The interaction of public and private pensions - ATP

The interaction of public and private pensions - the Danish case Ole Beier Sørensen, Chief Pension Researcher, ATP ATP – October 2015

Analysis report no. 2:2015

Publisher: ATP Kongens Vaenge 8 DK – 3400 Hilleroed +45 2011 1213 www.atp.dk

September 2015.

Responsibility clause: This report is part of a joint project “Pillar integration, basic protection, replacement rates and replacement rate sensitivity in 4 modern multi pillar pension systems” between ATP, The Swedish Pension Authority, Stockholm, Sweden; the Gover nment Actuary’s’ Office, OSFI, Ottawa, Canada and the Bureau for Economic Policy Analysis, The Hague, Netherlands. The report does not necessarily reflect official ATP positions.

Contact: Ole Beier Sørensen, Chief Pension Researcher, ATP E-mail: [email protected]

Summary Pension systems must tend to many, diverse – and often contradictory – objectives simultaneously. In order to do that, multi-pillar pension systems combine different types of schemes with different characteristics. In the Danish case the key objectives of basic protection and risk sharing are served through the combination of public and private pension provision as such and through extensive i ncome tests applied to public pension benefits and income and needs tests applied to social non-pension benefits for the elderly. In this report, this approach is analysed in detail based on micro-simulations. The analysis shows that net-income effects stemming from typical life choices and life events are reduced substantially and that the approach provides quite effective protection against a wide range of idiosyncratic risks – among other business cycle risks. The analysis shows that while the poverty alleviation aspect remains important, the targeting measures have much broader implications and importance in terms of risk mitigation, income stability, responsiveness and robustness. However, the social rationale does not always align well with an individual rationale and the income test of public benefits does raise significant dilemmas in terms of weaker incentives to save for retirement. This challenge is aggravated even further when the implicit tax on investment returns is considered. Income testing – and other targeting methods – leads to high implicit tax rates. This incentive issue rank high on the current political agenda as it threatens to weaken popular support and acceptance of compulsory pension savings as part of the overall pension system. The analysis suggests that the interaction of public and private pensions is the turning point of the political economy of pensions in the Danish case. Paradoxically, the factors’ weakening incentives are the same factors that provide effective risk mitigation, predictability, security and robustness. In return for high implicit tax rates the individual is provided with a high level of income security and risk protection. The implicit tax rate argument fails to price this element and take it into account. Turning to the challenges facing government and viewing these from an analytical stand-point, the key issue may not be about the modus operandi as such but rather about the policy balance struck between various incentive concerns on the one hand and the host of social concerns discussed in this analysis on the other. Viewed from an analytical stand-point, the key objectives may be about avoiding non-participation and free-riding and about changing minute design details with the view of improving the rational e of saving for retirement while keeping the basic structure intact, preserving a significant risk sharing element and safeguarding the legitimacy of targeted social benefits.

Page 3

Contents 1. The interaction of pillars .......................................................................................................................5 2. The Danish pension system ..................................................................................................................8 2.1 The three pillars ................................................................................................................................8 2.2 Early retirement .................................................................................................................................9 2.3 Targeting: income and means testing .............................................................................................10 2.4 Income tax ......................................................................................................................................12 2.5 Summary and recent reform overview ............................................................................................14 3. Targeting measures – incentives and implicit tax rates ...................................................................16 4. Labour market career and income in retirement – singles ..............................................................20 4.1 Replacement rates for full time employed workers .........................................................................20 4.2 Adverse labour careers and income in retirement ..........................................................................21 4.3 Complex labour career scenarios ...................................................................................................23 4.4 The relative income position of singles ...........................................................................................25 5. Labour market career and income in retirement – couples .............................................................27 5.1 Replacement rates for full time employed full career couples.........................................................27 5.2 Adverse labour careers and income in retirement ..........................................................................29 5.2.1 Part time work .........................................................................................................................29 5.2.2 Maternity and part-time work in relation to child rearing .........................................................29 5.3 Complex labour career scenarios ...................................................................................................30 5.4 The relative income position of couples ..........................................................................................32 6. Systemic risk ........................................................................................................................................34 6.1 Pension fund performance ..............................................................................................................34 6.2 Post-retirement income development .............................................................................................35 7. Structural risks – alternative financial scenarios .............................................................................37 7.1 Sensitivity ........................................................................................................................................37 7.2 Replacement rates and pension composition under alternative deterministic scenarios ................38 7.3 Business cycle sensitivity – 500 variable financial scenarios .........................................................40 8. Conclusion ...........................................................................................................................................43 Appendices ...............................................................................................................................................48 Simulation model ..................................................................................................................................48 Applied financial assumptions ...............................................................................................................48 Modeltype indiduals ..............................................................................................................................48 References ............................................................................................................................................49

Page 4

1. The interaction of pillars The Danish pension system is gradually maturing, but as is often the case in the world of pensions, mat uration is a lengthy process. The current structure was completed during the 90’ies by a massive expa nsion of private labour market pension (the Danish version of 2

nd

pillar pensions) coverage facilitated by

the gradual implementation of a number of new multi-employer pension schemes. These new schemes are compulsory, contributory, collective, fully funded insurance-based DC-schemes. Hence, it will take 45 decades before the full potential of these schemes is realised. In the very long term – 2050 and beyond – pension provision in Denmark will have changed. Some 7-8 in nd 10 pensioners will benefit to a greater or lesser extent from a 2 pillar supplementary pension benefits nd

rd

and around half of aggregate old-age pension income is expected to be provided by 2 and 3 pillar pension schemes (Ministry of Economic Affairs 2014, ATP 2013a, The Danish Welfare Commission 2005). The dominant element of private pension provision will be 2

nd

pillar benefits leaving only a relative-

rd

ly modest role to 3 pillar schemes. This development will mark a significant change measured against the current situation. Currently half of all Danish old-age pensioners do not have supplementary pension benefits topping up their basic pe nnd

rd

sion. 2 and 3 pillar benefits – including PAYG financed benefits provided for some segments of civil servants - provide some 27 pct. of aggregate old-age pension income (ATP, 2013a). The Danish pension reform of the late 80s/early 90s differs from reform efforts in many other countries. Rather than being driven by financial sustainability concerns the process focused on adequacy concerns, structural financial concerns and the need to relieve the pressure for increases to the basic pension (Danish Government 1987). The pension reform of the early 90’s will particularly benefit mid income groups and supply higher replacement rates for these segments. The maturation of the Danish pension system will mean that individuals’ financial situations as pensioners will increasingly become a function of their labour careers – the more stable the work life, the longer the labour career, the higher the wage level etc., the higher the old-age pension. Consequently, weak or no labour market affiliation or lengthy or frequent disruptions of the labour career will have negative e ffects on the financial situation in old-age. The more and the longer the spells of unemployment, matern ity, part-time work etc., the stronger the negative effect on the pension outcome will be. These relationships seem self-evident and indeed, they have received much attention in public debates in Denmark. Especially the negative pension effects of maternity and part-time work in relation to child rearing has attracted much attention and pension experts/advisors have used this line of reasoning to e.g. invite women to save more individually in order to make up for the allegedly detrimental effects m aternity and child rearing has on financial well-being in old-age. It is not difficult to show, that substantial potential gross savings is sacrificed in the event of a lengthy period of reduced labour participation or absence from the labour market - if you work less, you earn less and you save less.

