Europaudvalget 2006-07
2767 - beskæftigelse m.v.
Offentligt
1
The Danish labour market System
1. European Commissions report 2002 on Denmark
In 2002 the EU Commission made a joint report on adequate and sustainable pensions.
In the country summaries the description of the Danish pensions system was the following:
“The first pillar of the Danish pension system consists of the universal, residence-based and
non-contributory, statutory old age pension scheme that is financed from general taxation
and consists of a flat-rate benefit and an income tested element. It is designed to secure a
decent minimum standard of living for all citizens from the age of 65. A full public old-age
pension is conditional on 40 years’ residence in Denmark. The benefit is indexed to private
sector wages and is taxable. It consists of two parts, a basic amount that goes out to
everybody and a supplement, which is income tested. The post-tax, net value of the two
benefit elements corresponds to 47% of the average take-home pay of a worker. At present
the basic pension is paid to 99% of residents above retirement age. Of these 99% receive the
full basic amount and 64% the full supplement. For single pensioners the basic pension
constitutes 61% of their income.
A second tier of the first pillar consists of the statutory, working time-related, fully funded
ATP scheme (which is available for all economically active persons, but only offer benefits
at a moderate level equivalent to 20% of the 1
st
pillar pension) and the statutory labour
market supplementary pension scheme for recipients of anticipatory pensions (SAP). The
ATP scheme provides for a substantial amount of redistribution notably in favour of the
unemployed and disabled. In addition, civil servants’ pension schemes, which are statutory
and paid for by taxes, are included in the first pillar.
The second pillar consists mainly of occupational schemes based on collective agreements at
the sectoral level which are fully funded defined-contribution schemes. These schemes have
been expanded significantly since the 1980s and now cover more than 80% of the employed
workforce. While based on individual accounts, these trade-union initiated schemes have
important solidarity elements, in particular invalidity insurance and the absence of health
criteria for qualification purposes. In addition, they do not present barriers to labour
mobility, thanks to immediate vesting and transferability between schemes. The normally
regressive distribution effects and public budget costs of tax incentives for supplementary
pension provision are moderated by the fact that tax exemption only applies to income tax at
a standard rate and that returns on investments are taxed. In 2002, the statutory Special
Pension Savings scheme was redefined as a savings scheme without any redistribution
objective and based on individual accounts.
The third pillar consists of individual pension savings schemes, many of which result in
lump sum benefits instead of annuity payments.
Access to a number of needs- and income tested cash supplements (e.g. housing, heating and
medicine allowances), to free health and long-term care and to recreational activities
contribute to guaranteeing a decent minimum standard for all.
Challenges
While the Danish system currently appears to provide a solid and decent income level to all
long-term residents, there appear to be weaknesses as far as the relative living standard of
the elderly is concerned, although national data present a different picture from ECHP data.
In view of the fact that a significant proportion of wage earners were only covered recently
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109 by occupational schemes, it can be expected that many people retiring over the next 15-
20 years will have had insufficient access to schemes that allow income levels to be
maintained after retirement. Over the long run the situation can be expected to improve
thanks to the gradual accrual of occupational pension entitlements based on collective
agreements.
However, access to income maintenance through occupational schemes for people in non-
standard jobs could be improved. The increasing importance of occupational pension
schemes which reflect earnings could result in a somewhat greater gap between the pension
incomes of men and women.
Expenditure on public old-age pensions stands at 4.4% of GDP and is estimated to increase
by 3.4% of GDP by around 2035. However, including all public pension schemes (such as
disability pensions, civil servants pensions and statutory supplementary pension schemes),
the total expenditure amounted to 10% of GDP in 2000 and is estimated to rise to 14.5 % by
2030 and to decrease to 13.3% by 2050 (Economic Policy Committee projections). The
strategy for financial sustainability hinges upon maintaining a surplus on public finances
averaging 1�½-2�½% of GDP up to 2010 and an increase in the labour force of 133,000
persons by 2010 also. Both of these goals are ambitious and are at the same time crucial for
the strategy to succeed, given the relatively short period of time for reacting if underlying
assumptions on economic developments should not hold.
