Danish statutory pension fund ATP said people who do not save for a second pillar pension – but could – are ending up with more money over their lifetimes than those who do.
The DKK918bn (€123bn) pension fund published research exposing the paradox resulting from the interaction of the Danish tax, benefits and pension systems, and quoted an academic who suggested the new Pension Commission’s remit could be expanded to solve the problem.
ATP said: “The Danish welfare system is built around the philosophy that the widest shoulders carry the heaviest load.”
Within the pension system, this happened by reducing public pensions as private pensions increased, it said.
But for the philosophy to work, ATP said it was crucial that everyone who could save up for their own retirement actually did so.
“That is not the case today,” it said.
“Therefore, those who are obliged to save for retirement end up both financing their own pensions and co-financing, via tax, the higher public pensions of those who do not save up but who could – the so-called free riders,” the fund said.
ATP said that over a lifetime, someone with an annual income of DKK350,000 and an annual contribution of 12% into a labour-market pension would have about DKK312,000 less to live on than someone with the same income who did not save for a pension.
ATP said the “remaining group” of people who did not save for a second-pillar pension was mainly composed of people who had spent long periods on welfare, self employed people and employees outside labour-market pension agreements.
Although the new “Mandatory Pension Scheme” (OP), which started this year and is run by ATP, would help reduce this remaining group, the scheme was only expected to trim it 1.4 percentage points to 28.6% of the population, the pension fund said.
“The reasons why the remaining group is not reduced very much, are because the contribution is relatively modest and that only benefit recipients are covered by the scheme,” ATP said.
In its research publication, ATP quoted Michael Svarer, professor of economics at Aarhus University and former chair of the Secretariat of the Danish Economic Councils about how the problem could be solved.
“There may be several ways to address the free-rider problem,” he said.
One was to extend the wealth basis offset against the state pension to include housing assets etc, Svarer said, adding that another idea was to introduce mandatory savings for employees in the remaining group.
“Both the Welfare Commission and the Presidency of the Economic Councils have already proposed models for compulsory pension savings, so it could be relevant to expand the terms of reference of the forthcoming Pension Commission to shed light on models for reducing the free-rider problem too,” he said.