Page 5

However, the underlying analysis is somewhat flawed as it fails to take account of three basic facts. Firs tnd rd ly, that savings based pensions in the 2 and 3 pillar are elements in a wider multi pillar structure. Secondly, the basic pension continues to be a very important element of old-age support for all pensioners and particularly so for the lower 70-80 pct. of the income distribution. Thirdly, the interaction of the different pillars in the overall system has great potential in mitigating net-income effects and in sharing idiosyncratic risks. As will be demonstrated in this analysis, the net-income effects stemming from e.g. adverse labour cand reers are generally modest. While 2 pillar participation in general is very important to financial wellbeing in old-age, the interaction of the pillars provide a high level of risk sharing including protection against net-income effects stemming from adverse labour careers, pension fund performance, effects of business cycle fluctuations, post-retirement income development etc. (ATP 2012a, 2013 b and c, 2014a and c and The Money and Pension Panel 2012). The key mitigation vehicle is provided by the basic pension as such and by an extensive use of income tests in the Danish public pension system. Such income tests are applied to the basic pension itself as well as to various social benefits available to the elderly. As regards social benefit s these are not only 1 income tested, they also take account of needs, expenses and assets . This practice however, raises challenges because it creates high implicit marginal tax rates an d high and age related return tax rates (ATP 2014d, Danish Economic Council 2008 and 2014). High implicit tax rates weaken the utility of pr ivate pensions for low and mid-income pensioners and it weakens the incentive for pension savings esp ecially for older workers. If incentives become too weak it may weaken system support and participation, and it may stimulate arbitrage behaviour. This challenge was the key motive behind the Danish centre left governments’ decision in 2014 to form an expert commission looking into the challenges that may face the Danish pension system (M inistry of Taxes and Revenue, 2014). The issue is not a question dividing the Danish polity, nevertheless the newly elected (June 2015) liberal government decided to close the commission in June 2015 and replace it with a reform agenda setting out two objectives: More people must save for retirement, and saving for retirement shall always pay. The reform is to be launched by spring 2016 (Danish government 2015). The agendas set out by the two governments are different, and then again commonalities outweigh differences. The motive for closing the commission seem to relate to concerns over political process rather than content. The challenge is serious and important, but still the reasoning may still seem a bit short sighted. Focu sing on implicit tax rates in isolation fails to include in the protection enjoyed by the individual through the risk mitigation provided by the interaction of public and private pensions in the assessment. While it is extremely difficult to price these aspects, they do undoubtedly represent great value to society as well as the individual and therefore the marginal tax rate approach needs to be accompanied by other analytical approaches in order to better capture the full picture and include risk sharing aspects and social policy aspects.

1

In gross terms such benefits account for some 13 pct. of total public payments to old-age pensioners. Some 85 pct. of these social benefits are housing allowances. See Sørensen & Keldorff 2015 for a detailed analysis of the Danish housing allowance for the elderly and its’ role and effects.

Page 6

Therefore the key research questions in this analysis are how variations in work life course, business cycle fluctuations and other risks and uncertainties affect net-income in old-age and how – and to what extent - effects stemming from life events, life choices, idiosyncratic risks and uncertainties are mitigated? The analysis will document the great importance of mitigation and risk sharing to income security, responsiveness and robustness. While this may be so, the key dilemma remains as the individual may still revert to the simple implicit tax argument and evaluate each individual contribution payment in this co ntext. The heart of the matter is, that the greater concern for social cohesion and the common good over a longer time span may not align well with a more narrow and immediate individual concern. Some perspectives on possible reform steps are briefly discussed on the basis of the analysis. Section 2 describes the Danish pension system, the interaction of its’ pillars and relevant aspects of the Danish income tax system. Section 3 discus the targeting measures applied in the Danish pension system. Section 4 looks at the effects of adverse labour careers for singles while section 5 covers the same issues for couples. Section 6 looks at systemic risk while section 7 focus on structural risks. Finally the analytical results are discussed and related to current debates in Denmark in section 8.

Page 7

2. The Danish pension system 2.1 The three pillars The Danish pension system is a three pillar structure com bining different public and private elements. The elements have different properties and they serve different functions. st

The 1 pillar – the state funded old-age pension and ATP – provides a socially targeted minimum pension in old-age and a basis upon which other complementary systems can build. The state funded basic st

pension currently provides some 90 pct. of all 1 pillar payments. It is purely tax financed and noncontributory. The key qualifying criteria relates to age and to years of residence. Bene fits are indexed in 2

line with the wage index as defined by legislation . ATP is a fully funded, contribution defined, collective insurance scheme. Contributions are flat rate and paid in relation to labour market participation and receipt of social securi ty benefits – i.e. unemployment benefits, sickness benefits and other. There is a direct link between accruals and contributions at indivi dual level and in the sense that intergenerational transfers are prohibited. The insurance based platform makes ATP a hybrid – a DC scheme designed with the view of providing DB-like outcomes. The ATP benefit is a guaranteed life-long with profits deferred annuity. Indexation is conditional. Employer respo nsibilities cease when contributions due are paid to ATP. There is no external sponsor of last resort. Together with the state funded basic pension – and supported by a battery of means and needs tested 3

4

social benefits - ATP provides a minimum retirement income and an income floor to be complemented and supplemented by other schemes. 5

The 2nd pillar – not for profit labour market pension schemes set up through collective agreement or similar – complements the basic pension with the objective of providing relative income replacement. Such schemes cover app. 85 pct. of the employed work force. Participation is compulsory for anyone working in jobs covered by a particular collective agreement. Schemes are DC much in the same sense as ATP and as is the case for ATP, employer responsibilities cease when contributions due are paid. nd

The content of the specific 2 pillar pension scheme, the choice of operator and the contribution level is nd decided through collective agreement. The key focus of 2 pillar schemes is on old-age support but they will also cover other social risks – i.e. disability, survivors’ benefits and critical illness benefits. Typically some 15-25 pct. of the current contribution will be spent on social risk cover other than old -age.

