New early retirement rules cause controversy

Negotiations on Denmark's 1999 Budget ended in late November 1998 with a broad political majority for an overall package, which contained major changes in the rules governing early retirement benefit and pensions. This has resulted in a fierce dispute between parts of the trade union movement and the government, in which the special "Danish model" for regulating the labour market via collective agreements may be questioned.

In late November 1998, a broad overall settlement on Denmark's 1999 Budget was concluded in a late-night session by negotiators for the main political parties. In addition to fixing the government finances for 1999, the settlement also contains an extensive reform of the rules governing early retirement benefit and pensions - one of the key areas of the Danish welfare system. Most people became aware of the changes when it was announced on the radio the following morning that "while you were sleeping, you have moved two years closer to the pensionable age." There was reportedly considerable shock that the rules on such an important issue had been changed by a small handful of politicians behind closed doors in the early hours of the morning.

There had, admittedly, been talk for some time about the importance of increasing the actual age of retirement for Danes in the future (DK9807179N) because, in the decades to come, each year there will be a very large number of people who will become able to retire from the labour market, whereas the number of new entrants to the labour market will be relatively small. When this is taken together with a very high level of employment - one of the reasons being a halving of the rate of unemployment during the past five years under the present Government - a great need has arisen for a major pension reform which encourages people to remain on the labour market for longer. It was expected that the Budget agreement would contain adjustments of the rules governing early retirement benefit, but only few people had anticipated such an extensive reform.

The Budget settlement has been entered into between, on the one hand, the government parties - the majority Social Democratic Party and the minority Social Liberal Party- and on the other hand, four non-Socialist parties - the Liberal Democratic Party, the Conservative Party, theCentre Democrats and the Christian People's Party. This means that 80% of the 179 members of the Danish Parliament (Folketing) are behind the reform which, in turn, is being severely criticised from both the right wing - the Progress Party and the People's Party- and the left wing - the Socialist People's Party and the Unity List.

Despite the large majority, the Budget agreement and not least the changes in early retirement benefit and pensionable age have met with fierce protests among the population, including central parts of the trade union movement. In particular, the change in early retirement benefit has been seen by some as a breach of faith by the Social Democratic part of the government.

Key political issue

The issue of early retirement from the age of 60 has been one of the hottest issues in the political debate in the past year - not least during the election campaign in February-March 1998, when it was a key theme. Under current rules, the pensionable age from which the state retirement pension is paid to everyone is 67. However, it is possible to receive early retirement benefit (efterløn) from the point at which a person attains 60 years of age. The people concerned receive a benefit equivalent to full unemployment benefit - DKK 143,000 per annum - for the first two and a half years, after which 82% of the maximum rate of unemployment benefit is paid for the remainder of the period up to the 67 years of age.

The early retirement benefit scheme was introduced in 1979 by the then Government coalition of the Social Democratic Party and the Liberal Democratic Party, and it is the same parties which are today behind the new reform. The introduction of the early retirement benefit scheme was seen as a great victory for the trade union movement, and not least the large General Workers' Union (Specialarbejderforbundet i Danmark, SiD) whose former president,Anker Jørgensen, was Prime Minister at the time. With the right to retire at the age of 60, large groups of "worn-out" unskilled workers, who had performed hard physical work for 40 years, were given an opportunity to retire on reasonable financial conditions and consequently enjoy some relatively good years as pensioners. The introduction of the early retirement benefit scheme has therefore been seen as one of the major social reforms of the post-war era. At the same time, early retirement benefit was an economic policy means which, through early retirement, could create jobs for the younger generations in a period of high and rising unemployment.

In recent years, there has been a trend towards the early retirement benefit scheme being used not only by unskilled workers but also increasingly by groups of salaried workers and academics and professionals. Even though the formal pensionable age in Denmark is 67 years, the actual average age of retirement has therefore been reduced to just over 61 years of age (DK9706114F). If this pattern were to continue, a "time bomb" would be placed under the Danish economy, given the large age-cohorts who will reach the age of 60 in the course of a few years. As there is also currently a shortage of labour, the political debate has therefore been much focused on changing or totally scrapping the early retirement benefit scheme. Furthermore, many economists, including the economic advisers on the Council of Economic Advisers, have spoken in favour of reforms aimed at reversing the trend towards increasingly early retirement from the labour market.

Political guarantees

The non-Socialist parties, headed by the Liberal Democratic Party and the Conservative Party, favour a complete scrapping of the early retirement benefit scheme over a number of years. Moreover, one of the Government parties, the Social Liberal Party, has been a clear supporter of at least raising the age of early retirement from 60 years to, for example, 63 years. The opponent has been the Social Democratic Party, which was the party behind the introduction of the scheme, and which has maintained that it must still be possible to receive early retirement benefit from the age of 60. The Social Democrats stressed that the weak, worn-out groups on the labour market should still have this opportunity.

