Denmark’s early retirement scheme, known as /Efterløn/, offers the possibility of retirement from the age of 60, instead of at the standard retirement age of 65, as set out in the national residence-based ordinary pension scheme (Folkepension).
The Danish government is planning to reform the retirement system, leading eventually to a reduction in its scope, narrowing the age range in which employees can take early retirement and raising the general retirement age. The justification for this reform is to increase the size of the Danish workforce to counteract demographic predictions of a shortage of employees in years to come. A recent report, however, suggests that the reform will cause new unemployment.
Background
Denmark’s early retirement scheme, known as Efterløn, offers the possibility of retirement from the age of 60, instead of at the standard retirement age of 65, as set out in the national residence-based ordinary pension scheme (Folkepension).
To be eligible for early retirement, an employee must have joined an unemployment insurance fund and paid contributions into an early retirement scheme for 30 years. The scheme was introduced in 1979 and was aimed at employees who were unable to continue working beyond the age of 60 because they had spent years working in physically demanding jobs.
In June 2006 the Welfare Agreement (in Danish, 2.9Mb PDF) was implemented, introducing a gradual rise in the age of early retirement by six months per year from 2019 to 2022, and a gradual rise in pension age within the ordinary scheme by six months per year from 2024 to 2027.
By 2022 the earliest possible retirement age will be 62 and by 2027 the age at which the standard national pension can be claimed will be 67. The reform also proposed indexing the early retirement age and pensions, to ensure that a rise in life expectancy is followed by an increase in the number of years spent working. The first adjustment could take effect in 2025 with further adjustments every five years, but each change must be agreed ten years in advance.
In May 2011, the government published its Retirement Reform report containing the following proposals:
adding a further five years to the gradual rise in pension and early retirement age set out in the Welfare Agreement;
maintaining the current indexation of pension age and early retirement;
gradually reducing the available period of early retirement from five to three years, by gradually increasing the early retirement age from 62 to 64 years between 2018 and 2023.
These reforms would mean that by 2023 an employee will be able to take early retirement between 64 and 67, at which point they join the ordinary pension scheme.
Reasons for the reform
The justification for retirement reform is the decreasing size of the Danish workforce and demographic projections suggesting that in the future, Denmark will lack sufficient employees to fund the former pension system.
In addition to the proposed adjustments, a senior disability retirement payment (Seniorførtidspension) has been introduced, which is a variant of the existing disability retirement payment (Førtidspension). The senior disability pension is aimed at employees over the age of 62 who cannot continue to work because their job is physically demanding. This senior disability payment will not require membership of an unemployment insurance fund or contribution payments for the scheme.
The current government, which was elected in September 2011, has decided to implement the retirement reform as outlined by its predecessor.
Effects of reform
A recent report, Danish Economy, Autumn 2011 (176Kb PDF), conducted by The Economic Council, an economic advisory body governed by the Ministry of Finance, suggests that retirement reform will have the intended effect of gradually increasing the size of the workforce. However, its calculations also show that the market will not be capable of providing enough jobs to absorb the entire additional workforce.
When the reform comes into effect in 2014, there is expected to be an increase in the number of registered unemployed workers of about 5,000. In 2015, this will have risen to around 10,000, and by 2020, around 25,000 – people who would be employed if the reform had not been implemented. Overall unemployment in 2020 is expected to be 126,000 people.
Despite these findings, The Economic Council has stuck with its recommendation of eliminating early retirement, arguing that the positive consequences of the reform outweigh the negative effects. It says reform is the only way to increase Denmark’s workforce, although it will cause a period with more unemployment than otherwise would have occurred.
Trade union reaction
The Danish Confederation of Trade Unions (LO) has criticised the pension reform (in Danish, 77Kb PDF). It argues that senior disability retirement cannot replace early retirement, because early retirement is a right, whereas the possibility of making use of the senior disability retirement is dependent on approval from a committee.
LO is concerned that the level of rejection for the new senior disability retirement scheme will be as high as that for ordinary disability retirement, currently almost 70 % of all applicants. LO does not believe that the senior disability scheme makes up for the reduced benefits of the pension reform and worries that it will contribute to further inequality.
Helle Ourø Nielsen, Oxford Research
Il-Eurofound jirrakkomanda li din il-pubblikazzjoni tiġi kkwotata kif ġej.
Eurofound (2012), Retirement reform will make 25,000 unemployed, article.
