Pension Reform in the Nordic Countries: What Can Other EU Member States Learn? The Cicero Foundation...
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Pension Reform in the Nordic Countries: What Can Other EU Member States Learn? The Cicero Foundation Paris, 15-16 May 2008 Mika Vidlund
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Transcript of Pension Reform in the Nordic Countries: What Can Other EU Member States Learn? The Cicero Foundation...
Pension Reform in the Nordic Countries:What Can Other EU Member States Learn?
The Cicero Foundation
Paris, 15-16 May 2008
Mika Vidlund
Structure of the presentation
The changing demographics in the Nordic countries
Common features for Nordic pension schemes
Recent pension reforms
Concluding remarks
Source: Eurostat 2005
The change in old-age dependency ratio (65+/15-64) in the EU countries
15
20
25
30
35
40
45
50
55
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
%
EU15
EU25
EU10
FIN
The change in old-age dependency ratio (65+/15-64) and the situation in 2050
EU-25 averageSource: Eurostat
FRBE
UKLV
EE
DKSE
LU
NL
LTFI
MT
HU
DE
IT
BGEL PT
ATRO
CYIE
SI CZ
PL
ES
SK
30
35
40
45
50
55
60
65
70
30 50 70 90 110 130 150 170 190 210
Percentual change of elderly dependency ratio 2004-2050, %
Eld
erly
dep
ende
ncy
ratio
205
0, %
Old-age dependency ratios in Norway and Finland, 1950-2060
0
10
20
30
40
50
60
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
PE
RC
EN
T
Finland
Norway
Source: Statistics Norway; Statistics Finland
Public pension expenditure as a share of GDP between 2004 and 2050
0
2
4
6
8
10
12
14
16
2004 2010 2015 2020 2025 2030 2035 2040 2045 2050
% o
f GD
P
FIN
EU15
EU10
Source: EPC/AWG-calculations (2006)
Public pension expenditure in the EU-25 countries in 2004 and in 2050, % of GDP
SKLT
LV
MT
CZ
HU
SI
CYPT
DK
BE
AT
FR
FIDE
LU
SE IENL
ES
EL
IT
UKPL
EE
2
4
6
8
10
12
14
16
18
20
22
24
-6 -4 -2 0 2 4 6 8 10 12 14
change by 2050, %-points
pen
sion
exp
endi
ture
205
0, %
of
gdp
Source: EPC/AWG-calculations 2006
EU-25 average
FI
SE
DK
Allianz 2007: Reform Pressure Gauge
FI = 13th
SE = 11th
DK = 9th
NO = 8th
Common features for Nordic Pension Systems
”Universal” basic security- guarantee pension in FI, SE and NO (in 2010)- basic pension model in DK
Comprehensive earnings-related pension scheme- with the exception of DK - in DK and IS earnings-related pensions through occupational schemes- in FI no pension or wage ceiling
Low income inequality and poverty in old-age Prefunding of pensions
- Since the establishment of employment pensions: FI, SE, DK, IS- Norway: The origin of the Government Pension Fund can be traced back
to 1990 when the Government Petroleum Fund was formally established
Value of pension assets in the EU countries in 2004, per cent of GDP
0
20
40
60
80
100
120
140
NL DK SE UK FI IE CY LU SK BE PT ES FR PL DE AT HU CZ IT EE SI LV LT
%
II pillar
I pillar
Source: AWG (2006); EFRP 2005; OECD 2005
The Government Pension Fund and accrued old age pension liabilities, per cent of mainland GDP 2005 - 2060
0
50
100
150
200
250
300
350
400
2005 2015 2025 2035 2045 2055
% G
DP
Accrued pensionliabilities
Government PensionFund
Net interest rate 2 per cent; with real annual growth rate in earnings 2 per cent and real rate of return 4 per cent Source: Norwegian Ministry of Finance
Different Designs – Recent Pension Reforms
Countries are similar in many respects, but they differ when it comes to their pension design and the political making of the pensions
“The Swedish reform in the late 1990s was ‘big bang’ where everything was changed, the Finns build on piecemeal reforms that gradually changed the whole system, while on the surface, the Danish story is about stability and status quo.” (Three routes to a pension reform (to be published by Kangas, O.; Lundberg, U.& Ploug, N.)