2

The wage index applied is based on a weighted average of the observed real income development for blue and white collar workers. The formula is such that if the wage growth is less than 2 pct. nominally, benefits wil l be indexed to the wage index in full. If wage growth is above 2 pct., benefits will be increased to the wage index minus 0.3 pct. 3 Housing benefits are by far the most important element. Other elements are e.g. heating allowances, health benefits and i ndividual support benefits (Sørensen & Keldorff 2015). 4 The structure of the state funded basic pension and especially the application of income tests to the pension benefits has be en a matter of much and heated political dispute throughout its’ entire lifetime. The debate has evolved – and shifted – almost continuously since the inception of the universal old-age benefit in 1956 (K. Petersen and J.H. Petersen, 2012, Vol. 5 ch. 4). Even though the current design enjoys broad based political support, political ideas to income test the entire benefit or not to income test at all are frequently voiced. 5 Some 35 different companies are registered as providers of providing 2 nd pillar pension schemes. Taking account of group structures and collaborative structures the real number is lower – around 25. More than 80 pct. of aggregate annual contributions are collected by the 10 biggest providers.

Page 8

The structure of labour market pension schemes has changed dramatically in rec ent years moving from a 6 guarantee based insurance approach into a market rate based approach . This has happened in light of financial market developments and the adoption of mark to market accounting principles on the liability side (2002). As part of this process risks previously held by the provider and hence shared across the insurance collective have been privatised and individualised. While a systematic overview is wanting, the assumption is that most schemes have adopted life cycle approaches or other measures in order to reduce these privatised risks. Contribution levels vary according to labour market segments ranging from 12 pct. of gross wages for most low income workers to some 18 pct. of gross wages or more for high income workers. Only a small number of civil servants – mainly military personnel and senior managers – are covered by nd traditional DB schemes. The group is shrinking as insurance based 2 pillar coverage has replaced traditional civil servants pensions for most groups. rd

The 3 pillar – individual pension insurance or pension savings – provides vehicles for individual flexibility and the opportunity for people not covered by a 2

nd

pillar scheme to save for retirement on their own.

rd

3 pillar schemes are either insurance contracts or savings contracts providing a lump sum, a fixed term rd

annuity or – less common – a life-long annuity. 3 pillar schemes generally play a marginal role, and they nd are not described further. Most schemes relate to people who are already covered by a 2 pillar scheme. 3rd pillar schemes receive some 15 pct. of aggregate contributions paid to funded pension schemes in a given year.

2.2 Early retirement For decades a voluntary early retirement scheme has allowed Danes to retire before reaching the formal retirement age. The voluntary early retirement scheme is an extension of the unemployment insurance scheme and hence it is not formally part of the pension system. Nevertheless, the scheme has dramat ically affected retirement patterns since the late 70s. A number of reforms – 1998, 2006 and 2011 - have aimed at curtailing early retirement and drive the real retirement age upwards. Reforms have increased the minimum early retirement age to 62 and going fo rward the age – as is the case with the pension age - will be linked to longevity in order to keep maximum 7

benefit duration at three years . The benefit is flat and similar to the unemployment benefit but it is tested against private pension benefits – potential benefits and other accessible pension wealth as well as benefits actually collected. The scheme is contributory and benefit coverage requires a contribution record of 30 years. The benefit is available to those who meet the early retirement age and other eligibility criteria. The income and asset test however means that the potential of the benefit is limited for mid- and high income earners.

6

Many schemes have replaced a traditional insurance approach based on deferred annuities with a market rate approach wh ere individual accounts are annuitized at pension age or they have lowered the ambition level of the guarantees involved. 7 Originally the early retirement scheme had a maximum benefit duration of 7 years. Reforms lowered this duration to five years in relation to a lowering of the pension age from 67 to 65 years (2004-2006). Recent reforms (2006 and 2011) increases the early retirement age to 64 years coordinated with an increase of the retirement age to 67 years. Consequently the maximum benefit duration will be three years from 2019 and onwards.

Page 9

In order to incentivize deferred retirement, the scheme also provides a tax free premium to those who have access to the benefit but keep on working. The tax free premium is substantial and provides a relatively strong dis-incentive to retire early. Real retirement ages are on the increase – not least due to reforms – and enrolment has decreased dramatically in recent years. In the longer term as little as 15 pct. of the work force will have access to early 8 retirement benefits .

2.3 Targeting: income and means testing The basic pension provides a socially targeted minimum pension in old-age and it serves as a basis upon which other complementary systems can build. This double role defines the key trade off in relation to the basic pension. In order to square this circle the state funded basic pension is split into three benefit elements – a basic amount, a pension supplement and a special supplementary amount. All three elements are income tested and on top of that the latter element is assets tested. The income tests follow different principles – amounts and income test details are described in table 1. The basic amount is income tested against personal work income only and only against work income above a relatively high threshold – reducing the benefit by 30 pct. of individual work income above the threshold. Effectively this means that the benefit is universal for all pensioners only excluding pensioners 9 who have substantial work income – i.e. who have not retired . The universal character of the basic amount maintains the role of the basic pension as a basis upon which other benefits can build. The pension supplement is income tested against all taxable income including work income, private pension and capital income – reducing the benefit by 30.9 pct. (singles) of private income above a certain threshold exempting work income up to some 4,000 € from the income test. For couples the income test also incorporates the taxable income of the spouse basically looking at the household rather than the individual while applying a lower taper rate (16 pct.). Currently the pension supplement is paid to 9 in 10 pensioners, and 7 in 10 receive the full amount. As the pension system matures, more will be affected by the income test. The number receiving the benefit is expected to remain more or less the same – some 9 in 10 pensioners – while the number being eligible for the full benefit will decrease to some 3-4 in 10 (ATP and DREAM 2014). As it is, the benefit will remain an important element for the majority of pensioners.

8

Assessment based on enrolment data covering the 30-34 and 35-39 year old workers in 2013. Danish Agency for Labour Market and Recruitment, 2014. 9 People above the pension age who have not yet retired can defer their basic pension. If doing so, the benefit will be actuari ally increased.

Page 10

Table 1: The state funded basic pension – annual amounts 2014 (€) and income test brackets and rates Single pensioner Basic amount - Income test allowance (the test only relates to personal work income)

Couples1)

9,453

9,453

40,160

40,160

- Income test percentage for work income above the allowance

30 pct.

30 pct.

- Level of personal work income at which the basic amount ceases

70,880

70,880

Pension supplement

9,819

4,745

- Income test allowance (the test relates to all taxable private income) 2)

8,867

17,787

- Income test percentage for taxable private income above the allowance

30.9 pct.

16 pct.

- Level of taxable private income at which the pension supplement ceases

40,640

47,440

Special supplement

2,160

2,160

- Income test allowance (the test relates to all taxable private income)

2,547

5,053

34.2 pct.

17 pct.

