denmark. pension reform excellence as a side effect...welfare reform 2006 (broad political...
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Denmark. Pension Reform Excellence as
a Side Effect
The Politics of Pension Reforms in the Nordic Countries – the
whys, the hows, and the lessons
Jørgen Goul Andersen
The Research Council of Norway, Oslo, March 10, 2014
Point of departure
• 1891 “Old age relief”. Different from Bismarck 1889:
Tax financed, means-tested, citizenship based.
Eligibility & entitlements discretionary.
• 1922 “Old age rent”. Fixed rules.
• 1956 People’s pension. Minimum for all citizens,
otherwise means-tested
• 1964 (fully implemented 1970). Flat-rate for all (with
a small supplement for the vast majority).
• 1964 ATP. Small, flat-rate supplementary scheme
for all employees, fully funded (old promise in return
for low wage increases)
Attempts to introduce earnings-related
pensions
(when the government noticed that Norway was to
follow Sweden)
• Two commissions/working groups to come up
with suggestions
• Failed to produce any proposals while the
political window of opportunity was open
• Widespread resistance within the labour
movement: Rank-and-file members preferred
improvements of the people’s pension
Meanwhile crowding in of fully funded,
occupational pensions
• Especially among public employees, spreading
from the academics downwards, and from the
health care sector outwards
• Individual private pensions growing at the same
time
• Lock-in effect: More and more difficult to
introduce public, earnings-related pensions →
Eventually only multipillar solution was possible
• + Improvements of flat-rate people’s pension
(Rolls-Royce version)
Main Driver of change 1964-2013: The State’s
concern for macroeconomic imbalances (not
concern for pensions)
• All attempts of comprehensive state pension
reform failed
• All the adopted proposals were triggered by
macroeconomic imbalances, in particular
the aggravating current account deficit
1963-1990.
• Very large tax subsidies for private pensions
savings in the 1970s and 1980s
-5,5 -6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
19
45
19
47
19
49
19
51
19
53
19
55
19
57
19
59
19
61
1963
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
1983
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
current accounts as per cent of GDP
Current Accounts: Deficit permanent & increasingly critical.
Diagnosis: Too low savings.
Also severe credit restrictions from 1986
Initiatives in the field of pensions
• 1971: Social Pension Fund. For unspecified pension
improvements (in effect obfuscation of tax increase to cool
over-heated economy and excessive private consumption).
But funds accumulated, and decisions had to be made:
→ 1978. Very generous housing benefit scheme for
pensioners
→ 1981. Support for heating.
Contributions to Social Pension Fund terminated from 1982
Housing benefit essential part of minimum protection for pens.
Labour Market Pensions • Two heads of department in the Ministry of Finance managed
to include a short paragraph in the 1984 fiscal report stating
that the government would welcome LM pensions in order to
increase private savings.
• Chief trade union economist Poul Nyrup Rasmussen got the
message and elaborated a proposal (adopted in 1985)
• LMP Commission in 1988
• Public employees collective agreements in 1989
• Most private collective agreements in 1991
• Contributions gradually lifted from 0.9 % to 12 % (higher in
the “old” schemes) + Norm for nearly all labour contracts
• Instance of layering and differential growth – from a small
supplement to the backbone
• Small adm. Costs. Civil servants’ pensions phased out
• People’s pension more means-tested in the 1994 tax reform
Other elements
SP – Special Pensions Savings • Introduced as temporary pensions savings in 1997 –
mandatory savings in order to cool over-heated economy.
Fully funded, contributions 1 per cent of income.
• Permanent from 1998. Contributions 1 per cent. Payment
flat rate from 2009.
• 2001 changed by Lib-Cons governm. to defined contribution
• 2004 contributions suspended in order to boost the
economy after dot.com crisis
• 2008 plan to resume contributions suspended
• 2009 savings paid out in order to stimulate economy;
programme terminated
Supplementary pension benefits
The only scheme motivated exclusively by pension concerns
• 2003 – demanded by Danish People’s Party
• Strongly means tested (some 25 per cent received)
• Gradually increased as part of package deals with Lib-Cons.
government
Danish Multipillar Pension System Blue: Funded
Red: Means-test
First Pillar Second Pillar Third Pillar
State pens. & special
progr. for pens.