The Social Democratic Prime Minister,Poul Nyrup Rasmussen, personally guaranteed, both during the election campaign in early 1998 and through the summer and autumn, that the early retirement benefit scheme with 60 years as the starting age was to be maintained. Both Mr Rasmussen and other Social Democrats, including the Minister of Finance,Mogens Lykketoft, have, however, stated that it is necessary to ensure a later actual average age of retirement. A failure to do so would, it is claimed, result in the Danish economy, including the high rate of employment, being threatened.

Therefore, in the course of autumn 1998, the Government prepared a reform, and when it turned out to be possible to pass the reform in agreement with the large non-Socialist parties in connection with the Budget negotiations, this opportunity was seized. Consequently, the early retirement benefit scheme has been secured for a number of years to come. However, this has not been done without significant changes.

The new rules

Under the new rules, it will still be possible to go on early retirement benefit from the age of 60, but with entitlement to only 91% of the maximum rate of unemployment benefit - a reduction from the current 100%. In exchange, the rate of benefit will not, as is presently the case, be lowered after two and a half years of early retirement. In all, therefore, the amount paid out over the whole period will not change. However, the pensionable age for the state retirement age will be lowered from 67 years to 65 years, and this means that some groups will be worse off financially. Finally, a certain degree of deduction is made in respect of other non-statutory "capital" pensions, which is not the case under the existing rules. This also will mean a deterioration in entitlements. The new rules will enter into force from 1 July 1999, but as there is a five-year transitional period, only people with very high capital pensions will have a significant decrease in income from the start.

Another significant change is that, in the future, a special early retirement fee of around DKK 300 a month will be charged to employees in addition to the ordinary contributions to the unemployment insurance fund, which have previously been sufficient for obtaining early retirement benefit. At the same time, contributions must be paid for 25 years as opposed to the current 20 years in order to earn the right to early retirement benefit.

According to the existing rules, a person on early retirement may work for a total of 200 hours a year without any reduction in benefit. Under the new rules, people may work as much as they like, but for each working hour an amount equivalent to the rate of unemployment benefit for one hour will be deducted from the early retirement benefit. Low-paid workers will therefore be able to have only a very limited extra income from work, whereas high-paid employees will have a proportionately lower deduction from their income. This is one of the provisions which the trade union movement, headed by the Danish Federation of Trade Unions (Landsorganisationen i Danmark, LO), has criticised.

People who remain on the labour market until they attain 62 years of age will receive the full early retirement benefit during the following three years up to the pensionable age and, in addition, there will be no deduction in respect of capital pensions. People who stay on the labour market beyond the age of 62 will receive a special advantage in the form of a tax reduction, which rises the longer the remain on the labour market and reaches the maximum amount of just over DKK 100,000 at the new pensionable age of 65 years. There is consequently a strong incentive to remain longer on the labour market. Therefore, the estimated increase in the number of early retirees is expected to be reduced considerably. In the opinion of the government and the parties to the settlement, this ensures the economic underpinning for the early retirement benefit scheme.

Commentary

The new reform may, presumably rightly, be characterised as necessary in order to ensure the total welfare system in the field of pensions. In particular, it is more than doubtful whether early retirement benefit could have been maintained at all in the long term without the tightening of the scheme which has now been introduced. Nevertheless, the Social Democratic Party is being heavily criticised, precisely because of the changes in the early retirement benefit scheme. Several large unions affiliated to LO, headed by SiD, have criticised the new scheme for hitting low-income groups the hardest, and a further point of criticism has been that such extensive reforms of the welfare system were introduced without a prior comprehensive debate. The leadership of the trade union movement and, not least, the members have also discussed, in particular, the Prime Minister's guarantees that no more major changes would be introduced. Such changes have now been introduced and, therefore, the view is that the Social Democrats, headed by the Prime Minister, have let down voters badly. The result can be seen in the opinion polls. Whereas the Social Democratic Party received 35.9% of the vote at the general election, the party currently stands to receive only around 19% according to the polls in the first half of December - the lowest support which has ever been measured for the party. It is therefore, in the midst of all the criticism being heaped on the party, a comfort for the leadership of the Social Democrats that there are probably three years until the next general election.

The schism between the Social Democratic Party and the Social Democrat-dominated part of the trade union movement covers a more serious trend. It is thus significant that leaders from LO and the large trade unions were not informed in advance of the process which led to the introduction of the reforms. This may be seen as a break with the "Danish model" under which, as a general rule, the parties of the labour market - ie the organisations of employees and employers - are involved directly and are given a real say in legislation which directly affects conditions on the labour market (DK9708122F).

The Budget and its reform of the pension system may consequently be a signal that the Danish model has been seriously weakened. This is a signal which points in the opposite direction of the previous reform of the labour market policy, which was implemented in the autumn of 1998 (DK9810187F), precisely following previous agreement between the two largest central organisations, LO and the Danish Employers' Confederation (Dansk Arbejdsgiverforening, DA). (Jørgen Steen Madsen, FAOS)

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