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Pension Reforms in Denmark

Authors:
Pension Reforms in Denmark
Peter Abrahamson & Cecilie Wehner
Department of Sociology
University of Copenhagen
November 2003
Introduction
In many ways the Danish pension system is nothing special compared with other systems in Europe.
As other pension systems in as well the EU countries as the applicant countries, it consists of three
tiers, a basic social old age pension, occupationally related supplementary pensions and private pension
savings. However, the weighting of these three elements is what makes the Danish pension system
distinct: great emphasis is put on public old age pension for all citizens regardless of their previous
attachment to the labour market.
In recent years, the Danish pension system has undergone a number of reforms that have changed the
constitution of the system from purely public to partly private. This also indicates a shift in the ideology
governing the pension policy. The reluctance against following the Nordic pattern of introducing an
income related supplementary pension scheme in the 1960s could be seen as a result of strong
resistance against passing the income differences of working life on to the age of retirement as it was
expressed by one of the leading social science experts, Bent Rold Andersen. Instead, the basic
supplementary pension scheme, the ATP (Arbejdsmarkedstillægspension), was introduced in 1964, but for
several reasons the scheme was never fully developed and therefore also never gained any reel
importance. Today, people mostly regard it as a (hidden) part of the tax system.
1
Up trough the 1980s, concerns about the future demographic burden emerged in the welfare debate all
over Europe. How could the welfare state be sustained when too few people of working age should
provide for too many elderly? In Denmark, this rising concern with demographic changes was
interpreted as a question of whether the public PAYGO old age pension, the so-called ‘peoples
pension’ could survive in the years to come with its present features. Several white collar employee
groups had already established occupational pensions up through the 1960s and 1970s – in the middle
of the 1980s about one third of the employed was guaranteed an additional pension as a supplement to
the old age pension when they retired. As we will dig more into later, the bourgeois government and
the social partners made an agreement that would benefit the macro economy as well as the future
pensioners by establishing occupational pensions for the remaining two-thirds of the employees.
In 2001 Denmark spent DKK 90 billion on public old age pension (peoples pension). When
expenditures on survivors and disability are included this amounted to Euro PPS 3.632 per capita
which was at par with Norway, Sweden, Belgium, France, Germany, Italy, the Netherlands and the
United Kingdom (NOSOSCO 2003: 181). The peoples pension is financed out of taxation while the
occupational pension schemes are financed out of contributions from employers and employees.
In this paper we will present a historic view of the Danish pension system after WW2 and how we
ended up with the current system. In addition to this we will discuss if the recent changes from a purely
public to a partly private pension system should be regarded as path dependency or a path-breaking
tendency. Finally, future challenges to the Danish pension system – including the early retirement
scheme and how to possibly get rid of it – will be dealt with.
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The Danish pension system after WW2
Before we turn to the most recent development we will very briefly explain some of the first basic steps
in the establishment of the Danish pension system. These preliminary schemes are important for a
number of reasons. First of all, they show that though Denmark today is considered to belong to the
Scandinavian welfare regime with generous, universal benefits based on individual rights this was not
initially features of the Danish welfare schemes. Furthermore, as will be dealt with later, a number of
similarities exist between the original pension schemes and the recent wave of privatisation that has
characterised the last 20 years.
Already in 1891 the first pension-like scheme, the ‘Alderdomsunderstøttelsen’, was introduced as a social
policy measure for the worthy needy. The main principle was that Danish citizens who had reached the
age of 60 and who were in need of help would be entitled to the ‘Alderdomsunderstøttelsen’ that should be
generous enough to make it possible for the old person to provide for him- or herself. However, to
receive the benefit some preconditions had to be met: The claimant was not allowed to have received
any social assistance in the previous ten years and the social contingency causing the need for help was
not to be self-induced. The benefit was calculated on behalf of an individual means test (Johansen
1996).
Though the conditions that had to be met in order to qualify for the ‘Alderdomsunderstøttelsen’ might
sound pretty harsh comparing to what we know of nowadays, it then indicated a major step forward,
since receiving the benefit was not followed by loosing citizen rights such as the right to vote as had
been the case previously. The 1891 act on the ‘Alderdomsunderstøttelsen’ can be regarded as a first
foundation stone in the Danish welfare model with general access or right based on citizenship to a
means tested benefit financed by taxes and administered by the local governments (Johansen 1996; Due
& Madsen 2003; Green-Pedersen forthcoming).
3
Nevertheless, the individual means testing felt humiliating for people who had to go through it, and it
was removed in 1922 – partly as a consequence of the rising labour movement who – in many instances
and at times - have had great influence on Danish welfare policy. This we will return to later. After the
1922 reform the ‘aldersrente’ - as it then was renamed - was a fixed amount regulated by certain settled
rules according to the claimant’s income (Johansen 1996).
Today, the Danish pension system is usually regarded as consisting of three or four distinct pillars as
illustrated in the figure below:
Peoples
Pension
Occupa-
tional
Pensions
.
