Download The Danish Pension System

The Danish Pension System
Properties, outcomes and challenges
Torben M. Andersen
Aarhus University, Denmark
Eight International FIAP- ASOFONDOS
Congress,
Carteagena April 2015
Pension system: Multiple objectives
• Distribution: Ensuring that all elderly have a
decent living standard (minimum standards)
• Consumption smoothing: Ensuring that living
standards after retirement stand in a resonable
relation to living standards while working
• Insurance: Coverage of various events (spouse,
long life……)
Danish pension system
I: Public pensions (PAYG – defined benefits)
– Base pension for all (flat rate)
– Supplements – means tested
– All benefits are wage indexed
II: Labour market pensions (defined contribution)
– Bargained, but mandatory for the individual
– Covers the majority of the work-force
– Provide annuitities + insurance (spouse/children; health)
III: Private pension saving
– Tax subsidized and tied until retirement
– Free savings (property, financial assets…..)
International comparisons
Background -Danish welfare model
• Extended welfare state
– Pensions
– Health
– Old-age care
• Universalism
– Equal entitlements for all
– Tax financed
• Strong distributional objectives
Current pension system developments
• 1980s
– Savings deficit – systematic current account
deficits
– Political discussion on employee-owned firms
(wage-earner funds)
– Social partners: Agreement on development of
labour market pensions (centralized labour
market; high unionization)
• Collective - voluntary /bargaining
• Individual - mandatory
Labour market pensions – stepping up
%
20
Contribution rates
Pension wealth, % of GDP
250
18
16
200
14
12
150
10
8
6
100
LO-DA blue collar
LO-DA white collar
Nursery teachers
7
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1996
1993
0
1990
0
50
1987
2
Teachers
1984
4
Changing importance of public and
private pensions
9
Pensions, % GDP
% of GDP
8
7
6
5
4
3
2
1
0
1985
1995
2005
2015
2025
Public pensions
2035
2045
2055
Private pensions
2065
2075
Current system
1.000 kr.
450
1.000 kr.
450
Phasing out of public pension supplements
400
400
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0
-
50
100
150
200
250
300
Private pensions
Supplement I
Base amount
Supplement II
Private pension
350
0
Replacement rates (2012)
120
Projections:
- Replacement rates will increase
- Private pensions will increase in importance
- Public pensions will remain important
%
100
%
140
120
100
80
80
60
60
40
40
20
20
0
0
1
2.
3.
4.
5.
6.
7.
8.
9.
10
Income decile
Capital income
Private pensions
Public Pensions
Low income among pensioners
%.
%.
Share with income below 50%
of median income for entire
population
3.0
2.5
3.0
2.5
0.3 % of persons above 64 falls
below the official poverty line
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
65
66
67
68
69
70
71
Age
72
73
74
75
>75
Financially robust?
• Labour market pensions:
– Funded
– Non-firm specific
• Public pensions:
– Criteria for fiscal sustainability are met!
– Reforms to increase the statutory pension age
• Reducing possibilities for early retirement
• Discrete increases in pension age from 65 to 67
• Indexation of pension ages based on life expectancy at
the age of 60; expected pension period 14.5 years
Challenges
• Interplay between public and private
pensions (means testing)
• Taxation of various types of savings
• Not all are covered by a labour market
pension
• Balance expansion – macroeconomic
(in)stability
Distribution dilemma
• Binding distributional constraint – ensure
some minimum income (working age and
pensioners)
• Impossible to reach this target through
mandatory pension savings for groups with
income close to the limit
• Division of labour between public and private
pension via means-testing – targeting public
pensions towards low-income groups
Means-testing and incentives
• How to transit from public to
private pensions? (meanstesting)’
• If higher private pension =
lower public pension ;
implicit form of taxation in
addition to regular taxes
• Effective tax rates can be
high
- Slow phasing out: low tax
rates, but costly
- Quick phasing out: high
tax, less costly
1.000 kr.
1.000 kr.
Public pensions
200
200
180
180
160
160
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
-
50
100
150
200
250
300
350
400
Private pension
Supplement I
Supplement II
Base amount
Incentives – savings and retirement
• High effectiv tax rates
on pension savings
and later retirement
• Applies for low
income groups!
%
%
Effective tax rates on pension savings
75
65
55
45
35
0
100
200
300
400
500
Private pension(1.000 kr.)
600
Means-testing and insurance
• Low contribution due to involuntary
unemployment, illness etc.
• Low return on investments
etc.
= lower private labour market pension
= higher public pension
Stabilizes/insures total net pension
Taxation of savings
• ETT-regime for
pension savings
• Large variations in
taxation of various
types of savings
– Asset allocation
– Balance expansion
%
Pension
savings
Other types of
savings
%.
45
45
40
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
Return Property
taxation pensions
Shares
Capital
income
Balance expansion
• High level of pension
savings (illiquid)
% of GDP
• High level of borrowing
(large share with
variable interest rate)
• High risk exposure?
• Effects on
macroeconomic
stability
Financial assets
Financial liabilities
Financial net assets
Pension wealth, after tax
Deferred taxes
Pensions for all!
• Bargained solution= support from social partners
• But not all covered! (recipients of social transfers,
some employed, self-employed)
• ”Myopia” – insufficient savings (The argument for
mandatory pensions saving)
• Free-rider aspects + effect on public budgets
• Solution: Mandatory pension savings for all??
Conclusions
• Long transition phase – still on-going
• Robust system
– Meets distributional objectives
– Ensures high replacement rates
– Financially viable
• Unsolvable dilemma – how to reconcile
(re)distribution with incentives?
– Current system has clear incentive problems
(savings, retirement)
– Uneven taxation of various types of pensions saving
• Ensuring coverage for all – mandatory scheme or?