Danish pensions expert Jesper Rangvid is arguing for radical change in the Nordic country’s internationally lauded pension system, saying the link between retirement age and rising life expectancy leads to unfairness, and that people should be allowed to pause their pension contributions.
In a blog published yesterday, Rangvid – professor of finance at Copenhagen Business School (CBS) – said Denmark’s pension system could be improved, although it was a strong system that was able to inspire other countries.
Under Denmark’s 2006 Welfare Agreement, the political pact which established a connection between the retirement age and life expectancy and had a target of 14.5 years in retirement, Rangvid said that future generations would spend a smaller proportion of their adult lives in retirement than current retirees.
“Danes born in the 1950s – those now retired – will spend almost a third of their adult lives in retirement. By contrast, children born today can expect to spend only about a fifth of their adult lives in retirement,” he said.
“This is not inter-generationally fair,” said Rangvid, one of the two directors of the Pension Research Centre (PeRCent), but he added that finding a just solution was not straightforward.
Regarding contribution levels, Rangvid said Danes currently had to pay a fixed proportion of salary into occupational pension schemes of between 10% and 15% or more, but that there were arguments for making this more flexible, especially in the early stages of working life, although potentially also later.
“Personally, I would favour a system where individuals could pause or reduce their pension contributions for a period – say, a year or two – when having a child or purchasing a home,” he said.
Putting contributions on hold during periods of high expenditure would effectively increase disposable income in those years, thereby also lowering borrowing needs.
“It could help to reduce Danish households’ otherwise high levels of debt,” he said.
Alternatively, he suggested the system could start with lower contribution rates for younger workers, with the rates increasing as the workers get older.
The CBS professor argued that many Danes risked saving too much if the system were not adjusted.
The vast majority of today’s retirees had coverage ratios above 70%, he said, but with the retirement age projected to reach 77 by 2100, and with that cohort spending only 14.5 years in retirement, more than five years fewer than for current retirees, it was likely that future retirees’ income from private pensions could be up to 50% higher than that of today’s retirees.
“If no adjustments are made, meaning retirement ages continue to rise and the proportion of an adult’s life spent in retirement falls, there is a significant risk that a substantial fraction of future retirees will accumulate enough pension wealth to leave the labour market earlier than the official retirement age would otherwise mandate,” Rangvid said.
He also took aim at the statutory pension fund ATP, saying that he and his CBS colleague Henrik Ramlau-Hansen had long argued ATP was an ill-designed pension product, mainly because it was structured to guarantee a nominal pension.
“One might argue that a nominal guarantee is valuable in the payout phase. But there is little reason to believe that an 18-year-old entering the labour market today needs to know with certainty what their nominal pension income will be in 40, 50, or even 60 years,” Rangvid said.
For these younger workers, he said it would be far more important to aim for the highest possible pension income in real terms, even if that meant accepting some uncertainty in nominal outcomes.
“The problem is that ATP needs to invest conservatively to guarantee future nominal payouts. But conservative investments yield low returns,” he said.
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