Different Designs – Swedish Pension Reform
The reform emanated from Parliament, and interest organizations were excluded from the planning.
Path-breaking reform changing the logics of the system
Time schedule:
- 1984-1990 Pension Commission- 1991-1994 Working Group on Pensions- 1994 New System approved in Parliament- 1998 Final Legislation approved- 1999 New system comes into force- 2003 New system fully implemented
Transitional rules for those born in 1938-1953
Different Designs – Finnish pension reform
Tripartite: Politicians virtually watch the process from the sideline
Gradual and piecemeal reforms - working group negotiating to reform pensions. All major trade unions and employer federations were represented in the group, while there was no political representation; thus the Finnish procedure has been opposite to that pursued in Sweden.
Towards pension reform 2005: Kickoff: Deep economic crisis in the early 1990s
- Unemployment rate reached almost 17 per cent in 1994 and GDP fell from 1990 to 1993 almost 11 per cent
Smaller reforms throughout the 1990s- E.g. employees’ pension contribution introduced in 1993.
Earnings-related pension reform in 1996 - The calculation base for pensionable wage was gradually changed to the ten last years of each employment contract (previously 2 out of last 4 years) - Pensions paid to persons aged over 65 were revalued by a new index, in which consumer prices have a weighting of 80 per cent and wages a weighting of 20 per cent (previously 50/50)- The national pension was made proportional to the earnings-related pension
Different Designs – Finnish pension reform Pension reform 2005
Negotiations started at the end of 1990s - Pension agreements among the labour market parties on 12 November 2001 and 5 September 2002 - In November 2002, the Government submitted the bill to Parliament. - Parliament approved a pension reform package on 18 February 2003
Main changes- Flexible retirement age between the ages 63-68- Linking benefits to life-expectancy from 2010 onwards- Basing benefits on life-time earnings - Restricting access to early retirement - Increasing the accrual rate within the window of retirement- Changing indexation rules- Redefining and extending accrual for non-working periods
Employment rate of people aged 55 to 64 (% of population) in the Nordic countries
Source: OECD
Kvinnor
0
10
20
30
40
50
60
70
80
90
100
EU-15 FI DK NO SE IS
Män
0
10
20
30
40
50
60
70
80
90
100
EU-15 FI DK NO SE IS
1999
2003
2006
Men Women
Sweden- DC-old age pension system:
16 % (NDC) + 2,5 % (DC)- Flexible retirement age 61 - Automatic pension adjustment:
Balance ratio 1.0149 (2006).- Invalidity pension from sickness
insurance- Compulsory occupational
pensions (> 90%)- Administration: www.fk.se,
www.ppm.nu, www.ap1.se (ap 1st – 4th, ap6th and ap7th)
Finland- No pension or wage ceiling
Occupational pensions are rare
- Pension accrual rates: 1.5% (aged 18-52), 1.9% (aged 53-62) and 4.5% (aged 63-68)
- Flexible retirement age 63-68 (early retirement at the age of 62)
- Administration dezentralised (see e.g. www.etk.fi)
Wage
Pen
sion
Occupational pension
Guarantee pension
Premium pension
Income relatedpension
ca. 3 500 e/month
ca. 1 100 e/month
ca. 2 000 e/month
n. 2 200 e/kk
Wage
Pen
sion
National pension
Earnings-related pensionCa. 1 150 e/kk
Ca. 2 200 e/month
Different Designs – Norwegian pension reform 2010
Norway Current old-age pension scheme: - Retirement age 67- No statutory early retirement - Special early retirement pension (AFP)
from the age of 62- Occupational pensions compulsory
since 2006- Administration: www.nav.no
Pension reform 2010- Reform Commission was set up on 30
March 2001- Government’s 1st White Paper on 10
December 2004 – Parliament accepted main principles for a reform on 26 May 2005
