Lfeyriskerfin Norurlndunum og snemmtekinn lfeyrir

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Lífeyriskerfin á Norðurlöndunum og snemmtekinn
lífeyrir
Málstofa hjá Seðlabanka Íslands 4. febrúar, 2002

• Tryggvi Þór Herbertsson
• Hagfræðistofnun

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Introduction

• On the whole, labor force participation of older
  workers is declining in the industrialized
  countries due to changing age structures.
• In response to high unemployment, many countries
  expanded early retirement schemes in the 1980s.
• In the Nordic countries, substantial decreases in
  labor market participation have in particular
  occurred in Finland and, more recently, in
  Norway.
• Despite the common trend toward earlier
  retirement, however, labor market participation
  rates differ significantly across countries. This
  divergence indicates that participation depends
  on a wide variety of factors.
• Older workers in Iceland have among the highest
  participation rates in the world. Participation
  rates are also relatively high in Norway, despite
  the recent decline. However, Denmark and Finland
  have experienced low and falling participation
  rates, although there is some evidence that these
  rates may now be leveling out.
•  

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Introduction

• This combination of earlier retirement and longer
  life expectancy results in a much longer span of
  inactivity.
• Regardless of its causes, the withdrawal of older
  workers from the labor force leads to an increase
  in unused production capacity, a reduced tax
  base, and a heavier load on pension and fiscal
  systems.
• If the trend toward earlier retirement were to
  continue far into the future, it would pose even
  larger fiscal threats to pension systems,
  especially those that do not include a penalty
  for early retirement.
• The trend toward earlier retirement and the
  related issue of disability raise substantial
  policy challenges.
• General outline of presentation
• Demographics in the Nordic countries
• Pension arrangements
• Early retirement
• The costs
•  

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Key Figures
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The Demographic Time Bomb?
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Demographics
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Demographics

• Key features
• Low mortality
• High fertility
• Reasonably low migration

Proportion of population aged 65 and over
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Demographics
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Demographics
Old-age dependency ratio (65 over 20-64) in
Sweden 1860-2100

• Dependency ratio tends to plateau
• Costs are permanently, not temporarily, higher

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The Nordic Welfare State
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The Nordic Welfare Model

• Pensions have a long history in the Nordic
  countries.
• The generic Nordic pension system combines a
  public, means-tested minimum benefit a public
  earnings-related component and
  occupational-based private pension coverage.
• In 1998, pension spending amounted to
• 8.8 per cent of GDP in Denmark,
• 5.7 per cent in Finland,
• 3.3 per cent in Iceland,
• 7.8 per cent in Norway,
• 10.7 per cent in Sweden.
• Demographic trends will increase pension costs
  significantly over time. Although the results
  vary somewhat from country to country, the trend
  is unambiguous the elderly proportion in the
  population will exceed 15 per cent by 2030 in all
  the Nordic countries.

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Denmark

• Public old age pensions combine flat-rate
  pensions with a small earnings related pension,
  FP-pensions (pay-as-you-go financed)
• Flat-rate funded labour market supplementary plan
  (ATP-pensions)
• New funded supplementary plan (SP-pensions),
  paying a flat-rate 10-year annuity from the age
  of 67
• Occupational DC pensions
• Private pensions schemes with insurance companies
  and banks

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Denmark

• Private (occupational and personal schemes)
  coverage high in Denmark

Percentage Contributing to a Private Pension
Scheme in Denmark in 1998
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Finland

• Flat rate/very small earnings related Finnish
  National Pension (KELA)
• Mandatory TEL/related DB plans (partially funded)
• Third pillar insurance funds

Male TEL Contributions 1999 in Finland
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Iceland
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Norway

• Flat rate progressive earnings scheme
• DB occupational pensions
• Top up accounts

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Sweden

• Old PAYG system
• PPM
• Occupational schemes
• Insurance plans

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Sweden
(Buffer funds)
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Minimum Pensions
  Table Minimum pension in the Nordic pension
systems
 
As of 4th of April 2000
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The Costs of Early Retirement
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Labor Force Participation

• In 17 OECD countries, for which data are
  available, the proportion of the 55-64 age cohort
  of employed males fell by an average of more than
  10 percentage points between 1980 and 1996.
• For the Nordic countries the inactivity of those
  55 years and older has increased substantially
  over the last four decades.

Trends in the inactivity of males 55 in the
Nordic countries 1965-98 (weighted average)
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Early Retirement
Labour force participation rates among 55-64
years old males in the Nordic countries, 1977-96
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Costs of Early Retirement

• Herbertsson and Orszag (2001) developed a
  framework to assess the economic costs of early
  retirement in the OECD.
• There are substantial differences among the
  countries in costs due to early retirement.
• In particular, Iceland has the lowest costs in
  the OECD.

Costs of early retirement of 55-64 year-olds as a
share of potential GDP in the Nordic countries
and the OECD
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Why Early Retirement?

• Labor supply explanations
• Incentives (pension wealth, accrual rate,
  earnings tests, tax considerations, etc.)
• Disability (morbidity increases with longevity)
• Transition from long-term unemployment into
  retirement
• Government policies (lump-of-labor fallacy)
• Labor demand explanations (possibly
  pseudo-theorems)
• Jobs get obsolete and older workers lack skills
  (education) to switch jobs
• Older workers less productive than younger workers

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Why Early Retirement?

• The UK Cabinet Office (2000) estimates that at
  most one-third of early retirees have planned
  their retirement.
• Labor force status of people not working between
  50 and state pension in the UK
• Voluntary inactive
• Retired (18 per cent)
• Taking care of family (14 per cent)?
• Involuntary inactive
• Long-term sick or disabled (44 per cent)
• Looking for work (10 per cent)
• Other reasons for inactiveness
• Dont need job (5 per cent)
• Other (10 per cent)

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Early Retirement Denmark
 
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Early Retirement Finland
 
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Early Retirement Sweden
 
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Late Retirement Only in Iceland
Labor force participation rates for men over 65
in the OECD
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Disability Morbidity on the Move
Disability incidence among men and women age
55-59 in the Nordic countries
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Disability Morbidity on the Move
Percent of age-group with more than 75
disability pension in the Nordic countries
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Encouraging Work

• Important to recognise external costs of early
  retirement.
• Policy options
• Voucher programs,
• Quantity restrictions,
• Special schemes (FlexJob in Denmark).

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Conclusion

• Despite the political unpopularity of reforming
  early retirement systems, several countries have
  already taken steps to tighten eligibility rules
  and strengthen incentives to retire later.
• However, even these additional incentives are
  often weak or clash with supplementary pension
  provision.
• Furthermore, in most countries, few incentives
  exist to retire late, as reflected in low labor
  force participation after the formal retirement
  age.
• Steps taken so far to challenge changing
  demographic structures
• Denmark ATP, occupational pensions
• Finland prefunding of TEL, etc.
• Iceland voluntary individual accounts,
  mandatory occupational plans
• Norway the petroleum fund
• Sweden - PPM
•