Occupational pensions Personal pensions private
Third tier
(topping up /
replacement gap)
Rent pension
Capital/Age pension
Rate pension
Second/third tier
(income
maintenance)
Semi-mandatory labour
market pension
Civil servants’ pensions SP: Special Pensions
Savings (1998-2009) First tier
(basic security/
poverty
protection)
ATP: Suppl. Labour
Market Pension
People’s
pension
Basic
Amount
TAX
Pension
supplement
Preferential housing
benefits
Individual supplements
(health, heating)
Suppl. pensions
benefits
LM Pensions=Defined Contribution. Automatic adjustment of pens. to life
expectancy
Public Pension Age
indexed by Life Expectancy at 60 in 1979-1995
Men Women Average Change
Life expect. at 60
1981-1982 17.14 21.59 19.37
1995-1996 17.73 21.46 19.60 +0.23
2005-2006 19.94 23.12 21.53 +1.93
2011 21.2 24.3 22.75 +1.22
(France) (23.1) (28.1) (25.6)
Welfare Reform 2006 (broad political agreement)
Supposed to be implemented from 2019-2022, but first step
implemented 2014-2015. 2025ff. Adjustment 2025, 2030, 2035
etc. by max. 1 year each time.
Due to improved life expectancy 1995-2014, life as a pensioner
will be three years shorter than now – regardless of increase in
life expectancy at 60.
Initially an alternative to scrapping early retirement, but in 2012
this was also abandoned (de facto)
Very generous minimum protection
Including preferential housing benefits etc :
equivalent to maximum UB for single pensioner
Politically vulnerable?
• Housing benefits and support for heating may come
under pressure as the increasing prevalence of well-off
pensioners lower “deservingness” of pensioners
• This would mean substantially lower minima
• High de facto composite marginal tax (means tested
elder care could bring it to a highly critical level)
Minimum pension including housing benefits.
Single pensioner. Per cent of Average Wage. 2007
• Denmark 56 %
• Iceland 55 %
• Norway 52 %
• Sweden 46 %
• Finland 38 %
From Goul Andersen & Hatland (2014)
Data: Old-age Pension Systems in the Nordic Countries. NOSOSCO
report 35:09. Copenhagen 2009
Ageing is fully financed in Denmark
Forsikring & Pension Dec. 2012.
On the basis of DREAM-model of Danish economy:
Ageing does not increase net expenditures
For pensions, elderly care, age-related extra health care
expenditures
(1) Later retirement (indexation pension age)
(2) Deferred taxes in pensions savings
(3) Taxation 15 per cent of current returns (PAL tax)
(4) Lower People’s Pension (means-tested suppl.)
Already by 2013, Pensioners below 75 years on average pay more
to the welfare state than they receive (Statistics Denmark).
Money Machine …
• About 200 % GDP in pension savings
• Deferred taxes some 40 % (= ca. 80 % GDP)
• 15 % tax of current returns = equivalent to corporate taxes in
the long run
• Much money invested abroad – strongly improved NIIP
• Returns on pensions important for economic sustainability of
the welfare state. 1 percentage point of improvement in return
= 1 per cent of GDP in extra revenue to the state
• GNI growth is about 2½ times GDP growth)
Danish households most indebted in the world, but, men …
Pensions savings as % of GDP. OECD 2012. (* = 2011)
197,4
149,5
136,2 132,6
119,4
106,9
94,0 91,9
84,5
69,2
59,4
52,2
44,5
21,0 17,3 16,4
13,9 13,1 9,6 9,4 8,7 8,5 7,3 7,1 6,6 6,4 5,4 5,1 4,2 3,8 3,8 2,1 0,0 0,0
0,0
20,0
40,0
60,0
80,0
100,0
120,0
140,0
160,0
180,0
200,0
220,0 D
en
ma
rk
Ice
lan
d
Ne
the
rla
nd
s*
Ca
na
da
US
A
Sw
itze
rla
nd
*
U K
*
Au
str
ali
a
Fin
lan
d*
Sw
ed
en
Ch
ile
Isra
el
Ire
lan
d*
Ko
rea
Po
lan
d
Ne
w Z
ea
lan
d
Me
xic
o*
Sp
ain
Slo
va
k R
ep
Po
rtu
ga
l
Fra
nc
e*
Es
ton
ia
No
rwa
y*
Cze
ch
Re
p
Ja
pa
n (
20
05
)
Slo
ve
nia
Ge
rma
ny (
20
10
)
Au
str
ia*
Be
lgiu
m*
Hu
ng
ary
*
Tu
rke
y
Lu
xe
mb
ou
rg
Gre
ec
e*
Italy
(n
.a.)