ATP Pr i vate
Pensions
12 43
Basic Security Income Maintenance
Source: Nielsen 1998
Whether there is three or four pillars depends how the ATP is grouped – some place it together with
the peoples pension, other classify it with the occupational pensions, which according to the
terminology must be the most proper place to put it. In this paper we follow Nielsen’s (1998)
framework with four pillars where the ATP has got a pillar of its own, the reason for this being that
even though the ATP as indicated above is of little importance in the pension package, the reform that
4
resulted in the ATP is of great interest - not at least because Denmark with the non-income related
ATP schemes broke with the Nordic pattern (Nielsen 1991).
The numbers of the four pillars are not put on randomly. Firstly, they indicate a sort of chronological
order as the peoples pension was introduced before the ATP, which again - generally speaking - was
introduced prior to the occupational pensions. Secondly, when ignoring the distinct ATP pillar, the
numbers express the relative importance of the three remaining pillars of today’s individual pensioner,
as the peoples pensions still constitutes the basic element in the pension package. In addition to the
latter, the number order of the pillars can be regarded as an indication of the cumulative ‘top-up’ that
exists. Finally, the numbers could also be seen as an expression of the degree of privatisation as the
higher the number get, the more privatised the scheme is and the less people it covers.
In what follows, the main features and reforms that have resulted in each of the four pillars will be
analysed.
1. The Peoples Pension
The basic social pension, the peoples pension, is one of the elements in the Danish pension system that
definitely ties the Danish model to the Scandinavian welfare regime. The peoples pension is based on
citizenship, and it is therefore a universal right, and is financed by taxes following the PAYGO logic
where the generation in active employment pays the pensions of contemporary pensioners.
In 1956 the Aldersrente was substituted by the peoples pension (Folkepension) which gave a basic pension
to everyone 67 and older; and to those who had nothing else an additional amount was added, but as a
means-tested part. With this reform the pension age was increased from 65 to 67 and the citizenship
element was installed. From 1964 to 1970 the composition of the basic element and the additional
5
means-tested element was radically changed towards what was described as ‘full’ peoples pension paid
to everyone meeting the age criteria, supplemented with a flat-rate addition to those having no other
means.
This truly universal provision was and is conditioned upon some residence criteria. In order to be
eligible one must have been living in Denmark for at least three years all together and for non-nationals
they must have 10 years of residence in Denmark, including five years immediately before pension. One
is then eligible for a pension calculated as a fraction of the years set against 40. I.e. to receive a full
pension (basic amount) it takes 40 years of residency between age 15 and 65 (since 2004). If one has
been living in Denmark e.g. for five years one is entitled to 5/40, provided one lives in the country
currently.
The basic amount (grundbeløb) in 2002 was DKK 52,872 (Euro 7,108) that may be reduced according to
the professional earnings of the pensioner if they exceed DKK 223,200 (Euro 30,005). Pension
supplement (pensionstillæg) was DKK 24,672 (Euro 3,317) that may be reduced on account of the
earnings of the pensioner and spouse if they exceed DKK 98,800 (Euro 13,282) or DKK 49,200 (Euro
6,614) for a pensioner living alone. If the spouse is not pensioned, his/her earnings are not taken into
account up to DKK 154,100 (Euro 20,716).1 Pensions are taxed in the same way as wages (MISSOC
2002).
1 The adjustment rate (satsreguleringsprocenten) for social pensions, as well as that for the other transfer incomes
(overførselsindkomster), is set once a year on the basis of wage development. The basic amount (grundbeløb) depends
on the income gained from the pensioner's professional activity. Reduced by DKK 30 (Euro 4.03) for every DKK 100
(Euro 13) earned in excess of DKK 223,200 (Euro 30,005) per year. Pension supplement (pensionstillæg) is reduced by
30% of earnings and any other kind of income (earnings of pensioner and spouse) in excess of DKK 98,800 (Euro
13,282) per year for each married person and DKK 49,200 (Euro 6,614) for singles. If the spouse is not pensioned,
his/her earnings are not taken into account up to DKK 154,100 (Euro 20,716).
6
To give an idea about the living conditions of pensioners depending upon the peoples pension
including supplement and the ATP the compensation rate for a single pensioner has been calculated to
62 per cent in 2001. This is at par with Finland and Norway but less than was received in Sweden (68
per cent). For a couple the compensation is only 42 per cent which is a lot less than in the other
Scandinavian countries (NOSOSCO 2003).
When the peoples pension was inaugurated there was still some stigma attached to receiving public
benefits; but by granting the pension to everyone stigmatisation disappeared and the idea of seeing it as
a right was firmly developed. This has now become a problem for contemporary governments that face
an increasing elderly population and with time fewer in working ages. Therefore more recent reforms
have gone in the direction of reducing the basic amount relatively and make it more difficult to obtain
the additional amount. This development should, of course, be reflected on the background of a
dramatic change in longetivity: in 1960 a European male worker in average lived two years after
retirement; in 2000 he lives in average 15 longer than retirement age (Gården 2002). Obviously, the
peoples pension was not geared to pay pensions to people for many, many years which is, nevertheless
the prevailing condition.