Since Denmark already has one of the highest employment rates in the EU, labour reserves
are small. The pension reforms undertaken during the 1990s are expected to increase the
labour force participation of older workers during this decade, but only by about the amount
that is needed to offset the impact of the ageing workforce. In addition, employment is to be
raised through substantially improved employment rates among immigrants and an
improved integration into employment of the disabled as well as by increasing the
effectiveness of labour market policies.
Meeting the challenges
The Danish national strategy report expresses satisfaction with the reforms implemented
over recent years and stresses that no major adjustments to the system are planned at
present. The system is based on a broad consensus between the major parties about the
overall structure and the relative role of its various elements. In addition, a large majority in
parliament agreed in 2000 on the principle that the public old-age pension should form a
sound income basis for present and future pensioners.
The expansion of occupational pension schemes is expected to raise replacement rates
significantly and hence to reduce the current income maintenance gap. Yet the first pillar
will continue to play a lead role in provisions. By 2045, income from the basic pillar will
still account for about 50% of the average income of pensioners. A potential drawback of
defined-contribution occupational schemes in terms of gender equality, i.e. lower pensions
for women reflecting their longer life expectancy, is avoided by calculating pension benefits
on a unisex basis.
A major focus of the reforms during the 1990s was employment promotion through better
work incentives and working conditions for older workers. The pre-early retirement scheme,
which was a transitional allowance for people aged 50-59 years who had become
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unemployed and had contributed to the unemployment benefit scheme for at least 30 years,
was closed for new entrants in 1996 and will be fully phased out by 2006. The voluntary
early retirement scheme was made less attractive for individuals in 2001 through the
obligation to contribute to the scheme if a person opts to retire early. In addition, a special
tax exemption for contributions was introduced for people who postpone the take-up of a
voluntary early pension. Yet, the implicit tax on working beyond the ages 60, 62 and 65 is in
many instances still substantial. Regarding the disability pension scheme, rehabilitation
measures have been reinforced and the focus has been switched to encouraging people to
continue at work by mobilising the remaining capacity to work from those wishing to
benefit from the scheme. Measures taken have already resulted in a lower number of new
disability pension claimants.
An increased labour force and a further reduction in unemployment are also seen as crucial
for enabling the government to face increasing expenditure while implementing its debt
repayment strategy. The government aims to maintain on average a general budget surplus
of 1�½ to 2�½
%
of GDP up to 2010.
The complex structure of the Danish system (means-tested elements, ATP, fined
contribution schemes) can make it difficult to have a clear idea of a person’s income
situation after retirement. This issue is addressed by an obligation on pension schemes to
disclose their administrative costs and performance records. In addition, the ATP scheme, in
co-operation with almost all other pension providers, runs an internet site where individuals
can have their prospective net income from various pension schemes calculated.
Conclusion
The strategy for ensuring adequacy and financial sustainability of pension provision seems
appropriate. The reforms needed to achieve the adequacy and solidarity objectives have
been put in place over the last decade with support from a broad majority in Parliament. A
budget policy leading to quick debt reduction has already been sustained for some years and
all major parties support the continuation of this policy until 2010, when the public debt will
have been largely eliminated. A further rise in employment will be difficult to achieve in
view of the limited labour force reserves, but it is not implausible given Denmark's proven
track record in employment. In particular, the incentives for older workers to defer their
retirement could be further strengthened.
In sum the pension system seems to be financially sustainable in the long term under present
policies with a fairly equitable sharing of the burden between generations. Building up
occupational pensions will increase replacement rates in the future and thereby alleviate
potential pressure for increases in public pension rates. Yet, the sustainability calculations
hinge critically on maintaining large surpluses in public finances during this decade. Further
labour market reforms would seem to be needed to ensure the assumed increase in the
labour supply, which in turn is needed for ensuring the debt reduction strategy necessary for
financial sustainability.”
2.