- Income test percentage for taxable private income above the allowance 3) - Level of taxable private income at which the special supplement ceases - Asset test allowance - benefit not payable if disposable funds exceed a basic allowance

8,867

17,787

11,333

22,666

Notes: 1) All amounts for married/co-habitants relate to the individual partner. The income test of the basic amount for married/co-habitants takes account of personal income only, while the income test of the pension supplement and the special supplement takes account of household income. The numbers relate to pensioner couples. Special regulations apply to a pensioner married to/co-habiting with a non-pensioner. 2) Work income up to app. € 4,000 a year is exempt from the income test of the pension supplement. 3) The actual regulation is structured differently, but the percentages given here match. In addition to the income test, the special supplement is asset tested ceasing the benefit for individuals with disposable assets above app. € 11,333. Source: ATP and Ministry for Children, Equality, Integration and Social Affairs, 2014.

The special supplement is income tested against all taxable income including work income, private pension and capital income – in practice reducing the benefit by app. 34.2 pct. of private income above a threshold of € 2,547. For couples the income test also incorporates the taxable income of the spouse basically looking at the household rather than the individual. Furthermore the benefit is means tested excluding pensioners with disposable assets above a relatively low threshold (€ 11,333). Hence, the sp ecial supplement is targeted towards the financially most needy pensioners. Currently the special supplement is paid to 3 in 10 pensioners. As the pension system matures, this number is expected to decrease to 1-2 in 10 (ATP and DREAM 2014). The income tests are applied sequentially. Leaving the income test of the basic amount aside, chart 1 visualizes the sequence for a single pensioner. The chart illustrates how aggregate income in old -age 10 and income composition become functions of private pension income and ATP through the income test . The chart also provides a simple illustration of how the redistributive function of the pension system works: Everyone is given the basic amount and depending on their supplementary private income the individual will have greater or lesser income tested supplementary amounts.

10

The chart - and the analysis at large – does not include the battery of means and income tested benefits in kind (personal needs tested benefits) provided to Danish pensions and it does not include the housing benefit.

Page 11

Chart 1: Taxable private income and aggregate taxable income 2014 (€)

Source: ATP 2014.The chart also illustrates one of the challenges in the Danish system as income tested benefits are paid to individuals with very high income. The reason for this is the fact that income testing relatively high amounts in a high income tax regime requires a very long income bracket – unless very high implicit tax rates are accepted.

Leaving complex rules and regulation aside the mechanics of the Danish pension system is essentially quite simple: If for one or another reason you end up with a lower private pension, some of that disappointment will be compensated for by way of higher public benefits. In line with the universal character of the Danish basic pension this practise is applied regardless of the causes responsible for the lower private pension.

2.4 Income tax The descriptions so far relate to gross benefits and amounts. In order to assess the net -effects and relations, the analysis will look mainly at pension income after income tax. Key principles, numbers and rates of the Danish income tax system are summarised in table 2 and their application is illustrated by the examples described in table 3. The general tax regime as regards pensions is a so-called ETT regime

11

– pension contributions are tax

exempt, returns to pension investment are taxed (15.3 pct.) and pension benefits are subject to income tax. A general objective of Danish tax policies in this regard over the past 2 -3 decades has been to create a relative symmetry between the tax benefits provided when contributions ar e paid and the taxes levied when benefits are collected. Denmark is characterised by relatively high income tax levels on the one hand and an almost negligible use of earmarked social security contributions on the other. Generally, social benefits and heal th care are

11

In 2012 the tax regime for lump sum pension savings was changed into a ETT approach.

Page 12

financed from general taxation and the individuals’ tax payments has no bearing on neither eligibility nor 12 the quality and level of the benefits involved . Generally, all income less pension contributions

13

paid to ATP, 2

nd

rd

and 3 pillar schemes is subject to a

labour market tax of 8 pct. Pensioners are exempt from labour market tax. Table 2: Key amounts, thresholds and tax rates in the Danish income tax system 2014 (€) Non-retirees Labour market tax levied on all income Basic allowance (income exempt from income tax)

Retirees

Notes

8 pct. € 5.707

- Pension income is not subject to labor market tax € 5.707

Employment allowance (work income amount exempt from income tax)

7.65 pct. Max. € 3,333

The allowance only relates to work income. The 7.65 pct. allowance tops up the basic allowance. Up until 2022 Max. € 3,333 the allowance will gradually increase to 10.65 pct..

Additional employment allowance for singles (work income amount exempt from income tax)

5.4 pct. Max. € 2,360

The allowance only relates to work income. The 5.4 pct. allowance tops up the basic allowance and the general Max. € 2,360 employment allowance. Up until 2019 the allowance will gradually increase to 6.25 pct..

Basic tax

Basic income tax

High income tax

Health care tax Municipal tax (levied on all taxable income) High income tax (levied on all taxable income) High income tax allowance (amount exempt from high income tax)

6.83 pct. 5 pct.

25.5 pct.

15 pct.

€ 59.880

6.83 pct. Up until 2019 the health care tax will gradually disappear and be replaced by an equally higher basic 5 pct. tax The rate is set for the 98 municipalities individually by 25.5 pct. the municipal council. The rate applied is the typical level. 15 pct. Up untill 2022 the allowance will be increased relative € 59.880 to wages in order to make sure that only high income earners are subject to high income tax

Source: ATP and Ministery of Taxes and Revenue, 2014.

The remaining amount is subject to income tax. Taxable income above a basic allowance of € 5,700 is 14 subject to basic income tax . A supplementary allowance is given to the employed. Taxable income above a relatively high threshold of € 59,880 is subject to an additional high income tax. As a general principle - but contrary to the approach applied to the income test of public pensions - the income tax system focus on individuals meaning that spouses and co-habitants are taxed individually and not as a household. There are no tax credits and no age-specific franchises or deductions applied.

12

The exceptions are few: ATP-pension is fully funded and contributory. Unemployment insurance is voluntary and contributory. Pension contributions are not exempt from labour market tax, but the labour market tax due is calculated and paid by the pension company. 14 Mortgage interest cost, unemployment insurance contributions, work transport costs and a number of other items are deductible . The basic income tax has three different components – basic tax, municipal tax and health care tax. The latter is being phased out. 13

Page 13

Table 3: From gross income to net-income – two simple examples (2014-regulations in €) The first section illustrates the move from gross pay to net-income for a single high income worker with a gross taxable income of € 75,000 and a 2

nd

pillar pension contribution rate of 17 pct.