2. The Basic Supplementary Pension: the ATP
The reform of the peoples pension in 1956 did not put an end to the question of the future Danish
pension system. Supplementary occupational pension schemes for white-collar employees had already
existed for a long time, mainly for employees in the public sector. Though the benefits of the peoples
pension had been adjusted upwardly a number of times, also the blue-collar employees faced the
prospects of income reduction after retirement. In connection with the collective agreements in 1961,
the social partners agreed to settle a commission to investigate a supplementary pension schemes on
top of the peoples pension could possibly be made. In 1963 the ATP was introduced as part of the so-
7
called ‘Overall Solution’ (Helhedsløsningen), a political initiative taken in relation to the collective
bargaining round, and the scheme came into force in 1964 (Due & Madsen 2003; Green-Pedersen &
Lindblom forthcoming).
The intention of introducing an income related element was pursued by making contributions as well as
benefits to be based on number of hours worked, not earnings. In this way, the scheme actually did not
have any re-distributive effect. The scheme was a combination of a funded scheme and a PAYGO
scheme, though as the years went by the funded element has become more prevalent.
In 2002 Supplementary pension (arbejdsmarkedets tillægspension, ATP) amounted to: DKK 21,024 (Euro
2,826) per year.
Both benefits and contributions of the ATP scheme were and still is quite modest, and the social
partners never regarded the ATP as any more than a temporary solution that would need further
development to fulfil its goal as an occupational supplementary pension. However, this was and has
never been the case, and as the following part will show, the settlement of the Danish pension system
was also far from solved with the ATP.
3. The Occupational Supplementary Pensions
Though other Scandinavian countries such as Sweden and Norway managed to settle their pension
systems with income related elements during the 1960s, the Danes had to wait another 20 years to
complete their pension package. In the meanwhile, the number of occupational pensions for higher
level groups of white-collar employees had expanded from just around 10 in 1960 to 22 in 1980,
covering about one third of the employed (Due & Madsen 2003; LO 1985).
8
In this way, a ‘dual pensions system’ in which the majority of the wage earners were left with the
peoples pension and the ATP, whereas a minority had funded occupational pension supplements on
top of the peoples pension and the ATP, had occurred. Together with a number of other factors this
was part of paving the way for the establishment of occupational pensions for the remaining parts of
the labour market.
Up through the 1970s economic democracy had been on top of the agenda in the labour movement
and in the Social Democratic Party and especially in the peak organisation, the LO. Several attempts
were made to introduce economic democracy by law, but even in periods where the Social Democrats
were in power no political solution could be found, and economic democracy never became reality in
its original form. In the beginning of the 1980s, for some of the members of the labour movement
occupational pensions became a new opportunity for realising the ideals behind economic democracy if
they were created as one big central fund, controlled by the labour movement. Unsurprisingly, the
employers and the government did not support this approach, and one of the reasons why it took years
to establish the occupational pensions was that the employers – and the government as well – regarded
the models suggested by the labour movements as ‘economic democracy through the back door’ (Due
& Madsen 2003; Green-Pedersen & Lindblom forthcoming)
For instance, in 1985 a committee settled by the LO, The LO’s pension reform committee, who was
supposed to make recommendations for a reform of the existing pension system, concluded that a
three tier pension system where adjusted versions of the peoples pension and the ATP should make the
foundation and central fund based occupational pensions the supplement would be the way to do it.
Occupational pensions was a new element in Danish pension policy and the committee further
concluded that an extension of the PAYGO financed peoples pension did not constitute a realistic
solution to the problem of occupational pensions. In 1986, the LO proposal with a few changes was
9
endorsed by the Social Democrats, who suggested a pension scheme introduced by law covering all
wage earners who did not already have occupational pension savings in one of the existing schemes
(Due & Madsen 2003; Green-Pedersen & Lindblom forthcoming).
The bourgeois government was clearly interested in having occupational pension not least because of
the beneficial macro economic consequences such arrangements would have. However, it could neither
support the central fund nor the introduction by law. The government wanted occupational pensions to
be part of the collective agreements as this would ensure that part of the expected wage-increase would
be given in the form of pension savings, thereby impeding the immediate consumption and,
furthermore, if the occupational pensions would be imposed by law they would be regarded as tax
increases which would make it very hard to persuade the wage-earners not to claim further wage
increases in return for pension savings (Green-Pedersen & Lindblom forthcoming).
In 1987, the government and the social partners signed the so-called Common Announcement
(Fælleserklæringen). The announcement was intended to be a long-range structural initiative, which
should solve the severe macro economic problems by a wage restraining policy that also via the
occupational pensions should increase savings. First of all, the announcement stated that the government
and the social partners agreed and recognised the importance of that the development of costs in Denmark should not
exceed the development in other countries, and that one way to enlarge private savings would be by extending
the occupational pension schemes to those groups who did not have any supplementary pensions to
the peoples pension and the ATP (Due & Madsen 2003: 137).
In addition to this, the Common Announcement stated at least two other important elements that we
will deal with here: the establishment of a tripartite commission that by autumn 1988 should have
investigated different models of occupational pensions. However, what may seem even more important
10
today the announcement also stated that the government would be willing to introduce legislation that would be
necessary. What exactly should be understood by this statement is not clear. Some of the representatives
in the LO did interpret it as follow-up legislation in relation to the pension schemes so that those with
unstable or interrupted attachment to the labour market also would be covered, whereas the vague
formulation on legislation in the announcement might be a rather good illustration of the position of
the government: no clear position due to internal disagreements. Nevertheless, a follow-up legislation
to cover people outside or at the periphery of the labour market was not and has never been
introduced.