Nordic Welfare States=Healthy publ.finances
(2012 incl. reimbursement of early retirement contributions)
Budget surplus/deficit Net public assets/debt (OECD)
2007 2010 2011 2012 2007 2010 2011 2012
Denmark 4.8 –2.7 –2.0 (-4.1) +3.8 +1.7 –3.1 -7.0
Sweden 3.6 0.8 0.0 -0.7 +22.4 +23.8 +20.5 +23.3
Finland 5.3 –2.8 –1.1 -2.3 +72.6 +65.6 +54.1 +54.6
Norway 17.3 11.1 13.4 13.9 +137.9 +162.7 +166.3 +173.6
Iceland 5.4 –10.1 –5.6 -3.4 +1.0 –48.2 –55.1 -60.5
Germany 0.2 –4.2 –0.8 0.2 –42.6 –49.4 –50.8 -50.9
France –2.7 –7.1 –5.3 -4.9 –35.7 –57.5 –62.5 -70.7
Netherlands 0.2 –5.0 –4.4 -4.0 –27.8 –34.4 –38.7 -42.0
Belgium –0.1 –3.9 –3.9 -4.0 –73.1 –79.7 –81.1 -82.0
Italy –1.6 –4.3 –3.7 -2.9 –90.4 –103.0 –97.5 -112.9
Greece –6.8 –10.8 –9.6 -10.0 –86.5 –121.2 –142.6 -102.8
Spain 1.9 –9.7 –9.4 -10.6 –17.8 –40.1 –49.7 -61.0
Portugal –3.2 –9.9 –4.4 -6.4 –49.7 –71.7 –78.5 -88.5
Ireland 0.1 –30.8 –13.3 -7.5 +0.3 –40.8 –76.8 -79.5
UK –2.8 –10.0 –7.9 -6.5 –28.3 –53.8 –67.8 -70.9
USA –2.9 –11.4 –10.2 -8.7 –48.0 –74.3 –81.6 -87.1
Switzerland 1.0 0.3 0.5 0.7 –6.7 -6.9 -6.3 -5.5
Japan –2.1 –8.3 –8.9 -9.9 –80.5 –113.1 –127.4 -135.9
Euro (15) area –0.7 –6.2 –4.1 -3.7 –42.7 –57.6 –60.6 -66.3
Nordic Current Accounts as % GDP
2010 2011
2012
Average
2006–2012
Denmark 5.9 5.6 5.7 ↑ +3.9
Sweden 6.3 6.4 6.0 +7.4
Finland 1.4 –1.6 -1.9 +1.5
Norway 11.9 12.8 14.4 +13.7
Iceland –8.1 –6.5 -5.6 –13.8
Germany 6.1 6.2 7.0 +6.5
France –1.4 –1.8 -2.2 –1.4
Netherlands 7.4 9.5 9.4 +7.4
Belgium 1.1 –1.2 -2.2 -0.1
Italy –3.5 –3.1 -0.5 –2.4
Greece –10.2 –10.0 -2.5 –10.7
Spain –4.5 –3.8 4.7 –3.5
Portugal –10.6 –7.0 -1.5 –9.1
Ireland 1.1 1.2 4.4 +1.5
UK –2.7 –1.5 -3.8 –2.2
USA –3.0 –2.9 -2.7 –3.8
Switzerland 15.0 8.9 11.1 10.0
Japan 3.7 2.0 1.1 +3.1
Euro (17) area 0.0 0.1 1.2 –0.1
China 4.0 1.9 2.3 +5.9
-24,2
40,0
-30,0
-20,0
-10,0
0,0
10,0
20,0
30,0
40,0
50,0
1998
K4
1999
K1
1999
K2
1999
K3
1999
K4
2000
K1
2000
K2
2000
K3
2000
K4
2001
K1
2001
K2
2001
K3
2001
K4
2002
K1
2002
K2
2002
K3
2002
K4
2003
K1
2003
K2
2003
K3
2003
K4
2004
K1
2004
K2
2004
K3
2004
K4
2005
K1
2005
K2
2005
K3
2005
K4
2006
K1
2006
K2
2006
K3
2006
K4
2007
K1
2007
K2
2007
K3
2007
K4
2008
K1
2008
K2
2008
K3
2008
K4
2009
K1
2009
K2
2009
K3
2009
K4
2010
K1
2010
K2
2010
K3
2010
K4
2011
K1
2011
K2
2011
K3
2011
K4
2012
K1
2012
K2
2012
K3
2012
K4
2013
K1
2013
K2
2013
K3
Denmark. NIIP as per cent of GDP, 1998-2013
NIIP as per cent of GDP
(Quarterly national accounts, seasonally adjusted, quarterly accounts of NIIP)
Denmark GNI growth
100,0
138,6
100,0
156,0
90,0
100,0
110,0
120,0
130,0
140,0
150,0
160,0 1
99
0
19
91
19
92
19
93
1994
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
2011
20
12
20
13
Denmark. GDP and GNI 1990-2013 (1990=100)
index BNP index BNI
Political sustainability ???