- 2nd White Paper in October 2006 – Parliament’s agreement on 23 April 2007
- Government bill for consultation on 28 January 2008
0
1
2
3
4
5
6
7
1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 10,0 11,0 12,0
Earnings as B.a (1B.a ~ 8 300€ )
Pen
sion
as
B.a
Income-based pension Guarantee pension
Occupational pension Current system
0
40000
80000
120000
160000
200000
240000
280000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Earnings as B.a (1B.a = 66 812 NOK, 2007 )
Pension (NOK)
Basic pension Income-based pension Pension supplement
The main changes to the Norwegian pension system
Pre-reform After reform Retirement age Insurance period Pensionable wage Life-expectancy adjustment Upper earnings limit (ceiling) Wage-benefit ratio Unpaid care (minimum amount) Unpaid care for children Military service Indexing income-based pension payments Indexing pension entitlements Minimum pension (amount) Occupational pensions
67 40 years Best 20 years Not applicable Staggered ceiling from 6 B.a to upper limit 12 B.a DB, 42% + 1 B.a/ Pension earning equal to 4 B.a. up to the age of 7years Not pensionable earning Wage growth Wage growth 1,7933 x B.a Voluntary
From the age of 62 (flexible) Lifelong earnings All career earnings Life expectancy adjustment ratio All income up to 7.1 B.a. (linear)
DC-model: account value 18.1% per year Pension earning equal to 4.5 B.a. up to the age of 6 years 2.5 B.a. as the basis for pension earning Wage growth – 0.75 % Wage growth Guarantee pension at the current level, reduced by 80 % of the income-based pension Mandatory
Different Designs – Denmark and Iceland
Denmark: a lack of income-related statutory pensions - the demand for earnings-relatedness bifurcated into private occupational and individual pension programs. As the generous national pension scheme has become increasingly income-tested, the occupational schemes are eventually becoming the most important part of the overall pension design
Iceland: stability - development on pension funds and on voluntary savings
Denmark- No earnings-related statutory
pension- SP-scheme: 1% of wage
(suspension of contributions 2004-2008)
- Retirement age 67 65 67v...- Occupational pension coverage
over 80 %- Administration: municipalities
(national pension); ATP ja SP: www.atp.dk
Iceland- Earnings-related pension
arranged in separate funds together with occupational pensions: benefits may vary
- Retirement age 67 - Administration: national pension:
www.tr.is; Pension funds: www.ll.is (Icelandic Pension Funds Association, IPFA).
1.1.2007
Wage
Pensio
n
Pension supplement
Occupational pension
ATP-pension
National pension
ca. 3300 e/month
ca. 1550 e/month
ca. 5 500 e/month
Wage
Pen
sion
Pension supplement
Earnings related /Occupational pension
National pension (basic)
ca. 900 e/month
ca. 2000 e/month
ca. 3 000 e/month
Pension Reform in the Nordic Countries:What Can Other EU Member States Learn?
Nordic way to financially stable pension system: technical solutions to meet the changing demographics- Automatic adjustments e.g. pensions affected by life-expectancy- Flexible retirement - Prefunding- etc.
Incentives for later retirement- Tight connection between earnings and benefits- Pension policy is not enough
Hybrid pension plans between DC and DB
Inclusive pension coverage- Easier to renew than pension systems representing Continental welfare states - less pieces in puzzle
Broad consensus and political support- Piecemeal reforms in Finland vs. path-breaking reform in Sweden – similar results in the end?
Nordic cooperation- Close contacts between the Nordic countries in most areas of society- Nordic cooperation is firmly rooted in cultural and societal ties, shared democratic traditions, values and
way of life. Comparable to the Open Method of Coordination in EU?
Finally, main lesson and a real challenge...