The tripartite commission, the Occupational Pension Reform Commission, that apart from
representatives from the social partners also included civil servants from a number of relevant
ministries and was headed by the permanent under-secretary (departementschef) of the Ministry of Labour,
was settled in February 1988. The commission investigated the technical aspects of four different
models of occupational pensions: 1) the individual model, 2) the firm based model, 3) the decentral
model, and 4) the central model, but none of these were recommended as the way to do it, partly due
to disagreements between the social partners, and partly due to internal disagreements within the
bourgeois government.
However, according to Due & Madsen (2003), the investigations and discussions in the commission
nevertheless clarified the realistic solutions for the participants involved in the work. At the beginning,
the employers were stiff on the individual model whereas the LO – as we have touched on earlier –
were very keen on the central model, but as the work in the commission proceeded it became clear to
both parts that none of these ‘extreme’ models could become reality. The commission finished the
work just before Christmas 1988 and the realisation of introducing occupational pensions was left to a
political tripartite forum (Due & Madsen 2003: 155-165).
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As we have indicated earlier, also the bourgeois government suffered from disagreements between the
two major parties, the Liberals and the Conservatives, and this was one of reasons why the position of
the government with regard to labour market pensions was not clear. The Liberals were strongly in
favour of individual schemes, whereas the Conservatives had a more relaxed attitude towards the
pensions and at least some of the ministers were willing to introduce follow-up legislation. One
illustration of the internal disagreements in the government was the Conservative prime minister
Schlüter’s New Years speech in 1989. In this speech he proposed - without mentioning the newly
written report of the Occupational Pension Reform Commission with a word - that one way to
strengthen the Danish competitive position would be by at the same time reducing the wages and the
taxes, thereby maintaining the purchasing power. This rather controversial statement, which clashes
with the complex structure of the Danish wage bargaining system and the traditional autonomy of the
social partners, and which very few - if any - representatives from the government and the social
partners welcomed as a plausible solution, marked the new orientation of the government concerning
the occupational pensions and the willingness to introduce follow-up legislation (Due & Madsen 2003).
The New Years speech made the LO feel less sure about the governments initiatives with regard to the
realisation of the labour market pensions, whereas the employers appreciated that the idea of
introducing follow-up legislation seemed to have been abandoned by the government. However, later
in 1989 the LO gained hope. During the round of central bargaining the government, represented by
the Minister of Finance Palle Simonsen, reached an agreement with the trade unions for the public
employees to extend the occupational pensions to cover the employees in the municipal sector, who
previously had not been covered.
12
In this way, for the first time ever the central bargaining in the public sector sat the agenda for the
private sector, though the relation normally go the other way around. The way for introducing
occupational pensions via collective bargaining was paved and the powerful trade union, the Metal
Worker’s Union, announced that it would demand a pension scheme in the round of collective
bargaining in the private sector in 1991. The goal of getting occupational pensions for the remaining
part of the private sector was then achieved - though as mentioned earlier, without follow-up
legislation. The solution to the Danish pension problem became different occupational schemes for the
different trade unions – a much more decentralised solution than the one initially put forward by the
LO, and the fear of the employers of facing the ‘ghost of economic democracy through the back door’
was effectively dismantled.
4. Private Savings
The fourth pillar in the Danish pension system consists of private pension savings of which there exist
two kinds: so-called capital pension (kapitalpension) and rate pension (ratepension). Both forms are treated
preferentially by the tax authorities. Hence, payments are tax deductible when made, and moderately
taxed when they are paid out again. The first kind gives the pensioner a one off lump sum at the
beginning of retirement which will be taxed 40 per cent, while the other gives monthly payments which
will be taxed according to future prevailing tax regulation as any other income.
Yearly payments into private pension savings accounts are estimated to DKK 81 billions in 2003.
Because of the priviledged tax treatment the Danish state is estimated to loose tax revenue equivalent
to DKK 41 billion (Sørensen 2003: 2). Before the tax reform of 1998, called the Whitsuntide package
(Pinsepakken), tax rebates were even more advantageous. At the same time the Voluntary Early
Retirement Pension Scheme (Efterløn) was made less attractive, meaning that in order to receive a
reasonable coverage one would have to wait till 62 before retiring.
13
In a survey the association of financial institutions (Finansrådet) asked a representative sample of Danes
under 65 years of age whether the reforms have affected their interest for pension savings. 44 per cent
replied that they had not changed savings behaviour, only four per cent answered that the reforms have
encouraged them to save more, while 29 per cent felt that the reforms had reduced their inclination for
saving. Among a number of reasons for being less interested in saving about one in five said that it was
because of increased taxation; 18 per cent said that it was because they did not trust politicians and
another 18 per cent said it was because ‘the state takes the money anyway’. Nielsen (1998: 5) estimated
that in 1995 only 10-12 per cent of the current pensioners actually had private pension savings, while in
2015 he expected 25-35 percent of pensioners to have private savings. The survey mentioned above
found that only 18 per cent did not have any ‘pension plan’ (pensionsordning). This has probably been
interpreted as having neither an occupational pension nor private pension savings, but it does indicate
that in the future most Danes will involve the third and fourth tiers in financing their retirement.