European Commissions rapport 2005 on pensions system in Denmark
In 2005 the EU Commission made a new report on adequate and sustainable pensions.
In the country summaries the description of the Danish pensions system was the following:
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“The public old age pension is a universal, residence-based and non-contributory statutory
old age pension scheme financed from general taxation. A full public old-age pension is
conditional on 40 years’ residence in Denmark after the age of 15. It consists of a basic
amount and an income tested pension supplement. The pension depends on the pensioner's
present income and martial status, but assets have no effect on the amount. The benefits are
adjusted once a year based on the wage development in the private sector, and are taxable.
Since 2003, in addition a supplementary pension benefit of a flat rate amount is paid once a
year to the most disadvantaged pensioners (means-tested). For the 70% of older people with
the lowest incomes, social pension accounts for 50% or more of the gross income for both
single pensioners and couples. The statutory retirement age for both men and women is 65
years, being lowered from 67 years in July 2004.
Reforms were undertaken during the 1990s, aiming in particular at increasing labour force
participation of older workers so as to offset the impact of an ageing workforce. In addition,
people who postpone the take-up of a voluntary early retirement benefit beyond the age 62
are paid a tax-free bonus at the age of 65 (that increases with time worked beyond the age
62). Rules on deferred pension were introduced with effect from 1 July 2004. Persons who
have reached public old-age pension age and who participate actively in the labour market
(at least 1,500 hours annually) may choose to defer their public old-age pension against
having later their current public old-age pension increased by a supplement for deferred
pension.
Denmark has the supplementary mandatory funded
ATP
scheme, which can be considered
as part of the first pillar due to the fact that it is mandatory. But it has also the characteristics
of an occupational pension scheme as it is employment-related and organised in private
funds, thus not burdening public finances. On average ATP offers about 10% of public old-
age pensions to current pensioners. In collective agreements of 2004 covering the private
labour market, the social partners agreed in raising contribution rate to ATP by 9% in 2006.
The Special Savings Scheme (SP) was launched in 1999. All employees and self-employed
contribute 1% of their income in order to receive benefits, that are paid out over a 10-year
period after the retirement age is reached. A decision was however made to suspend
payments to the SP plan for the years of 2004 until 2007. Almost all citizens of working age
are in ATP and SP and even several groups of persons temporarily or permanently outside
the labour market pay contributions to the schemes. Thus, these schemes ensure almost all
future pensioners supplementary pension besides public old-age pension.
Statutory pensions are supplemented by occupational pension schemes, such as
Labour
market pensions,
labour market supplement pensions (SAP) and individual pension saving.
Especially labour market pension schemes expanded during the last 25 years from 30% to
some 90% coverage of employees. The bulk of labour market pensions are defined
contribution, i.e. the amount of the pension depends on the contributions paid. In 2004,
contributions to the agreement-based labour market pension schemes were typically 7-10
per cent of the wage in the private labour market and 12-16 per cent of the wage in the
public labour market. In connection with the collective bargaining in 2005, a number of
increases of these contributions were agreed. The employer contributes two-thirds, while the
individual person contributes one-third.
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Access to a number of needs and income tested cash supplements (e.g. housing, heating and
medicine allowances), as well as to free health and long-term care and to recreational
activities contribute to guaranteeing a decent minimum standard for all.
Current situation
Adequacy. The relative income of all people aged 65+ relative to the complementary age
group 0-64 stands at 70%, which is lower than in most of the other member states.
1
In spite
of the projected significant rise of funded schemes, the first pillar will continue to play an
important but decreasing role in pension provision.
The statutory pension schemes maintain the risk of poverty of the elderly people on a
moderate level (21% at the 60% threshold) higher than that of the 0-64 years (10%).
2
The
gender gap between men and women is one of the lowest in Europe. This is linked to the
high labour market participation of women and also to prevalence of supplementary labour
market pension of women as high as the one of men. In addition, pension rights in ATP and
labour market pensions (since 1998) are calculated on the basis of a unisex principle. The
unisex principle implies that a person’s gender must not be taken into account when pension
is calculated in regard to the remaining projected life expectancy.
