1. The Danish Pension System Properties, outcomes and challenges
Torben M. Andersen
Aarhus University, Denmark
Eight International FIAP- ASOFONDOS Congress,
Carteagena April 2015

2. 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……)

3. World Bank 1994 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…..)
World Bank 1994

4. International comparisons

5. Background -Danish welfare model
Extended welfare state
Pensions
Health
Old-age care
Universalism
Equal entitlements for all
Tax financed
Strong distributional objectives

6. Current pension system - developments
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

7. Labour market pensions – stepping up
Kilder: Bidragssatser; Basispensioner, Penge- og Pensionspanelet, Pensionsformue; Skatteministeriet (

8. Changing importance of public and private pensions
Pensions, % GDP

9. Current system

10. Replacement rates (2012) Projections:
- Replacement rates will increase
Private pensions will increase in importance
Public pensions will remain important

11. Low income among pensioners
Share with income below 50%
of median income for entire population
0.3 % of persons above 64 falls
below the official poverty line

12. Financially robust? Labour market pensions: Public 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

13. 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

14. 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

15. Means-testing and incentives
How to transit from public to private pensions? (means-testing)’
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

16. 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

17. 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

18. Taxation of savings ETT-regime for pension savings
Large variations in taxation of various types of savings
Asset allocation
Balance expansion

19. Balance expansion High level of pension savings (illiquid)
High level of borrowing (large share with variable interest rate)
High risk exposure?
Effects on macroeconomic stability
% of GDP
Financial assets
Financial liabilities
Financial net assets
Pension wealth, after tax
Deferred taxes

20. 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??

21. 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?