Most political parties and interest organisations maintain the four pillar system as the structure for
future pensions in Denmark. However, some radical movements advocate differently. Hence, the youth
wing of the liberal party (Venstres Ungdom 2001) recommends that the first tier, i.e. the Peoples
Pension, will be phased out over a 30 year period, so that people currently 35 and younger will not
benefit from it. So far, they are alone with the standpoint of abolishing the peoples pension, but the
other suggestion they have regarding the future of pensions is the abolishing of the Voluntary Early
retirement Pensions Scheme and that is supported by many observers, especially by ‘independent’
economists. We shall return to this while discussing the future at the end of this paper
In addition to the four pillars presented above a fifth, but very small, pillar actually exists. This fifth
pillar, the Special Pension Saving (SP), is often grouped together with the ATP (as it is also regarded as
14
a tax) and is a compulsory pension saving of 1 percent contributions of the earnings of wage earners,
self employed and some groups of social benefit claimants. The SP was introduced in 1997 by the then
Social Democratic government and the intention was to benefit the low-paid groups by making similar
benefits for all contributors (Albret 2002).
In that way, the SP - in contrast to the ATP – but in line with the peoples pension contained a re-
distributive element. However, in the spring of 2002 the newly elected bourgeois government
transformed the tax financed pension supplement to an individual compulsory pension with earmarked
contributions and benefits. That is, the re-distributive element of the SP has now been rejected, which
according to Albret (2002) means that the one million richest Danes gain a higher annual pension
saving whereas the 1.6 million poor loose on their pension savings. Consequently, the SP has been
transformed from a PAYGO model to an individual, funded scheme. Summing up, the four-pillar
Danish pension system is a top-up system, where the four pillars work as cumulative elements. The
figure below summarises the main characteristics of the different elements.
Characteristics of the four pillars
Peoples ATP Occupational Private
Pension Pensions Pensions
Legal basis Legislation Legislation Collective Private
agreements contract
Financing General Flat-rate Earnings-related Flexible
taxes contributions contributions Contributions
Accrual Years of Number of Number & size of Number & size
of Rights residence contributions contributions of contributions
Benefits Flat-rate + Based on reserves Based on reserves Based on reser-
income tested reflecting working reflecting earnings ves reflecting
supplements hours & duration and employment contributions
of work life
Source: Nielsen 1998
15
The constitution of the Danish pension system means that in relative terms the low-paid gain the most
from the peoples pension due to means testing and as different income groups get similar ATP
benefits, the share of the ATP benefit of the total pension is higher for the low paid. In contrast to this,
the occupational pensions and the private pension savings in general are of most importance to the
well-paid groups (Nielsen 1998).
In the following part we will turn to whether the introduction of the occupational pensions has caused
a qualitative shift in the Danish pension system.
Path Dependency or a Path Breaking Tendency?
We have earlier stated that the recent reforms of the Danish pension system have caused a shift from a
purely public to a partly private pension system. This indicates a shift from a PAYGO financed system
to a partly funded system where each generation saves money to pay for its own future pensions.
According to the path dependency framework developed by Myles & Pierson (2001) such shifts are not
easily undertaken. When moving from a PAYGO financed systems to a funded system a politically
difficult situation of double-payment occurs, as the working generation has to pay for contemporary
pensioners via the taxes and furthermore has to make savings for their own funded pensions. Due to
this, countries that years ago chose a PAYGO pension systems have entered a route of path
dependency and cannot shift to a funded model (Green-Pedersen & Lindblom forthcoming).
According to Green-Pedersen (forthcoming), not even a Social Democratic Government (instead of
the bourgeois government) could have expanded the PAYGO logic to supplementary pensions, as this
in reality - due to severe macro economic problems - was not an option. Supplementary pensions
following the PAYGO logic would have caused too high tax increases that neither economically nor
16
politically would have made the solution. This were the conclusions of as well the report of the LO
made in 1986 and the Occupational Pension Reform Commission in 1988, and as we have touched on
earlier, the LO’s proposal was actually later endorsed by the Social Democrats.
Furthermore, as illustrated above, the reluctance in the 1960s and 1970s to introduce an income related
element in the pension package gave the well-paid groups of employees an incentive to establish
occupational pension schemes and these could not be abandoned in order to secure a PAYGO
financed model. Once significant groups in society have established funded schemes, a PAYGO
solution becomes politically very difficult to introduce even for the rest of society, as inducing people
who have already saved for their own pension to pay taxes or social contributions to a scheme offering
earnings-related benefits at a high level to people who have not saved for their pensions seems
politically very dangerous (Green-Pedersen & Lindblom forthcoming).
In this quite strange way, the Danes ended up in a situation where the PAYGO path with regard to
income related pension supplements suddenly ended at a crossroad, forcing the supplementary
pensions to become either occupational or totally individual (private savings). In that sense, neither
path dependency nor a path breaking tendency seem to have much explaining power: the new road
points in the direction of path breaking tendency, but on the other hand not much of a choice was
offered since expanding the PAYGO logic to supplementary pensions or simply increasing the rates of
the peoples pension did not make a realistic option.
