Transcript Retirement in the Nordic Countries

Málstofa hjá Seðlabanka Íslands
4. febrúar, 2002
Lífeyriskerfin á Norðurlöndunum og
snemmtekinn lífeyrir
Tryggvi Þór Herbertsson
Hagfræðistofnun
Introduction
•
•
•
•
•
On the whole, labor force participation of older workers is declining in
the industrialized countries due to changing age structures.
In response to high unemployment, many countries expanded early
retirement schemes in the 1980s.
In the Nordic countries, substantial decreases in labor market
participation have in particular occurred in Finland and, more recently,
in Norway.
Despite the common trend toward earlier retirement, however, labor
market participation rates differ significantly across countries. This
divergence indicates that participation depends on a wide variety of
factors.
Older workers in Iceland have among the highest participation rates in
the world. Participation rates are also relatively high in Norway, despite
the recent decline. However, Denmark and Finland have experienced
low and falling participation rates, although there is some evidence that
these rates may now be leveling out.
Introduction
•
•
•
•
•
This combination of earlier retirement and longer life expectancy results
in a much longer span of inactivity.
Regardless of its causes, the withdrawal of older workers from the labor
force leads to an increase in unused production capacity, a reduced tax
base, and a heavier load on pension and fiscal systems.
If the trend toward earlier retirement were to continue far into the future,
it would pose even larger fiscal threats to pension systems, especially
those that do not include a penalty for early retirement.
The trend toward earlier retirement and the related issue of disability
raise substantial policy challenges.
General outline of presentation:
– Demographics in the Nordic countries
– Pension arrangements
– Early retirement
– The costs
Key Figures
Table 1. Some descriptive statistics for the Nordic countries
Denmark
GDP per capita, 1999 (PPP ajusted USD)
Population, 1998 (1 000)
Public pension spending/GDP ratio, 1998*
Dependency ratio, 1998 (65+/20-64)
Transfer ratio (expenditures/dependency ratio)
Labor force participation, 1998 (males 55-64)
Labor force participation, 1998 (females 55-64)
Mean retirement age males, 1995
Mean retirement age females, 1995
Unemployment, 2000
Health expenditures/GDP ratio, 1997
Life expectancy - males, 1997
Life expectancy - females, 1997
Total fertility rate, 1997
Infant mortality rate, 1997 (per 1 000 live births)
Hospital beds, 1997 (per 100 000 inhabitants)
Morbidity, 1997 (per 1 000 inhabitants)**
Deaths, 1997 (per 100 000 inhabitants (EPS))
Gross savings ratio, 1998 (pct of GDP)
27,073
5,295
8.8
24.3
0.36
61.1
44.2
62.7
59.4
4.7
6.4
73.3
78.4
1.752
5.6
464
190
821
19.9
Finland
22,723
4,954
5.7
21.4
0.27
44.5
39.7
59.0
58.9
9.8
7.6
73.4
80.5
1.746
3.9
790
208
738
25.1
Iceland
Norway
26,338
274
3.3
20.5
0.16
93.3
83.0
69.5
66.0
1.7
8.1
76.4
81.3
2.040
5.5
910
178
677
15.1
Notes: *Defined as spending on old age, early retirement, and disability pension within the Social Security system.
**Discharges from somatic wards.
Source: Nordic Medico Statistical Committee, OECD, the National Economic Institute in Iceland,
Blöndal and Scarpetta (1998), Ólafsson (1999), Herbertsson et al . (2000), and author's research.
28,133
4,418
7.8
26.7
0.29
75.8
60.8
63.8
62.0
3.5
8.0
75.5
81.0
1.857
4.1
398
148
701
27.1
Sweden
23,017
8,850
10.7
30.1
0.36
71.4
63.6
63.3
62.1
5.9
7.6
76.7
81.8
1.532
3.6
387
162
623
20.1
The Demographic Time Bomb?
Demographics
Percentage of Population Aged 65+
16
Nordic Countries
EEA
14
12
10
1960
1970
1980
Year
1990
Demographics
Key features
Finland
Denmark
Norway
Sweden
Iceland
0.25
•Low mortality
0.20
•High fertility
0.15
•Reasonably low
migration
0.10
0.05
0.00
1970
1980
1990
2000
2010
2020
2030
Year
Proportion of population aged 65 and over
Demographics
Population Age Structure in the Nordic
Countries, 2030
Population Age Structure in the Nordic
Countries, 1970
100
100
80
80
60
60
40
40
Norw ay
Denmark
20
Norw ay
Denmark
Finland
Finland
20
Sw eden
Sw eden
Iceland
Iceland
0
0
< 25
25-44
45-54
55-59
60-64
65+
< 25
25-44
45-54
55-59
60-64
65+
Demographics
Old-age dependency ratio (65+ over 2064) in Sweden 1860-2100
•Dependency ratio
tends to plateau
0.5
0.4
Dependency ratio
•Costs are
permanently, not
temporarily, higher
0.3
0.2
0.1
1850
1900
1950
2000
Year
2050
2100
The Nordic Welfare State
The Nordic Welfare Model
• Pensions have a long history in the Nordic countries.
