The YEL pension system will turn 55 this year, but no one is planning to celebrate this particular occasion. The system is outdated and needs reform.
The YEL system was originally created to improve the social security of entrepreneurs and secure their future retirement. The objective was good, but the current system does not sufficiently account for changes that have since taken place in working life and modern-day entrepreneurship.
Fortunately, however, the problem has been acknowledged. Jukka Rantala, former Managing Director of the Finnish Centre for Pensions, was commissioned by the Ministry of Social Affairs and Health to investigate ways in which the YEL system could be developed.
The definition of YEL income is problematic
High expectations have been set for the ongoing YEL survey work. Many entrepreneurs are especially frustrated with the definition of YEL income and so Rantala is focused on finding alternatives as part of his survey work. According to the law, YEL income should correspond to the salary that would be paid to an equally qualified person doing the entrepreneur’s work.
I would be lying if I said that this will be an easy matter to solve. The earnings-related pension sector has, however, proposed a transition to a YEL income definition that is based on actual earnings. This would eliminate the current ‘fictional’ nature of the income amount and would assure that YEL insurance is more closely based on reality.
There are, of course, a lot of things to consider in this model to ensure that the system doesn’t end up overly steering the decision-making and choices of entrepreneurs, such as the choice of company form. Finland needs different types of entrepreneurs and companies and an equal pension system for all of them – a system that is worthy of our entrepreneurs.
Entrepreneurship has changed but the YEL system hasn’t
The equation is further complicated by entrepreneurs who conduct entrepreneurial activities alongside paid employment for another employer or whose entrepreneurial activities are otherwise part-time. The number of light entrepreneurs has also increased in recent years.
Currently, pension does not accrue to light entrepreneurs whose income is below the lower limit for YEL insurance. We need reforms that take into account the changes that have taken place in entrepreneurship.
The income of entrepreneurs and financial results of business activities vary. However, it is essential that everyone has the same level of protection and that all work is insured in a way that is as equal and competitively neutral as possible.
This would create the conditions for entrepreneurs to carry out their activities as freely as possible. This would also likely make entrepreneurship and business activities more meaningful and profitable.
Funding issues must be resolved
The pension contributions of entrepreneurs have never been funded. The earnings-related pension sector hopes that the YEL survey work will identify options for funding. This is not an easy task, either, as capital is needed to initiate funding. This should not be viewed as a major obstacle, however; we need to consider alternative ways to get the funding process started. Funding would help to boost entrepreneurs’ confidence in the pension system.
It is often said that entrepreneurs are the backbone of our country. We must ensure that this backbone will continue to support Finland in the coming years.