Nevertheless, if the fact that increasing numbers of occupational pensions were established for certain
well-paid groups of employees from the 1960s and onwards is regarded as a path in itself (see for
instance Green-Pedersen & Lindblom forthcoming), then the development in the end of the 1990s can
be regarded as path dependency, as the majority followed the path pointed to by the minority: the
17
occupational pensions. However, this somehow blurs the meaning of path dependency, since several
paths pointing in different directions then can exist at the same time. As pointed out earlier, in the
middle of the 1980s two thirds of the employees were left with the peoples pension and the ATP
both of them being (primarily) PAYGO financed elements. That is, the main characteristic of the
Danish pension system then was the peoples pension, not the occupational pensions, and from our
point of view, the introduction of the labour market pensions represents a shift of paths, though the
initial step in this direction was taken many years ahead of the reform.
Future challenges
Though from a general perspective - when comparing the Danish pension system with other European
systems - the Danish case seems to be quite well equipped to meet the future challenge of an increased
demographic burden, some elements of the system still concerns politicians. The most remarkable one
of these is the voluntary early retirement scheme, the ‘efterløn’. The voluntary early retirement scheme
was introduced in 1979 and was targeted at workers with health problems needing an early exit from
the labour market. However, the scheme quickly gained popularity – not least among other groups than
the one it initially was targeted at.
Today, the early retirement scheme is one of the very hot topics in the welfare debate in Denmark, and
also one of the most expensive schemes, since it apart of the benefits paid in fact lowers the retirement
age of workers: the official age of retirement is age 65 (since 2004), but in reality the average age of
retirement is around 61. The issue is that in fact the scheme allows all/most employees (and self-
employed?) to take retirement at age 60 instead of at age 65 which is the official retirement age in
Denmark. Given that Danes having reached the age of 60 can expect to live to 79 and 82 for men and
women respectively (Statistics Denmark 2003) 60 or 61 seems a very early (read: expensive) retirement
age. The conflict is, thus between the large majority of the people, and, of course an overwhelming
18
majority of people 50 and older on the one hand side who consider the scheme a social right, and, on
the other hand government officials, independent experts and the like who point to the difficulties of
sustaining the scheme financially.
However, reforming the voluntary early retirement pension scheme has become a sort of ‘political
trauma’ as the most reason attempt in 1998 made by the then Social Democratic government turned
out to have severe political consequences for the involved politicians, who were punished for it in the
2001 general election, and the current bourgeois government shows little interest in reforming the
scheme though especially economic experts are much in favour of it (Due & Madsen 2003: 411). In line
with the solution of the ‘pension bomb’, one could argue that one possible way to solve the problem of
the voluntary early retirement scheme would be to leave it to the social partners and the collective
agreements.
Conclusion
In this paper we have briefly outlined the general features and reforms of the Danish pension system.
The order of the four pillars in the pension system, the peoples pension, the ATP, the occupational
supplementary pensions, and private savings can be regarded as an indication of their relative
importance for today’s pensioners, who top-up their pensions according to how long they have lived in
Denmark, their labour market affiliation, their previous earnings, and their private savings.
However, the most recent major reform – the introduction of occupational pensions to the remaining
two-thirds of the labour market in the beginning of the 1990s – indicates a qualitative shift towards a
more privatised pension system with greater emphasis on especially the third tier. In addition to this,
the move from a purely public to a partly private system needs elaboration; a more proper formulation
19
may be from a purely public to a predominantly private pension system. Following the new path, a
privatisation of the Voluntary Early Retirement Scheme may occur in the years to come.
References
Albret, Poul (2002): ”Overset lov omfordeler milliarder fra fattige til rige” in Mandag Morgen 2002.
Andersen, B. R. (1999). Ældrepolitik på afveje. Copenhagen: Fremad.
Due, Jesper & Jørgen Steen Madsen (2003): Fra magtkamp til konsensus. Arbejdsmarkedspensionerne og den
danske model. København: Jurist- og Økonomforbundets Forlag.
Finansrådet (1998). Pinsepakken og Efterlønsreformen: Effekten af indgrebet. Copenhagen: Finansrådet.
Green-Pedersen, Christoffer (forthcoming): Det danske pensionssystems endelige udformning.
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Gården, H (2002). ”Tvungen privat pension.” Aktionæren No. 10.
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MISSOC [Mutual Information System On Social Protection] (2002). Social Protection in the EU Member
States and the European Economic Area. Brussels: D G Employment and Social Affairs.
Myles, John & Paul Pierson (2001): “The Comparative Political Economy of Pension Reform”, pp.
305-333 in Paul Pierson (ed.): The New Politics of the Welfare State, Oxford: Oxford University Press.
Nielsen, Fritz von Nordheim (1991): ’ The Politics of Ageing in Scandinavian Countries’ in John Myles
& Jill Quadagno (ed.) States, Labour Markets, and the Future of Old-Age Policy. Philadelphia: Temple
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Nielsen, Fritz von Nordheim (1998): The Danish Pension System. Individual Responsibility and Social Solidarity
in Productive Balance. Contribution to the conference Pension Systems and their changes in the EU &
Slovenia on the eve of the 21st Century, 14-15 September 1998, Ljubljana, Slovenia.
