possible any longer. Nowadays capital, including pension capital, is invested according to where the best possible profits can be made without taking in consideration national goals as was previously the case. Here, we come up against 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 country, which in turn squeezes the base for collecting pension premiums. Thus, the crucial question is whether or not this vicious circle can be broken, and if it can be broken, then how? The Finnish experience serves as a good example of how social policy has been successfully used as a developmental strategy. In the history of the Finnish pension policy there are a number of issues that may serve as learning strategies for developing countries. First, the initial national pension scheme was introduced in a predominantly agrarian and poor society. Hence the implementation of the scheme, as well as the way in which problems related to the insurance premium collection were solved, may provide useful lessons. 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 as a device to promote national economic goals; this is given particular attention in this paper. The first national pension scheme of 1937 was based on individual savings accounts. The pension scheme was a kind of obligatory saving, or confiscation of consumption, for investments purposes. To some extent it worked, and national pension funds were used to help the country through the turmoil of the Second World War and the rebuilding of the nation after the war. National pension funds were deliberately 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. Those pensions were based on partial funding. 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 have helped to establish an industrial society."(pg 3)