Pension policy in Denmark is well-diversified across the three pillars, according to the World Bank classification:
(1) Public pensions are considered a basic part of the welfare state; the base pension is universal in the sense that it is only age-dependent. However, a full pension requires residency for 40 years, with the pension age set at 65; what’s more, there is a labor income limit. In addition to a base pension, there are means-tested supplements.
In addition there are age-specific subsidies (e.g., for transport) as well as a specific scheme for rent subsidies for the elderly.
(2) Labor market pensions made their mark on Danish society during the late 1980s and early 1990s. These pension schemes are negotiated in the labor market but are mandatory for the individual. The contribution is split between employers (2/3) and employees (1/3). The contribution rate has been increased over the years and is now 10.8% for most employees. However, since these pension funds are relatively new, few have contributed at high rate during their whole working career. In addition, there are supplementary labor market pensions from pension funds ATP and LD Pensions. The former is mandatory and redistributive, in the sense that contributions depend on income but are based only on working years. The LD Pension is a “frozen” wage increase from the 1970s that has since been transformed into a pension right.
(3) While most citizens are covered by pensions from pillars one and two, there is still a large group (roughly 1/3) who collect private pensions through financial institutions on top of their public pension. Since this is related to labor market performance, there is a gender difference both due to a slightly lower labor force participation for women and a lower level of income. Pension savings are tax subsidized. Contributions are deductable in taxable income, while pensions are taxable income. However, for most the tax rate that applies to the deduction when working is higher than the one applying when not working as a pensioner, due to progressive elements in taxation, and hence the subsidy. The tax principle causes problems in relation to portability when, for example, Danish pensioners decide to move to another country.
In addition to the public pension scheme, the early retirement scheme is important. It allows retirement at the age of 60 and offers a benefit until the statutory pension age of 65.The scheme is voluntary and contribution-based, but it is highly subsidized. The scheme was introduced in 1979 as a labor market initiative to cope with youth unemployment, but has since then become an integral part of the welfare package. The scheme has been reformed a number of times and now includes incentives to delay retirement until the age 62.
While the labor force participation in general is high in Denmark even for citizens aged 50 to 55, it is low for those aged 60 to 65, which reflects the effects of the early-retirement scheme. The scheme is much debated and politically controversial.
The problems of an aging population are also affecting Denmark. The financial consequences of increasing longevity are large, and have been at the core of policy debates for some years. A so-called welfare reform was approved with broad parliamentary support in 2006. This scheme increases the statutory age for early retirement by two years over the period 2019-2023, and the statutory pension age by two years over the period 2024-2027. After these transitions periods, the statutory ages are linked to longevity via an indexation mechanism targeting an average retirement period of 19.5 years.
This reform is a significant response to the challenge of Denmark’s aging population, although recent assessments show that the reform does not fully solve the problem.
Aftale om fremtidens velstand og velfærd og investeringer i fremtiden, downloadable from:
Kirsten Ketscher,“Folkepension i 50år,” Juristen, No. 4 (2007).
Jørn Henrik Petersen og Nina Smith,“Tilbagetrækning og pension,” in Jørn Henrik Petersen & Klaus Petersen (eds.), 13 Løsninger for den danske velfærdsstat. Odense: Syddansk Universitetsforlag, 2006, pp. 151-166.
Velfærdskommissionen, 2006, Fremtiden velfærd– vores valg, Analyserapport, www.fm.dk
DREAM, 2009, Langsigtetøkonomisk fremskrivning 2009, www.dreammodel.dk