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http://www.statistikbanken.dk/statbank5a/default.asp?w=1024
Sørensen, F. (2003). “Pensionsbomben afmonteres.” [Defusing of the pension bomb]. Parlamentet.dk.
Venstres Ungdom (2001). Arbejdsmarkedspolitisk oplæg.
21
... The other reason is that the introduction of the occupational pensions and the private pension savings in Denmark made the social pension system in Denmark more adequate as contributors, with these two schemes, are able to supplement their pensions based on their life expectancy as well as their labor market affiliation, their previous earnings, and their private savings (Abrahamson & Wehner, 2003). In this regards, Nielsen (1988) argued that Danish occupational pensions and the private pension savings are of most importance to the well-paid groups. ...
... Adjustment once a year according to the adjustment rate (satsreguleringsprocenten). This adjustment rate for social pensions is set once a year, based on wage developments (Abrahamson and Wehner, 2003). ...
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Until recently, social assistance has received relatively little attention in the comparative welfare state literature, which is remarkable given its central function in combating poverty and pursuing social inclusion. This paper explores the developments of social assistance and minimum income benefits across 14 Western European countries, 12 Central and Eastern European countries and 7 non-European countries over the period 1990-2009. First, an institutional analysis shows that eligibility conditions, work requirements and benefit sanctions vary considerably across countries. Second, relying on new indicators, our analysis shows that real benefit levels increased in most countries, whilst the net income replacement rates declined on average. This development seems to fit with a ‘making work pay’ agenda. A subsequent qualitative analysis of the policies underlying the quantitative measures indicates that the declining replacement rates do not result from benefit cuts but from relatively larger wage increases. In addition, our policy analysis indicates that work requirements and benefit sanctions have become more activating in many countries. Third, the data indicate that social assistance benefits diverged across EU and other OECD countries between 1990 and 2009. Finally, this paper seeks to make a methodological contribution to the ongoing debate on the ‘dependent variable problem’ in the welfare state literature by analysing to what extent changes in quantitative indicators reflect actual policy changes.
... The estimates obtained for the impact of taxes during retirement (ages 65 and over) also reflect the fact that pensions are taxed in both countries. Much of the material presented here is based upon Abrahamson and Wehner (2003). 7 To be eligible, an individual must have been in residence in Denmark for at least three years, and for non-nationals 10 years including the 5 years immediately prior to the pension. ...
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We develop a simulation model of household behaviour in which both the consumption/saving and labour/leisure choices are endogenous. This model is used to explore the effects of the UK and Danish state tax and benefit systems on the labour supply of workers aged 50 or over. We find that, in broad terms, differences in labour force participation can be accounted for by differences in benefit structures. Furthermore, our simulations suggest that the UK system is preferred by young people while the Danish arrangement which imposes a larger tax burden and provides larger welfare benefits is chosen by people of 50 or older. Notably, people older than 60 are in the majority in the simulated population. The Danish system does not promote notably greater equality over the lifetime, but it does underpin a higher level of consumption for people of 50 or older.
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The objective of this thesis is to examine the effect of pension system design on saving. Chapter II analyses the relationship analytically, in a two-period two-generation partial equilibrium Samuelson-type of OLG model in the logarithmic format, augmented by design of the public pension system and by the mandatory funded pension programme with the displacement coefficient. The model predicts higher household saving for countries with a lower contribution rate, higher redistribution within the public system and greater importance of private pension savings, i.e. systems that could be classified as ‘Beveridge’. Partial derivatives of the model are numerically simulated. Chapter III first deals with the measurement issue, defining the set of ‘pension design indicators’ that will be used later for the empirical analysis. Then it tests the ‘convergence hypothesis’ of pension models using several methods. The results unambiguously suggest that, despite a convergence in pension policy goals, convergence of pension models has not occurred i.e. the pension systems around the world are still influenced by their historical paths. Chapter IV empirically investigates the effect of pension system design on saving rates. The first part of the analysis closely follows work in Disney (2005), with somewhat differently calculated public pension design variables and with data for the 2000s. I also tested the impact of private pension component on household saving. The overall pension system design was estimated using principal components composite indices. The results obtained using a number of estimation methods have not confirmed the predictions of the theoretical model, and are actually counter-intuitive. In addition to methodological issues related to household saving data, a possible explanation for this could be the complexity of household saving behaviour that needs to be adequately controlled for. The final chapter summarizes the findings, discusses limitations of empirical investigation and sets forth directions for future research.
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This paper develops a general equilibrium simulation model of a heterogeneous population in which both consumption/saving and labor/leisure choices are endogenous. The authors use it to explore the effects of the different state benefit systems on the labor supply of old and older workers in Denmark, Germany and the UK. In broad terms, they find that differences in labor force participation can be accounted for by the differences in benefit structures. These conclusions are not altered when they allow for the effects of poor health at different ages. The UK system is found to be preferable by young persons while the German arrangement is preferred by old and older people (who make up the majority in the simulated population).
