Transcript Pension Reform in a Mature Welfare State

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
1.000 EUR
1.000 EUR
30
30
20
20
10
10
0
0
0
10
20
30
40
50
60
70
80
90
100
-10
-10
-20
-20
-30
-30
-40
-40
Dependency Ratio and Old Age Dependency Ratio
0,800
0,800
0,700
0,700
0,600
0,600
0,500
0,500
0,400
0,400
0,300
0,300
0,200
0,200
0,100
0,100
0,000
1981
0,000
1991
2001
Dependency Ratio
2011
2021
2031
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 (DCschemes)
• Private pension schemes (DC-schemes)
Distribution of 50 – 80 years old population in 2004
100
90
80
70
60
50
40
30
20
10
0
50
52
54
56
58
60
62
64
66
68
70
72
Disability pension
Employment
Others
Public pension
Sickness benefits
Unemployment
Voluntarily early retirement
Cash assitance
74
76
78
80
Primary and total public budget relative to GDP
6
6
4
4
2
2
0
2004
0
2009
2014
2019
2024
2029
2034
2039
-2
-2
-4
-4
-6
-6
-8
-8
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
Pensionable age
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
changed
Resulting labour market participation rates in 2005,
2030, 2050
1.0
1.0
0.9
0.9
0.8
0.8
0.7
0.7
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0.0
0.0
17
22
27
32
37
2005
42
47
2030
52
57
2050
62
67
72
Share of life in employment
0.56
0.56
0.55
0.55
0.54
0.54
0.53
0.53
0.52
0.52
0.51
0.51
0.50
0.50
0.49
0.49
0.48
0.48
0.47
2006
2026
2046
Baseline
2066
Retirement reform
2086
0.47
2106
Expected period as retiree
30
30
25
25
20
20
15
15
10
10
5
5
0
2006
2026
2046
Baseline
2066
Retirement reform
2086
0
2106
Employment effects
2620
2620
2570
2570
2520
2520
2470
2470
2420
2420
2370
2370
2320
2004
2320
2009
2014
2019
Baseline
2024
2029
Retirement reform
2034
2039
Primary and total public budget
Primary budget surplus
Total budget surplus
6
6
6
6
4
4
4
4
2
2
2
2
0
-2
0
2004
-2
-4
-4
-4
-4
-6
-6
-6
-6
-8
-8
-8
-8
0
2004
-2
0
2009
2014
2019
Baseline
2024
2029
Retirement reform
2034
2039
2009
2014
2019
2024
2029
2034
2039
-2
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