pension reform in a mature welfare state – danish experiences
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Pension Reform in a Mature Welfare State – Danish Experiences. Lars Haagen Pedersen June 8, 2007. The Scandinavian Welfare model. Public transfer income and services: Universal entitlements based on objective criteria Equality issues are central (transfers are indexed to wages) - PowerPoint PPT PresentationTRANSCRIPT
Pension Reform in a Mature Welfare State
– Danish Experiences
Lars Haagen Pedersen
June 8, 2007
The Scandinavian Welfare model
Public transfer income and services:
• Universal entitlements based on objective criteria • Equality issues are central (transfers are indexed to
wages)• Large public production of individual service• High level of standards for public provision of welfare
services
Financing• Direct and indirect taxation of income
The social contract
• The public sector redistributes income over the life cycle
• The responsibility of individuals in the working ages towards children and the elderly is institutionalized in the public sector
• Enables and requires a high labour market participation rate of both men and women. Implies high tax rates by international standards
• High sensitivity to changes in demography
Aims of the retirement reform
• Maintaining the share of life in employment with increasing life expectancy (i.e. a constant labour force relative to population)
• Maintaining the current level of social pension relative to wage income
Age distribution of net contributions to the public sector per individual, 2004
-40
-30
-20
-10
0
10
20
30
0 10 20 30 40 50 60 70 80 90 100
1.000 EUR
-40
-30
-20
-10
0
10
20
30
1.000 EUR
Dependency Ratio and Old Age Dependency Ratio
0,000
0,100
0,200
0,300
0,400
0,500
0,600
0,700
0,800
1981 1991 2001 2011 2021 2031
0,000
0,100
0,200
0,300
0,400
0,500
0,600
0,700
0,800
Dependency Ratio Old Age Dependency Ratio
Danish pension system
• Voluntary early retirement scheme from 60 years for individuals in the labour market
• Disability pension for individuals up to 65 years with diagnosed reduced ability to work
• Universal social security pension for individuals from 65 years
• Fully funded labour market related pensions (DC-schemes)
• Private pension schemes (DC-schemes)
Distribution of 50 – 80 years old population in 2004
0
10
20
30
40
50
60
70
80
90
100
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80
Disability pension Employment
Others Public pension
Sickness benefits Unemployment
Voluntarily early retirement Cash assitance
Primary and total public budget relative to GDP
-8
-6
-4
-2
0
2
4
6
2004 2009 2014 2019 2024 2029 2034 2039
-8
-6
-4
-2
0
2
4
6
Total budget surplus/GDP at market prices
Primary public budget/GDP at market prices
Baseline: Macroeconomic levels in 2040 in the projection compared to 2004
• Real GDP has grown 92.8 percent• Employment is reduced by 7.2 percent• Private consumption has grown 106.4 percent• Public consumption has grown 119. 8 percent• Fiscal sustainability requires an annual reduction in
public expenditures of 4.0 percent of GDP
The retirement reform I
• The legal pension age of the VERP and the social pension is indexed to the life expectancy of a 60 year old average individual.
• The legal pension age of the VERP is increased by a ½ year in each of the years 2019 to 2022.
• The legal pension age of the social pension is increased by a ½ year in each of the years 2024 to 2027
The retirement reform II
• Starting in 2025 the legal pension age of the VERP is increased according the increase in life expectancy of a 60 year old in the period from 2010-2015. The increase is announced in 2015.
• The legal pension age of the social security pension is increased according to the same increase in life expectancy – in 2030 (This keeps the pension period of the VERP constant).
• Legal pension age is increased by 0, ½ year, 1 year each fifth year after the initiation in 2025
Indexation of the legal pension age
Ann. VERP age
changed
Pension-able age
changed
60 year life exp.
Acc. Chg.
Size of chg
Acc. Chg
VERP age
POAP age
2015 2025 2030 1.2 1.2 1.0 1.0 63.0 68.0
2020 2030 2035 0.6 1.8 1.0 2.0 64.0 69.0
2025 2035 2040 0.6 2.4 1.0 3.0 65.0 70.0
2030 2040 2045 0.6 2.9 0.5 3.5 65.5 70.5
2035 2045 2050 0.5 3.5 0.5 4.0 66.0 71.0
2040 2050 2055 0.5 4.0 0.5 4.5 66.5 71.5
2045 2055 2060 0.5 4.5 0.5 5.0 67.0 72.0
2050 2060 2065 0.5 5.0 0.5 5.5 67.5 72.5
2055 2065 2070 0.5 5.4 0.5 6.0 68.0 73.0
2060 2070 2075 0.4 5.9 0.5 6.5 68.0 73.0
2065 2075 2080 0.4 6.3 0.5 7.0 68.5 73.5
2070 2080 2085 0.4 6.7 0.0 7.0 69.0 74.0
2075 2085 2090 0.4 7.1 0.5 7.5 69.5 74.5
2080 2090 2095 0.4 7.5 0.5 8.0 70.0 75
2085 2095 2100 0.4 7.9 0.5 8.5 70.5 75.5
Resulting labour market participation rates in 2005, 2030, 2050
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
17 22 27 32 37 42 47 52 57 62 67 72
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2005 2030 2050
Share of life in employment
0.47
0.48
0.49
0.50
0.51
0.52
0.53
0.54
0.55
0.56
2006 2026 2046 2066 2086 2106
0.47
0.48
0.49
0.50
0.51
0.52
0.53
0.54
0.55
0.56
Baseline Retirement reform
Expected period as retiree
0
5
10
15
20
25
30
2006 2026 2046 2066 2086 2106
0
5
10
15
20
25
30
Baseline Retirement reform
Employment effects
2320
2370
2420
2470
2520
2570
2620
2004 2009 2014 2019 2024 2029 2034 2039
2320
2370
2420
2470
2520
2570
2620
Baseline Retirement reform
Primary and total public budget
Primary budget surplus
-8
-6
-4
-2
0
2
4
6
2004 2009 2014 2019 2024 2029 2034 2039
-8
-6
-4
-2
0
2
4
6
Baseline Retirement reform
Total budget surplus
-8
-6
-4
-2
0
2
4
6
2004 2009 2014 2019 2024 2029 2034 2039
-8
-6
-4
-2
0
2
4
6
Baseline Retirement reform
Macroeconomic levels in 2040 given the retirement reform compared to 2004
• Real GDP has grown 101.4 percent (92.8 percent)• Employment is reduced by 0.3 percent (7.2 percent)• Private consumption has grown 113.6 percent (106.4
percent)• Public consumption has grown 119. 8 percent (119.8
percent)• Fiscal sustainability requires an annual reduction in
public expenditures of 2.2 percent of GDP (4.0 percent)
Time inconsistency?
• Current generations of voters close to retirement age are exempted from the gradual increase retirement age – whereas future generations of voters will experience this gradual increase
• Changes in the retirement age are introduced by ”jumps” in the retirement age of up to 1 years. This generates large annual changes in labour supply and potential problems in case troughs in business cycles.
Conclusion
• The retirement reform solves the problem of a declining labour supply (relative to population)
• The retirement reform solves approximately half of the fiscal sustainability problem in Denmark by maintaining a constant share of transfers to GDP
• The part of the sustainability problem that follows from
the increased individual public services is not solved