Gross wage (€) 2nd pillar pension contribution*) ATP contribution*) Income subject to labour market tax Labor market tax Labour market tax (8 pct.) Taxable income Basic tax Basic tax allowance Employment allowance (7.65 pct. - maximum € 3,333) Employment allowance for singles (5.4 pct. - maximum € 2,360) Basic tax (basic tax, health care tax and municipal tax - average 37.14 pct.) High income tax High income tax allowance High income tax (15 pct. of all taxable income above the allowance) Net income

75,000 -4,250 -144 70,606 -5,648 64,958 -5,707 -3,333 -2,360 -19,891 -59,880 -762 44,305

The second section illustrates the move from gross pay to net-income for a single pensioner with a gross supplementary pension income (incl. ATP) of € 20,000. Private income and ATP 2nd and 3rd pillar pension ATP pension Total private pension and ATP Basic amount Basic amount Supplementary amount Full supplementary amount Income test - 30.9% of private taxable income above the allowance of € 8,867 Net supplementary amount Special pension supplement Full special pension supplement Income test - 34.2% of private taxable income above the allowance of € 2,547 Net special pension supplement Gross taxable income Basic tax Basic tax allowance Basic tax (basic tax, health care tax and municipal tax - average 37.14 pct.) High income tax High income tax allowance High income tax (15 pct. of all taxable income above the allowance) Net income

17,500 2,500 20,000 9,453 9,819 -3,440 6,379 2,160 -2,160 0 41,432 -5,707 -13,268 -59,880 28,164

nd

*) In this example 2 pillar contributions are split 2:1 between employer and employee. Source: Calculations by ATP 2015

2.5 Summary and recent reform overview On top of the early retirement reforms other pension reform measures have addressed the challenges of increasing longevity and financial sustainability and security. Six reform steps have been adopted in o rder to address these challenges. Firstly - and as mentioned above - based on reforms in 2006 and 2011, early retirement will be curtailed in terms of duration (max. 3 years), accessibility and benefit generosity. Secondly, the early retirement age and the retirement age will increase from 60 to 64 and from 65 to 67 respectively. This process will be completed by 2024. Thirdly, beyond 2024 the early retirement age as

Page 14

15

well as the pension age will be indexed to longevity . The point is to keep the duration of the average old-age retirement period stable around 17 years. Fourthly, the minimum pension age in private pension schemes will change in line with the statutory pension age and track the official retirement age lacking 5 years behind. Fifthly, the Danish FSA has issued a longevity benchmark taking stock of future longevity. Generally, private pension providers have to adopt this benchmark when valuating liabilities. By taking more careful stock of future longevity increases future income streams – i.e. pension promises - can be priced more carefully and the longevity risk of private schemes is reduced significantly. Sixthly, a markto-market regime has been adopted and Danish funds will be covered by Solvency II regulation. In summary ten points about the Danish pension system may be notable in an international context. st

1. There is practically no public involvement in pension provision outside the 1 pillar. 2. The objective of the public pension system is confined to the provision of targeted basic income security. 3. The objective of securing a reasonable replacement rate has been privatised and allocated to private nd 2 pillar schemes. nd 4. 2 pillar pension schemes are fully funded insurance schemes, nd 5. 2 pillar funds are subject to solvency II financial regulation. st 6. As regards elements outside the 1 pillar redistribution between generations or groups is prohibited. 7. There are no special tax credits or other favouring the elderly or particular groups of elderly. st nd rd 8. Risk sharing and risk mitigation is provided through the interaction of the 1 pillar and the 2 and 3 pillars. 9. Longevity increases are handled through longevity indexation of the pension age and through the adoption of mortality tables taking stock of future longevity increases when pricing pension promises and in the valuation of liabilities. 10. Access to early retirement has been curtailed and targeted.

15

The legislation stipulates that increases should be announced with at least 10 years notice and that planned increases should be confirmed by parliament (Bill no. 10, 2015).

Page 15

3. Targeting measures – incentives and implicit tax rates Targeting in the Danish pension system is facilitated by two different factors - the existence of a universal basic pension and the partial income test of its benefits. Social targeting is further supported by subsidised contribution payments to ATP for social security recipients before retirement, housing benefits and a battery of social assistance benefits for the neediest pensioners and by the progressivity of the tax system. In the longer term the income test of the pension supplement will affect wide groups of pensioners pr esenting them with high implicit tax rates on their private pension benefits. Chart 2 describes three diffe rent tax rates – the marginal income tax, the implicit marginal tax and the average tax rate as a function of private pension income. The chart shows how the income tax rate evolves progressively by levying a high income tax at high income earners. The chart also shows how the implicit marginal tax rates (including the implicit taxation stemming from the targeting of public pension benefits) are rather high for low and mid -income pensioners. In fact the implicit marginal tax rate is higher for low and mid-income than for high income pensioners. If housing benefits and other social benefits targeted towards the financially neediest pensioners are included, the implicit marginal tax rates for low and mid-income pensioners increases further to a level around 75 pct. or even higher. If reductions of income tested public benefits are included when calculating the implicit marginal tax rate benefits, the same should apply when calculating the average tax rate – e.g. by interpreting the tax free housing benefit as a tax credit. Chart 2 also shows that recipients of housing allowances looking at very high implicit marginal tax rates are simultaneously looking at low or very low average tax rates. Pensioners experiencing high implicit tax marginal rates do so because they receive high public benefits. The paradox is striking: High implicit taxes are caused by features that make them better than they would otherwise have been. The dilemma is ever present: the balance between incentives on the one hand and risk sharing and social objectives on the other. The implicit marginal tax rate addresses the incentive aspect while the implicit average tax rate addresses the distribution aspect. The highest levels observed in chart 2 relate to targeted social benefits. Some 40 pct. of all current pensioners receive one or more such benefits. The rationale of including such benefits in a calculation of an implicit tax rate is questionable. Such benefits are not only income tested they also take account of needs and expenses and their recipients are generally in a much better financial position with these benefits than they would have been in their absence (Sørensen & Keldorff 2015). In fact, the housing allowance and other targeted social benefits can be seen as much as a protection of the incentive to save – especially for low and middle-income earners – as an element reducing this incentive. This is so, because the benefits ensure – within certain limits - that the individual pensioner main-

Page 16

tains the purchasing power advantage achieved, for instance, through prior pens ion savings, regardless of housing costs, special needs or other. High implicit tax rates do inhibit incentive effects but the behavioural effects related to this set of ince ntives are likely to be negligible. The benefits in question are highly targeted, they cannot be planned for with any accuracy, and those who do will have to plan systematically with the view of creating a situation with very modest financial resources. Adding to this picture is the fact that o nly few pensioners – some 15 pct. - receive this kind of benefits throughout their retirement. Most of those who actually do, received similar benefits before retirement. Many pensioners will receive this kind of benefits at a later stage - in relation to becoming single, deteriorating health or other substantial changes to their living conditions (Sørensen & Keldorff 2015). Chart 2: Implicit tax rates on private pension benefits in the Danish pension system 2014

Note: The implicit tax rate is calculated as the net-income increase resulting from an incremental gross private pension benefit increase. Source: Calculations by ATP 2015.

