Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005



6.1 Retirement

A retirement reform can be seen as a natural response to increasing longevity
since it directly aims at ensuring a balance between the number of "contributing"
and "benefitting" years to the social contract. However, demographic shifts
come gradually, and it is a further political concern that eligibility ages for early
retirement and pensions are not changed significantly over short periods of time.
To allow agents to adapt to the changes it is thus a premise that the changes
should be phased in over a longer period of time. Given the long transition
period it is interesting to analyse how such changes, which have marginal short
run effects over time, will affect public finances and thus contribute to the
solution of the fiscal sustainability problem via an increase in labour supply and
employment.

In Denmark there is an early retirement scheme making retirement possible
from the age of 60 (the scheme has incentives to postpone retirement to 62),
and the official pension age is 6523 . The average retirement age is currently
slightly above 61, and more than 60% have left the labour market before they
reach the age of 65. Given the increasing longevity there has been much focus
on measures to increase the retirement age.

In the following, we present an assessment of a retirement reform with the
following two main elements

* The early retirement scheme is phased out over the period 2009 to
2028 , specifically the eligible age for entry into the scheme is
increased by 4 months per year starting in 2009, and the scheme
is closed when the early retirement period becomes 1 year.

* The eligible age for public pension is linked to longevity,
specifically by increasing the age limit by one month per year
starting in 201324

Note that longevity according to the demographic projection underlying the
calculations presented above approximately increasing by one month per year.
Hence, the reform of the public pension is to index the eligible age to longevity25 .

In the assessment of this reform two issues are particularly important. The
first is how large a fraction of persons currently on early retirement in the
absence of this scheme would be entitled to a different transfer like disability
pension. Various assessments of this issue have been made, and it is estimated
that between 10% and 30% of those currently on early retirement would be
entitled to a different transfer. In the assessment presented here the fraction is

23 Eligibility to the scheme requires that contributions have been paid for at least 25 years
of the last 30 years. The contribution finances between 1/3 and 1/4 of the accumulated value
of the early retirement b enefit. The transfer is 91% of maximal unemployment benefits. By
p ostp onin g early retirem ent from the age of 60 to 62 there is a higher transfer (100% of
maximum unemployment benefits) and a more favourable treatment of some forms of pension
savings. Moreover, there is a tax-free bonus to persons delaying early retirement.

24 Observe that the indexing of the eligibility age for the public pension is started later than
the out-phasing of the early retirement scheme since the opposite would imply a transition
period in which the early retirement period would increase.

25At regular intervals the indexation parameter should be adjusted to updates of demo-
graphic projections.

24



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