Theoretical pension replacement rates of today are relatively low compared to almost all
other member States. The current total gross replacement rate is 49%, resulting in net
replacement rate of 71%. Since most Danish funded schemes are not yet fully mature (a
majority of new pensioners have not yet contributed during a full working life) the level of
measured income of pensioners relative to the working age population will improve
gradually, in particular for people on low and average incomes. The counterpart is however
that the build-up of the mandatory savings-based schemes to some degree will supersede
other savings. The replacement rate ensured by the pension system must be seen in relation
to the supplementary benefits targeted at pensioners and the public financed health and
elderly care.
The Danish Government wishes to put self-employed persons on an equal footing with
employees when it comes to the possibility for saving up for retirement. Self-employed
persons can now achieve full deductions for pension contributions of up to 30 per cent of the
profit for the year and can thus decide on an ongoing basis how much they wish to
contribute.
Financial sustainability: Public debt has been reduced since 1998 and is below the average
in EU, being 45.9% of GDP in 2003 and the State budget was in small surplus in 2002
(0.7% of GDP) and 2003 (0.3% of GDP). Government has set the operational fiscal target of
upholding a structural budget surplus of 0.5 - 1.5 per cent of GDP (1.5-2.5 per cent of GDP
including ATP) on average through 2010. The reduction of debt improves fiscal
sustainability. To support the long-term sustainability of public finances and the pension
1
Accumulated wealth, which is higher for older people, should also be considered when comparing living standards
across generations. Due to data limitations unfortunately this is not possible for all countries.
2
This figure does not include as income negative capital income and imputed rent from private housing, which gives an
incomplete picture of income situation, in particular for older people. When taking into account this more
comprehensive definition of income, the risk of poverty in Denmark for elderly people is fairly the same as in the rest of
the population (8.7% for people aged more than 65 and 10.6% for people aged more then 75, compared to 9.8% for 0-
64 aged people).
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6
system tight expenditure control and a permanent rise in employment generated from new
structural policy initiatives are pursued. In relation to this, the Government has launched the
integration plan that a majority of the political parties have agreed on in June 2005.
The total employment rate (75.7%) and the total female employment rate (71.6%) are
currently the highest in the EU (2004), while the one of older workers (60.3%) is the second
highest and far exceed the Lisbon targets. As from 1 July 2004, the age at which a person
becomes eligible for public old-age pension is 65 years (before it was 67). The formal
pensionable age was lowered as part of a reform of the voluntary early-retirement scheme in
1999. The lowering of the formal pensionable age is not assessed to have any significant
effect on the average retirement age.
Modernisation: Reduced transfer fees for individual pensions in the 3. Pillar contracted in
pension companies have improved the possibilities for transfer, and this is expected to result
in intensified competition between companies and thus greater efficiency. Nevertheless, the
bonus potential is not transferable between pension providers and this makes the
consequences of a transfer less transparent. Frequent job/industry changes, leave, etc. could
have unfavourable impact on labour market schemes, as a new employee is often subject to
a waiting period before he/she becomes a member of the pension scheme.
The complex structure of the Danish system (means-tested elements, ATP, defined-
contribution schemes) can make it difficult to have a clear idea of a person’s income
situation after retirement. This issue is addressed by an obligation on pension schemes to
disclose their administrative costs and performance records. In addition, a common
database,
PensionsInfo,
has been established in cooperation between pension funds, life-
insurance companies, banks and public authorities.
PensionsInfo
gives the individual
pension saver access to information from almost all pension suppliers, thus enabling him/her
to get a total overview of his/her pension savings.
Outlook, reform measures and policy debates
Denmark is projected to face similar demographic trends to most EU15 Member States in
until 2030 and then experience more favourable trends. According to the latest projections
of Eurostat, ageing would be slower than the average EU. Indeed, the elderly dependency
ratio will increase from the present 23% (2004) to 38% in 2030 and 42% in 2050, staying
significantly below the EU25 average of 52% in 2050.