Hence, it may make little sense to include targeted social benefits in an implicit marginal tax rate calcul ation. Furthermore, leaving the social benefits aside may be necessary in order to maintain a social policy platform as part of the wider old-age policy and hence preserve the ability to address the needs of the neediest segments. Based on this interpretation the key focus becomes the income test of the supplement ary amount. Chart 2 displays implicit marginal tax rates in the late 50s and it reveals levels for mid -income groups that are 4-6 pct.-points higher than the high income tax, and it reveals a “bumpy trajectory”. All three elements may be politically worrisome. High implicit marginal tax rates weaken the utility of private pensions for low and mid income pensioners , and it weakens the incentive for pension savings. If incentives become too weak , it may weaken system

Page 17

support and participation, and it may stimulate arbitrage behaviour. The challenge may be even greater, as higher levels for mid- than for high income pensioners may call the justice of the system into question. The calculations discussed above and chart 2 looks at the implicit marginal tax rate w hen the pension payment has commenced. The approach may be a bit naïve as it takes the savings effort leading to the private pension available for granted and as it interprets the savings effort as one single action. Altern atively, the e.g. 45 year long savings effort can be viewed as a row of 45 individual efforts and the utility of 16 each individual contribution payment can be evaluated individually . Basically, the point is to follow the money: A contribution of € 100 is paid at a given age, it is tax exempt, it grows through investment returns, and under way these returns are subject to investment return tax of 15.3 pct. At pension age the accrued capital translates into an annual benefit – an annuity – and this benefit is subject to the public pension benefit income test before finally being subject to income tax. While the math may be a bit complicated, the question is simple: If the income test is viewed as a return tax, what is the effective return tax levied on the benefit payment generated by each individual annual contribution? Chart 3 summarises the results. The closer to retirement, the more important the contribution payment itself is to the pension benefit and the higher the implicit return tax. Levels above 50 pct. are observed for ages 55+ reaching a level of 350 pct. just before retirement. This calculation may be relevant to individuals deciding on their pension contributions themselves. They might consider whether alternative savings strategies – e.g. paying down mortgages – could be more attractive when they reach a certain age, and they might very well conclude that this is indeed possible. The calculation is equally relevant to the social partners negotiating collective agreements and formatting labour market pension schemes. If the individual rationale of pension savings can be called into question – in general or for workers above a certain age – it will affect the rationale and legitimacy of stipulating pension contributions in collective agreements. The sole reason as to why implicit return tax rates increase by age is the income test of the basic pe nsion. In absence of this element the return tax rate would be the same regardless of contribution age – i.e. 15.3 pct. Chart 2 reports a uniform implicit marginal tax rate of 56 pct. for mid income earners. If the segmented approach in chart 3 was applied to an implicit income tax calculation for a mid -income earner the level would increase by contribution age. The reason as to why the levels are so high is that the income test calculation takes the entire private benefit – the part related to the initial contribution and the part related to investment returns – into account and views the foregone public benefit as tax on returns alone. The implication is not that someone receiving a benefit of € 100 based on late contributions will have a negative income effect. The point is that the value of the resulting income stream is less than the contribution payment generating it.

16

The approach is developed by The Danish Economic Council 2008 and developed further by Haagen, Linaa and Sørensen 2010.

Page 18

Chart 3: Implicit return tax rate in the Danish pension system 2014

Note: The age specific implicit return tax rate is calculated as the implicit return tax levied on the benefit generated on the basis of a contribution paid in at a particular age. The calculation t akes the entire private benefit – the part related to the initial contribution and the part related to investment returns – into account and views the foregone public benefit as tax on returns alone. The implication is not that someone receiving a benefit of € 100 based on late contributions will have a negative income effect. The point is that the value of the resulting income stream is less than the contribution payment generating it. Source: Calculations by ATP 2015.

These effects could be avoided completely by abolishing the income test. However, such a step would mean less or no targeting and a less responsive and robust pension system. In order to avoid this dile mma the income test could be replaced by other redistributive features – e.g. special tax allowances of tax credits. While such steps might make the conflict less visible, the effects would – all else equal – in reality be exactly the same. The social rationale does not always align well with an individual rationale – this is particularly so if the individual action and rationale is segmented into rows of single considerations.

Page 19

4. Labour market career and income in retirement – singles 4.1 Replacement rates for full time employed workers The mature system will provide workers with a pension combining public and private benefits. The system can be expected to provide relatively high replacement rates to most workers. These points are illu strated in table 4 showing expected pension results for workers at different wage levels on top of a full time working career. The table indicates that net-replacement rates are expected to be high or even very high for low income workers and somewhat lower for higher income segments. The table also illustrates how the importance st

nd

of 1 and 2 pillar pensions differs substantially across the income span. While the basic pension r emains important to workers at all income levels, its role is particularly important to low and mid -income workers. nd

Comparing replacement rates with and without access to 2 pillar benefits demonstrates the importance nd nd of 2 pillar coverage. 2 pillar pensions provide substantial increases to the net-replacement rate supplied by the basic pension alone. Consistent with the overall design of the Danish pension system the rule of thumb is straight forward: The higher the income before retirement, the greater the importance of nd 2 pillar coverage to financial well-being in old-age. Table 4: Replacement rate and income composition in the mature Danish pension system assu ming full longevity indexation of the pension age (singles) Low income worker With 2nd pillar pension coverage Net-replacement rate in first retirement year State funded old age pension share in first retirement year Pension supplement relative to full supplement in first retirement year

Semi-low income worker

Mid income worker

High income worker

1.08

0.81

0.70

0.63

0.67

0.57

0.45

0.24

0.98

0.86

0.68

0.21

In absence of 2nd pillar pension coverage Net-replacement rate in first retirement year

0.87

0.61

0.46

0.37

Tax free ERB premium Tax free premium compared to the netincome in first retirement year

0.96

0.88

0.79

0.62

Note: Net-replacement rates are calculated after tax and payment of social security contributions. The pension age is indexed to longevity. In this case it is 73 years. The low-income worker has an income of 50 pct. of the APW. This is a very low level in the Danish context and hardly realistic as a life time level. Source: Calculations by ATP 2015.