• The generic Nordic pension system combines a public, means-tested minimum
benefit; a public earnings-related component; and occupational-based private
pension coverage.
• In 1998, pension spending amounted to:
–
–
–
–
–
8.8 per cent of GDP in Denmark,
5.7 per cent in Finland,
3.3 per cent in Iceland,
7.8 per cent in Norway,
10.7 per cent in Sweden.
• Demographic trends will increase pension costs significantly over time.
Although the results vary somewhat from country to country, the trend is
unambiguous: the elderly proportion in the population will exceed 15 per cent
by 2030 in all the Nordic countries.
Denmark
•Public old age pensions combine flat-rate pensions with a small
earnings related pension, FP-pensions (pay-as-you-go financed)
•Flat-rate funded labour market supplementary plan (ATP-pensions)
•New funded supplementary plan (SP-pensions), paying a flat-rate 10year annuity from the age of 67
•Occupational DC pensions
•Private pensions schemes with insurance companies and banks
Denmark
Personal
Occupational
Source: Danish Insurance Association
60
Per cent
40
20
0
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
Age
Percentage Contributing to a Private Pension
Scheme in Denmark in 1998
•Private
(occupational and
personal schemes)
coverage high in
Denmark
Finland
•Flat rate/very
small earnings
related Finnish
National Pension
(KELA)
30
25
20
15
10
5
0
18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63
Other
Old-age
Pooled
Disability
Unemployment
Male TEL Contributions 1999 in Finland
•Mandatory
TEL/related DB
plans (partially
funded)
•Third pillar
insurance funds
Iceland
Objectives
Redistribution
Savings
Savings
Form
Minimum Pension
Occupational Pension
Individual Accounts
Financing
Tax-financed
Fully Funded and Regulated
Fully Funded
Mandatory Publicly Managed
Mandatory Privately Managed
Voluntary Pillar
Norway
•Flat rate +
progressive
earnings scheme
•DB occupational
pensions
•Top up accounts
Sweden
•Old PAYG system
•PPM
•Occupational
schemes
•Insurance plans
Sweden
Old-age Pension Contribution
18,5 % of capped income
16 %
2,5 %
AP1-6
Swedish national debt office
(interime management)
(Buffer funds)
Premium Pension AuthorIty (PPM)
AP7
Income pension (pay as you
go)
Private fund companies
Premium pension (funded)
Table: Minimum pension in the Nordic pension systems
Minimum Pensions
Denmark
Finland
Iceland
Norway
Sweden
67
65
67
67
65
Minimum social security pension
before tax for a single individual
with no alternative income (basic
pension and supplements).
€12,855
€5,071 €5,298
€11,844
€10,362
€9,368
Is minimum state security pension
income tested?
Not the
basic
amount, but
the lowincome
supplement
Yes
Yes
Not the
basic
amount, but
the lowincome
supplement
Not the
basic
amount, but
the lowincome
supplement
Official retirement age
As of 4th of April 2000
The Costs of Early Retirement
Labor Force Participation
•
•
In 17 OECD countries,
for which data are
available, the proportion
of the 55-64 age cohort of
employed males fell by an
average of more than 10
percentage points between
1980 and 1996.
For the Nordic countries
the inactivity of those 55
years and older has
increased
substantially
over the last four decades.
80%
70%
60%
50%
40%
30%
20%
Workless
Inactive
Unemployed
10%
0%
1965
1970
1975
1980
1985
1990
1995
Trends in the inactivity of males 55+ in the Nordic
countries 1965-98 (weighted average)
Early Retirement
100
90
Denmark
Finland
Iceland
Norway
Sweden
OECD
80
70
60
50
40
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
Labour force participation rates among 55-64 years
old males in the Nordic countries, 1977-96
Costs of Early Retirement
•
•
•
Herbertsson and Orszag
(2001) developed a
framework to assess the
economic costs of early
retirement in the OECD.
There are substantial
differences among the
countries in costs due to
early retirement.
In particular, Iceland has
the lowest costs in the
OECD.
0.10
0.08
0.06
0.04
Denmark
Norw ay
Finland
Sw eden
Iceland
OECD
0.02
0.00
1979
1985
1991
1997
Costs of early retirement of 55-64 year-olds as a share of
potential GDP in the Nordic countries and the OECD
Why Early Retirement?
• Labor supply explanations:
– Incentives (pension wealth, accrual rate, earnings tests, tax considerations,
etc.)
– Disability (morbidity increases with longevity)
– Transition from long-term unemployment into retirement
– Government policies (lump-of-labor fallacy)
• Labor demand explanations (possibly pseudo-theorems):
– Jobs get obsolete and older workers lack skills (education) to switch jobs
– Older workers less productive than younger workers
Why Early Retirement?
• The UK Cabinet Office (2000) estimates that at most one-third of early
retirees have planned their retirement.
• Labor force status of people not working between 50 and state pension in the
UK:
• Voluntary inactive
– Retired (18 per cent)
– Taking care of family (14 per cent)?