Since persons are now entitled to higher pensions compared to previous rules,
supplements for deferred public old-age pension for people who wish to work beyond the
retirement age of now 65 will not necessarily improve fiscal sustainability. Nevertheless
the aim is to increase the average retirement age by six months to the age of 61.5.
The expansion of occupational pension schemes (SP and labour market schemes) is
expected to raise replacement rates significantly and hence to reduce the current gap.
Theoretical total gross replacement rate for a worker retiring at 65 after 40 years at the
average wage is expected to increase from 49% in 2005 to 64% 2050 because of an
expected increase of the gross replacement rate in the second pillar from today 4% to 25%
in 2050 and despite a slight decrease of the gross replacement rate for the first pillar
(including ATP) from 45% today to 39% in 2050. Because of taxation of the pensions, the
increase in total net replacement rate is significant lower, starting from 71% in 2005 to
76% in 2050.
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Denmark’s national strategy report highlights that the budgetary pressure from ageing is
not only related to public old-age pension, but also to health and elderly care expenditures,
and that the sustainability of the public pension system cannot be assessed independently
of other public expenditures and the overall assessment of the long-term sustainability of
public finances because public pensions are financed by general tax revenues. Latest
available national budgetary projections included in 2004 in the context of the assessment
of the long-term sustainability of public finances indicate that public pension spending
will grow by 2.3 p.p. of GDP between 2004 and 2050, while total age-related expenditure
by 6.0 p.p. between 2004 and 2050. [Paragraph
to be updated with latest AWG
projections]
ATP and SAP savings-based schemes, pension rights are earned on the basis of a unisex
principle. SP is a purely saving-based scheme without re-distribution. The unisex
principle, which implies that a person’s gender must not be taken into account when
pension is calculated, became statutory for labour market pensions in 1998. The principle
will only take full effect for pensions paid out from 2040. As regards maternity leave
without wage, the social partners in the central, local and regional government area agreed
in connection with the collective bargaining in 2005 that pension contributions will be
paid in the maternity leave periods in which no wage is paid.
The system is based on a broad consensus between the major parties about the overall
structure and the relative role of its various elements. In addition, a large majority in
parliament agreed in 2000 on the principle that the public old-age pension should form a
sound income basis for present and future pensioners. The government has set up a
Welfare Commission charged with submitting specific proposals before the end of 2005
for reforming the Danish welfare model, including social pensions. In the light of the
analyses from the Welfare Commission and with a view to maintaining the long-term
targets of economic policies, the Government will in spring 2006 present a new economic
multi-year plan for Denmark, covering at least the period up to 2015.
Conclusion
The strategy for ensuring adequacy and financial sustainability of public pension provision
seems appropriate. A budget policy leading to quick debt reduction has already been
sustained for some years and all major parties support the continuation of this policy until
2010, when the public debt is expected to be substantially reduced.
In sum, the pension system seems to be financially sustainable in the long term under
present policies with a fairly equitable sharing of the burden between generations.
Denmark reports not only one of the lowest gender gap between men and women in the
risk of poverty in Europe but also a very small gender gap in the pension entitlements of
the current pensioners. While relative living standards of older people are moderate,
building up private pensions is expected to increase replacement rates in the future and
thereby alleviate potential pressure for increases in public pension rates. Nevertheless, the
future contribution of private pensions to adequate pensions would benefit from periodic
reviewing.
Yet, the sustainability calculations hinge critically on maintaining large surpluses in public
finances. Furthermore, ambitious targets have been set to increase employment by 60.000
persons by 2010. Given Denmark's proven record in employment, further rises in
employment rates will be difficult to achieve and will require further measures, especially
to slow the outflow of older workers through early retirement scheme.
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In the light of the proposals for welfare system reforms from the Welfare Commission and
with a view to maintaining the long-term targets of economic policies, the Government
will in spring 2006 present a new economic multi-year plan for Denmark, covering at least
the period up to 2015.”