The lower section of table 4 lists the tax free premium related to the early retirement scheme - the ERB premium (cf. section 2.2). If the full time employed worker has chosen to join the voluntary early retir ement scheme but abstains from actually taking out the benefit, he can collect a tax free premium. It appears from table 4 that this premium is substantial and equals a qu ite high fraction of the net-income during the first retirement year. If the worker retires at the pension age, he can decide to spend his tax Page 20

free premium before activating his private pension benefits. If he does that , his basic pension will increase as he doesn’t have a taxable supplementary income. Handled this way the tax free premium allows him to defer his private pension benefits by 2 years or more. When he finally activates the benefits they will have increased substantially due to the shortened benefit period. Typically, retirement is associated with some loss of income and hence replacement rates below 1.0 are 17 to be expected . Pension systems have redistributive features and typically – as is the case here - they generally provide higher replacement rates to low income workers. Table 5 shows the relative net-income 18 position of the four model persons before and after retirement and it shows how the relative income differentials narrow when moving from active years into retirement. Table 5: Net-income relative to the net-income of a retired mid-income worker (singles) Low income worker Relative net-income level in last active year Relative net-income level in first retirement year

Semi-low income worker

Mid income worker

High income worker

0.53

0.77

1.00

1.41

0.83

0.90

1.00

1.27

Note: Net-incomes are calculated after tax and payment of social security contributions. The pension age is indexed to longevity. In this case it is 73 years. Source: Calculations by ATP 2015.

It should be noted, that the calculations may not provide a true picture of the distribution of financial living conditions. The calculations do not take account of the housing benefits and other social benefits targeted at the elderly. Housing benefits in particular can have a very substantial impact on the individuals net –income, and most low income pensioners are likely to receive such benefits. Therefore the income position for low income pensioners may actually be somewhat better than the estimates suggest. At the same token it should be noted, that the modelling does not include other wealth. Especially for high income earners this may be important, and hence the estimated income positions may underestimate the real financial position.

4.2 Adverse labour careers and income in retirement Few will enjoy a full work life without disruptions of any kind. Training, maternity, spells of part -time employment, spells of unemployment etc. will be part of most life courses. In the following sections the analysis looks at the post-retirement net-income effects of such life events and life choices. Table 6 summarizes simulation results for four different adverse labour careers – a full time career, a full part-time career, a maternity and part-time scenario and an unemployment scenario.

17

The flat rate nature of the basic pension is such that very low income workers and some social security recipients may exper ience replacement rate above 1.0. 18 The tax free ERB premium is not taken into account as it requires voluntary affiliation and a lengthy contribution record.

Page 21

Table 6: Private pension accrual and net-pension results – three adverse labour career scenarios compared to full time workers at similar full time wage level Full time employment but 2 maternities, 15 years unemployed in age years working part time (50 pct.) 26, 28-29 and 31-32

Permanent part time employment (50 pct.)

Full time employment Life time labor input All income groups

1.00

0.50

0.80

0.90

1.00

0.51

0.79

0.90

Low income worker

1.00

0.90

0.95

0.98

Semi-low income worker

1.00

0.86

0.94

0.98

Mid income worker

1.00

0.82

0.92

0.97

High income worker

1.00

0.75

0.89

0.95

Low income worker

1.08

1.73

1.04

1.07

Semi-low income worker

0.81

1.29

0.77

0.80

Mid income worker

0.70

1.08

0.65

0.68

High income worker

0.63

0.88

0.56

0.60

Low income worker

1.00

0.91

0.96

0.99

Semi-low income worker

1.00

0.88

0.95

0.98

Mid income worker

1.00

0.84

0.93

0.97

High income worker

1.00

0.77

0.90

0.95

Low income worker

0.67

0.80

0.72

0.68

Semi-low income worker

0.57

0.74

0.64

0.59

Mid income worker

0.45

0.65

0.53

0.48

High income worker

0.24

0.47

0.33

0.28

Aggregate private pension wealth at pension age All income groups Aggregate gross pension (taxable income)

Net-replacement rate

Net-pension

Public pension fraction

Note: Net-incomes are calculated after tax and payment of social security contributions. Source: Calculations by ATP 2015.

The table shows how a lower life-time labour input translates into a reduced accrual of private pension benefits. This in turn translates into a lower gross pension and a lower net -income in the first year of retirement. The greater the reduction of the life time labour input, the greater the net-income effect. However, the table also illustrates how the interaction between public and private pensions reduces the net-income effects stemming from adverse labour careers substantially. This aspect is visible at all income levels, but the strength of the mitigation effect decreases by income. The part-time scenario represents the greatest labour input reduction – 50 pct. – and therefore it is the most extreme of the three adverse scenarios. The private pension benefit at pension age will be reduced by app. 50 pct. compared to the benefit of a full time employed worker. However, due to the mitigation effects of the system the net-income effects will be much lower – a loss of 9-23 pct. depending on income level. Extensive part-time work affects the net-income in retirement but a higher public pension fraction moderates the net-income effects substantially.

Page 22

Similar results are recorded for the maternity and the unemployment scenario albeit at a less dramatic level. The life-time labour input reduction is much smaller – 20 and 10 pct. respectively – and hence the pension effects are much smaller as well. For the maternity scenario, a 21 pct. reduction of private pension benefits translates into an aggregate net-income loss of 4-10 pct. depending on the income level during active years. For the unemployment scenario, the effects are even smaller, as a 10 pct. reduction of private pension benefits translates i nto an aggregate net-income loss of less than 5 pct. Again, the adverse labour career affects the net-income in retirement but a higher public pension fraction moderates the net-income effects substantially. The mitigation is generated by a combination of different effects. The existence of the basic pension as such is by far the most important element as it makes up a substantial part of the overall pension even for the full time employed reference worker. The basic pension reduces the effect of private p ension variations by its’ mere existence. Secondly, the income test of the pension supplement will reduce effects further. Finally, the slight progressivity of the tax system will reduce effects a bit further. Example: Comparing the part time employed mid-income worker to her full time employed sister reveals that the effect of the 50 pct. private pension loss is reduced to a 27 pct. gross income loss by the exis tence of the basic pension alone. This effect is further reduced to an 18 pct. gross income loss by the income test, and finally the tax system reduces the effect further to a 16 pct. net-income loss.

4.3 Complex labour career scenarios In order to illustrate compound effects, table 7 summarizes two complex scenarios. The two scenarios follow the same work life pattern: A single female pensioner entering the labour market at the age of 25, she has two children at the age of 28 and 30, and her last child birth is followed by 15 years on part -time (50 pct.), she returns to full time employment at the age of 46 but suffers 5 years of late career unemployment. Finally she retires three years ahead of the pension age. The first scenario concerns an individual with access to early retirement benefits while the second sc enario concerns an individual without early retirement coverage. Both will take out private pension savings in order to meet a gross replacement rate of 0.80 during early retirement. The results indicate how the effects described in the single event scenarios stack and create rather dr a19

matic composite effects. The private pension losses are much bigger than in the single event scenarios, and likewise the net-income effects are quite severe despite the mitigation effects produced by much 20

higher public pension fractions . The two scenarios differ as regards access to early retirement benefits. The table shows how early r etirement without access to early retirement benefits can have dramatic consequences for private pension

19

The model assumes that the individual will target an 80 pct. gross replacement rate in the first year on early retirement. Gi ven the precarious financial situation presented in these scenarios, the individual might settle for something less ambitious. If so the post-retirement effects will be reduced albeit not substantially so. 20 In all cases but one, the pensioner will receive a full supplement, and further the pensioner may receive a means tested special supplement.