• Involuntary inactive
– Long-term sick or disabled (44 per cent)
– Looking for work (10 per cent)
• Other reasons for inactiveness
– Don’t need job (5 per cent)
– Other (10 per cent)
Early Retirement: Denmark
Table 3.1. Main early retirement schemes and their caracteristics
Scheme
1. Disability pension
Eligible
group
age
18-66
Special conditions
for eligibility
Minimum 50% disability;
Is continued Number of
work possible? recipents
in 1995
(1000)
Partly
272
Part-time
5
Very limited
117
Part-time
1
Very limited
45
No
Few
social and economic criteria
2. Part-time (old age)
pension
3. Post-work salary
60-66
10 years contibution to AT P:
reduction of hours worked
60-66
Long membership of UB scheme;
eligeble for UB
4. Part-time post-work
salary
5. Temporary early
retirement pension
6. Prolonged unemployment benefit
60-66
UB as above: reduction
of hours worked
50-59
Conditions of post-work salary
if work continued until 60 years
50-59
50 when UB expires
Note: Post-work salary and part-time post-work salary is now combined in one scheme which includes
possibility for continued work.
Source: European Economy (1998), "Income Benefits for Early Exit from the Labour Market in Eight
European Countries: A Comparative Study, No. 3, European Commission and authors research.
Early Retirement: Finland
Table 3.3. Main early retirement schemes in Finland and their characteristics
Scheme
1. Disability pension
Eligible
group
age
Special conditions
for eligibility
16-64
60% reduced working capacity
Is continued Topping-up to Number of
work possible? a guaranteed recipents
minimum level in 1998
(1000)
Limited
Yes, minimum
and socio-econmic conditions
2. Partial disability
16-64
40-60% reduced working
Partly
pension
capacity
3. Individual early
60-64
Reduced work capacity and not
Limited
disability
eligible for normal disability pension
4. Early old-age pension 60-64
None
Not in same job
5. Part-time old-age
pension
6. Unemployment
pension
7. Prolonged unemployment benefit
8. Farmers' early
retirement aid
58-64
Works 16-28 hours per
244,252
pension
No
Yes, minimum
43,795
pension
Yes, reduced
58,462
limited
minimum pension
Partly
No
10,924
49,389
week
60-64
Unemployed at age 60
Limited
Yes, minimum
55-64
Unemployed more
Partly
Yes, social
pension
than two years
55-64
Desisted from farming
42,696
assitance
Not on the
No
farm
Source: European Economy (1998), "Income Benefits for Early Exit from the Labour Market in Eight European
Countries: A Comparative Study, No. 3, European Commission and authors research.
Early Retirement: Sweden
Main early retirement schemes in Sweden and their caracteristics
Scheme
1. Disability pension
Eligible Special conditions Reduction Topping-up to Number of
group
for eligibility
of normal a guaranteed
recipents
age
old-age minimum level
in 1999
pension
(1000)
16-64
Medical certificate
No
Yes, minimum
419
pensions
2. Early old-age
pension
3. Part time pension
60-64
None
Yes
Yes, reduced
18
minimum pension
61-64
In work 17-35 hours
No
No
per week
Source: European Economy (1998), "Income Benefits for Early Exit from the Labour Market in
Eight European Countries: A Comparative Study," No.3, European Commission and
Ministy of Social Affairs, Sweden
2.7
Late Retirement: Only in Iceland
45
Denmark
40
Finland
35
France
Germany
30
Iceland
25
Italy
Japan
20
Netherlands
15
Norway
10
Sweden
United Kingdom
5
United States
Source: OECD
0
1960
1970
1980
1990
2000
Labor force participation rates for men over 65 in the OECD
Disability: Morbidity on the Move
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
1980
Denmark (50-59)
Norway
Iceland
1985
Finland
Sweden
1990
1995
2000
Disability incidence among men and women age 55-59
in the Nordic countries
Disability: Morbidity on the Move
50
16-19 (18-19 for Denmark)
45
Per cent of age group
40
35
Source: T horlacius et al. (1998)
20-29
30-39
40-49
50-59
30
25
60-64
65-66
20
15
10
5
0
Denmark 1995
Finland 1995
Iceland 1996
Norway 1996
Sweden 1995
Percent of age-group with more than 75% disability
pension in the Nordic countries
Encouraging Work
• Important to recognise external costs of early
retirement.
• Policy options:
– Voucher programs,
– Quantity restrictions,
– Special schemes (FlexJob in Denmark).
Conclusion
•
•
•
•
Despite the political unpopularity of reforming early retirement systems, several
countries have already taken steps to tighten eligibility rules and strengthen incentives
to retire later.
However, even these additional incentives are often weak or clash with supplementary
pension provision.
Furthermore, in most countries, few incentives exist to retire late, as reflected in low
labor force participation after the formal retirement age.
Steps taken so far to challenge changing demographic structures:
–
–
–
–
–
Denmark – ATP, occupational pensions
Finland – prefunding of TEL, etc.
Iceland – voluntary individual accounts, mandatory occupational plans
Norway – the petroleum fund
Sweden - PPM