There are two pension indexes: the earnings-related pension index and the wage coefficient.
- The earnings-related pension index adjusts pensions that are already in payment against rising prices. Earnings-related pensions are adjusted with the earnings-related pension index at the beginning of January each year. The more prices have risen over the year, the more the index affects the amount of the pension.
- The wage coefficient ensures that the accrued pension retains its value relative to how earnings have developed. It is applied at the time of retirement. The more wage have risen in the previous year, the higher the coefficient is.
The indexes are confirmed for each year based on changes in the consumer price and earnings level indexes calculated by Statistics Finland. For the calculation of changes, the reference periods used are the third quarter of each year. In the earnings-related pension indexes, the changes in price level weigh 80 per cent and the changes in the level of earnings of wage-earners weigh 20 per cent. In the wage coefficient, on the other hand, the changes in price level weigh 20 per cent and the changes in the level of earnings of wage-earners weigh 80 per cent. Pension indexes 2022–2023
|Earnings-related pension index||2691 (change 2.3%)||2874 (change 6.8%)|
|Wage coefficient||1.501 (change 2.5%)||1.558 (change 3.8%)|
Earnings-related pension index affects pensions in payment
Earnings-related pensions are adjusted at the beginning of January with the earnings-related pension index (also called the pensioner’s index). The adjustment is made automatically, so there is no need to apply for it separately. All earnings-related pensions are adjusted with the earnings-related pension index:
- the old-age pension and the partial old-age pension,
- the disability pension and the cash rehabilitation allowance,
- the survivors’ pension (the surviving spouse’s pension and the orphan’s pension),
- the years-of-service pension, and
- the vocational rehabilitation allowance.
The index adjustment is made for the first time in the year following the year in which a person has retired. For example, if you retire at some point in 2023, your pension will be adjusted with the earnings-related pension index for the first time in January 2024.
The index adjustment is calculated by multiplying the old pension amount with the new earnings-related pension index and by dividing the sum with the former earnings-related pension index.
Amount of old pension × new earnings-related pension index ÷ old earnings-related pension index = amount of new pension
In 2022, your average monthly pension was €1,600. At the turn of the year 2022-2023, your pension amount is adjusted to the level of 2023 level by multiplying your 2022 pension amount with the earnings-related pension index for 2023 and dividing the sum by the earnings-related pension index for 2022.
€1,600 × 2874 ÷ 2691 = €1,708.81
In 2023, your monthly pension is €1,708.81.
Wage coefficient ensures that accrued pension retains its value
When you retire, the wages and income from work that you have earned during your working life are adjusted with the wage coefficient to the level of the year in which you retire.
In other words, your earnings from each year are increased with as much as the value of the wage coefficient has changed from the year of earning the wage to the year in which you start drawing your pension. Your pension is calculated based on your earnings increased with the wage coefficient. When your earnings from different years have been increased to the level of the year in which you start drawing your pension, your pension amount retains its value relative to the development of earnings.
The amount of pension you have earned that is stated on your pension record is indicated at the time at which your pension record is issued. That means that the annual pension amount on your pension record has been adjusted with the wage coefficient to the level of the time at which you check your pension record.
You were born in 1959. Your earnings in 2005 were €36,000 . You retire at the retirement age of your age group in 2023.
At retirement, your annual earnings of €36,000 is increased with the wage coefficient to the level of 2023 by multiplying the earnings with the wage coefficient for 2023 and dividing the sum by the wage coefficient for 2005.
€36,000 × 1.558 ÷ 1.028 = €54,560.31
When calculating the pension you have accrued in 2005, your annual earnings for 1996–2016 are first deducted with the earnings-related pension contributions you have paid. In 2005, the employee’s earnings-related pension contribution was 4.6% of the annual earnings.
€54,560.31 – (€54,560.31 × 4.6%) = €52,050.54
You accrue pension at an annual rate of 1.5 per cent of that amount. Your monthly pension is calculated by dividing the sum by 12.
€52,050.54 × 1.5% ÷ 12 = €65.06
Your accrued pension is then multiplied by the life expectancy coefficient for your age group (born in 1959):
€65.06 × 0.94984 = €61.80
Adjusted to the 2023 level, you accrued pension for your earnings from 2005 to the amount of 61.80 euros per month.
How the timing of retirement affects the pension amount
The index development may slightly effect when it is most favourable for you to retire. The timing may matter if the development of the wage coefficient is significantly different from the development of the earnings-related pension index. You may want to take this into consideration particularly if you plan to retire at the turn of the year.
If the wage coefficient grows more than the earnings-related pension index, it is more favourable to retire after the turn of the year. If the earnings-related pension index grows more than the wage coefficient, it may be more favourable to retire already before the turn of the year.
That said, it is worth noting that, as a rule, continuing at work and retiring late eventually increases your pension more than the index increase does.
Each year, Kela adjusts the national pensions in payment at the beginning of January according to changes in the national pension index. The indexation retains the purchasing power of national pensions in relation to changes in price levels. In addition to index adjustments, step increases have been made to national pensions from time to time with a parliamentary decision.