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All European countries are aiming to reform their pension systems in line with two conceptual ideas: firstly, that systems should combine public, occupational and private pensions; secondly, that entitlements should be individualized. The Dutch and the Danish pension systems already consist of these three different pensions with relatively individualized entitlements and in a way form an ideal type of pension system. However, these systems are far from ideal since they are deeply gender biased. The positive effects of citizenship-based state pensions conceal the negative ones. In addition, recent developments in the combination of the pension schemes counteract the positive effects. Given the male-oriented norm when it comes to full pension entitlements, and given the fact that life courses are still gendered, these countries’ systems and developments have negative effects for women.
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Pension levels in the EU15 are significantly gendered. Various reforms to pension systems explicitly aim at improving women's opportunities to build up pension entitlements. These reforms differ from country to country. We see so-called work–life balance policies to increase women's labour market participation by facilitating part-time employment in particular as well as pension entitlements for care periods outside the labour market. At the same time, however, other seemingly gender neutral reforms generally tend to have the opposite effect. These measures include changes in pension calculation norms and pension composition, increasing the importance of non-public pensions. Therefore, future female pensioners will not be significantly better off. However, for women to be better off is necessary in times of pension retrenchments and individualization.Based on recent life-course theories and studies, this article analyses the multiplicity of reasons for gender differentiated pension levels. It shows that the numerous direct and indirect pension determining factors related to life courses and welfare arrangements are interlinked on many fronts. Their cumulative effects finally result in (continued) significant gender gaps. It is argued that there are no quick fixes for reducing the gender gaps in pensions but that this will require attention to the degendering of labour market and the reformulation of life course norms.
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En 1999 el gobierno nicaragüense decidió reformar su sistema de pensiones adoptando un esquema provisional de capitalización individual. Por diversos motivos esta reforma no ha entrado en vigor y su puesta en marcha está aplazada sine die. Este trabajo argumenta que, dada la estructura del mercado laboral del país, un cambio de esas características no resuelve los problemas existentes. Asimismo, se presenta una propuesta de reforma basada en la extensión de la cobertura de las prestaciones a través de beneficios no contributivos. Se simula el coste fiscal de una prestación focalizada y universal en varios escenarios de crecimiento económico.
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This article investigates earnings-related pension schemes in Denmark and Sweden with a focus on the last two decades. It takes the path dependency idea as its starting point and develops it further with regard to pension politics. In the Danish case, the article shows that existing funded, occupational pension schemes precluded a pay-as-you-go (PAYGO) solution for workers not already covered due to a ‘reverse double payment problem’. Political attention centred instead on broadening the coverage of occupational schemes. The article demonstrates that the development of funded pension systems also shows a great deal of path dependency. In the Swedish case, we provide a detailed empirical investigation which shows how the double payment problem affects the positions of political parties, rather than the entire reform process. The study thus argues that the political parties were the crucial actors in the Swedish pension reform and that the path dependency facilitated a consensual reform process because it made irrelevant a more fundamental party political disagreement over the pension system.
The Danish Pension System. Individual Responsibility and Social Solidarity in Productive Balance. Contribution to the conference Pension Systems and their changes in the EU & Slovenia on the eve of the 21 st Century
  • Fritz Nielsen
  • Von Nordheim
Nielsen, Fritz von Nordheim (1998): The Danish Pension System. Individual Responsibility and Social Solidarity in Productive Balance. Contribution to the conference Pension Systems and their changes in the EU & Slovenia on the eve of the 21 st Century, 14-15 September 1998, Ljubljana, Slovenia. Statistics Denmark (2003). Statistics Bank: http://www.statistikbanken.dk/statbank5a/default.asp?w=1024
Nordic Social Statistical Committee
  • Copenhagen
Copenhagen: Nordic Social Statistical Committee. http://www.nom-nos.dk/nososco.htm.
Pensionsbomben afmonteres
  • F Sørensen
Sørensen, F. (2003). "Pensionsbomben afmonteres." [Defusing of the pension bomb].
Arbejdsmarkedspolitisk oplaeg
  • Venstres Ungdom
Venstres Ungdom (2001). Arbejdsmarkedspolitisk oplaeg.
Overset lov omfordeler milliarder fra fattige til rige" in Mandag Morgen
  • Poul Albret
Albret, Poul (2002): "Overset lov omfordeler milliarder fra fattige til rige" in Mandag Morgen 2002.
Social Protection in the EU Member States and the European Economic Area
MISSOC [Mutual Information System On Social Protection] (2002). Social Protection in the EU Member States and the European Economic Area. Brussels: D G Employment and Social Affairs.
The Politics of Ageing in Scandinavian Countries
  • Fritz Nielsen
  • Von Nordheim
Nielsen, Fritz von Nordheim (1991): ' The Politics of Ageing in Scandinavian Countries' in John Myles & Jill Quadagno (ed.) States, Labour Markets, and the Future of Old-Age Policy. Philadelphia: Temple University Press.
Pinsepakken og Efterlønsreformen: Effekten af indgrebet
Finansrådet (1998). Pinsepakken og Efterlønsreformen: Effekten af indgrebet. Copenhagen: Finansrådet.