• Appeared partly by chance. No master
plan
• Could be destroyed by accident.
• Constitutional guarantee against change in
policies affecting the pension system
Growth in private consumption 2007-2012. Per cent
-19,3
-17,3
-14,7
-10,9
-8,6 -7,9
-6,7
-5,0
-3,0 -2,9 -2,2
-0,8
1,1 1,7
2,2
3,7 3,8 4,0 4,2 4,4 4,6 5,0 5,6
6,3 6,8
7,6 8,6
10,1 11,1 11,3 11,5
12,9
14,6
16,2
-20,0
-15,0
-10,0
-5,0
0,0
5,0
10,0
15,0
20,0
Græ
ke
nla
nd
Isla
nd
Es
tla
nd
Un
ga
rn
Irla
nd
Po
rtu
ga
l
Sp
an
ien
Ita
lie
n
Sto
rbri
tan
nie
n
Ho
lla
nd
Da
nm
ark
EU
-27
Tje
kk
iet
Slo
ve
nie
n
Fra
nk
rig
US
A
Lu
xem
bo
urg
Ja
pa
n
Tys
kla
nd
Slo
vakie
t
Øs
trig
Be
lgie
n
New
Zeala
nd
Fin
lan
d
Me
xic
o
Sveri
ge
Sc
hw
eiz
Ko
rea
Tyrk
iet
Ca
na
da
No
rge
Au
str
ali
en
Po
len
Isra
el
Growth in public consumption, 2007-2012.
-15,3 -14,1
2,0 3,1
3,7 4,0 4,1 4,8 4,9
5,5 6,3
6,9 7,1 7,3 7,3 7,4 8,1 8,4 8,8
9,9 10,6 10,6
12,3 12,8 13,0 13,8
16,4 16,6
20,2
22,8
-20,0
-15,0
-10,0
-5,0
0,0
5,0
10,0
15,0
20,0
25,0
Græ
ken
lan
d
Irla
nd
Port
ugal
Itali
en
Un
garn
Isla
nd
Tje
kk
iet
Dan
mark
US
A
Fin
lan
d
Sch
wei
z
Sto
rbri
tan
nie
n
Øst
rig
EU
-27
Bel
gie
n
Sp
an
ien
Slo
ven
ien
Sver
ige
Est
lan
d
Fra
nk
rig
Slo
vak
iet
Jap
an
Holl
an
d
New
Zea
lan
d
Tysk
lan
d
Mex
ico
Pole
n
Norg
e
Can
ad
a
Isra
el
Lu
xem
bou
rg
Au
stra
lien
Kore
a
Ch
ile
40 40 40 42 44
48 49 49
52 55
59 60
65 68
72 73
80 78 78 79
0
10
20
30
40
50
60
70
80
90
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
157
132
122
110 106
101 95
90 86
77
67 65 62 58 57 56 54
0
20
40
60
80
100
120
140
160
180
Da
nm
ark
Ho
lla
nd
Sc
hw
eiz
UK
Po
rtu
ga
l
US
A
No
rge
Sp
an
ien
Sve
rig
e
Ja
pa
n
Fin
lan
d
Tys
kla
nd
Fra
nk
rig
Græ
ke
nla
nd
Øs
trig
Ita
lie
n
Be
lgie
n
Boligkreditboblen (landbruget værre) Politikfejl I. Deregulering kreditpolitik
Boligkreditboble: Realkreditudlån til ejerboliger og fritidshuse, 1993-2012. Pct. af BNP.
Verdens mest gældsatte husholdn.: Husholdn.s gæld, brutto. 2009.
Pct. af BNP.