Page 23

benefits available at the official retirement age. Private benefits may be red uced by more than 80 pct. Hence, the results indicate that early retirement coverage may indeed serve as a protection of old -age pension savings – especially for low and mid-income workers. While the mitigation effects produced by the interaction of public and private pensions may seem relatively strong as regards the single event scenarios discussed above, the results in the event of early retirement are very different. Generally, early retirement will entail pre-retirement spending of private pension benefits to an extent that cannot be effectively mitigated – especially when early retirement is not supported by early retirement benefits. Table 7: Private pension accrual and net-pension results – two complex scenarios compared to full time workers at similar full time wage level

Full work life, full time employment

2 children, 15 years on part time (50 pct.), 5 years of late career uneployment and early retirement with ERB

2 children, 15 years on part time (50 pct.), 5 years of late career unemployment and early retirement without ERB

Life time labour input All income groups

1.00

0.64

0.64

Aggregate private pension wealth at pension age Low income worker Semi-low income worker Mid income worker High income worker

1.00 1.00 1.00 1.00

0.68 0.55 0.46 0.41

0.16 0.16 0.22 0.32

Aggregate gross pension (taxable income) Low income worker Semi-low income worker Mid income worker High income worker

1.00 1.00 1.00 1.00

0.94 0.88 0.81 0.70

0.85 0.79 0.73 0.66

Net-replacement rate Low income worker Semi-low income worker Mid income worker High income worker

1.08 0.81 0.70 0.63

1.06 0.75 0.60 0.47

0.97 0.68 0.55 0.45

Net-pension Low income worker Semi-low income worker Mid income worker High income worker

1.00 1.00 1.00 1.00

0.95 0.90 0.83 0.73

0.87 0.81 0.76 0.69

Public pension fraction Low income worker Semi-low income worker Mid income worker High income worker

0.67 0.57 0.45 0.24

0.74 0.71 0.66 0.53

0.88 0.86 0.79 0.60

Source: Calculations by ATP 2015.

The left column of table 7 illustrates the situation of the full time employed full career reference worker. If the reference worker is enrolled in the early retirement scheme, the financial differential between him and the two adverse scenario workers is much greater because of the tax free premium from the early retir ement scheme (cf. section 2.2).

Page 24

4.4 The relative income position of singles The examples described above compare model type individuals with similar income levels – i.e. the analysis illustrates the “cost” in terms of net-income loss stemming from various life events and life choices. Table 8 describes the relative income positions of the model type individuals in some of the scenarios. The upper section compares the income of different individuals to the net -income for a pensioner receiving the bare minimum pension (equal for everyone – cf. section 2.1). Net-income positions span from slightly above 1.0 – among other for low income individuals working part-time and/or retiring early - to 1.86 for the full time employed high income worker. The middle section of the table compares the income of different retired individuals to the net -income of a still active full time employed worker at each income level – i.e. the net-replacement rate measured against the potential full time work income. The maximum net-income differential relates to scenarios involving life-long part-time work (not included here) or early retirement – that is scenarios involving substantially lower work input and pension savings and/or substantial pre-retirement spending of pension savings. The differentials range from some 10 pct. for low income workers to around 25 pct. for high i ncome workers. The table reports replacement rates above 1.0 for low income workers. The point is, that the involved work income is very low and indeed lower than the basic pension. Table 8: Net-income positions for single pensioners compared to the minimum retirement income (upper section) and compared to the net-income of a still active full time employed worker (lower section)

Maternity and part time

Complex scenario - early retirement without ERB

Full time

Complex scenario - early retirement with ERB

Maternity and part time

Complex scenario - early retirement without ERB

Full time

Complex scenario - early retirement with ERB

Maternity and part time

Complex scenario - early retirement without ERB

High income worker

Full time

Complex scenario - early retirement with ERB

Mid income worker

Maternity and part time

Complex scenario - early retirement without ERB

Semi-low income worker

Full time

Relative to the minimum pension Relative to a full time employed active worker at same income level Relative to a full time employed active worker at average wage

Complex scenario - early retirement with ERB

Low income worker

1.20

1.16

1.18

1.09

1.30

1.25

1.23

1.13

1.44

1.37

1.30

1.21

1.81

1.67

1.43

1.36

1.08

1.05

1.07

0.99

0.81

0.78

0.77

0.71

0.70

0.66

0.63

0.59

0.63

0.58

0.50

0.47

0.58

0.56

0.57

0.53

0.63

0.60

0.59

0.54

0.70

0.66

0.63

0.59

0.89

0.82

0.70

0.67

Note: Index 1.0 in the upper section equals the net-income of a pensioner without any 2

nd

pillar pension coverage –

i.e. a pensioner receiving the Danish minimum pension. ERB = Early retirement benefits. Source: ATP 2014.

The lower section of the table compares the income of different retired individuals to the net -income of a still active full time employed worker at average wage – i.e. how are the modelled pensioners doing compared to an average wage active worker. The modelled pensioner with the lowest retirement income – a low income worker in a complex scenario involving early retirement without the support of early retir ement benefits will be at 0.53, while a retired full time high income worker will be at 0.89.

Page 25

As mentioned earlier it should be noted that the calculations do not include housing benefits and that they do not include other wealth.

Page 26

5. Labour market career and income in retirement – couples As explained in section 4.2 the full Danish state funded basic pension is lower for individuals living in couples than for single pensioners – some 23 pct. lower. The motive is to take account of the economies of scale enjoyed by couples. The thresholds and taper rates applied in the income test are adjusted accordingly.

5.1 Replacement rates for full time employed full career couples Table 9 illustrates net-replacement rates that can be expected at retirement for full time employed co und ples. If both partners enjoy 2 pillar coverage (left section), they can expect a household level netreplacement rate ranging between 85 for very low income households to around 60 for high income households. A comparison of the left and the right section of table 9 shows how replacemen t rates will be significantly lower in the absence of 2

nd

pillar coverage.

Table 9: Net-replacement rates for full time employed full career retired couples with 2 nd pension coverage (left section) and without 2 pillar pension coverage (right section)

Low income

0.85

Semi-low income

0.74

0.65

Mid income

0.67

0.61

0.57

High income

0.63

0.58

0.56

Low income

Partner 1

Partner 1

Low income

Partner 2 Semi-low income Mid income High income

0.58

nd

pillar

Partner 2 Semi-low income Mid income High income

Low income

0.65

Semi-low income

0.53

0.45

Mid income

0.45

0.39

0.35

High income

0.36

0.32

0.29

0.25

Source: Calculations by ATP 2015.

The relative importance of the different pillars is detailed further in table 9 (left section) showing the pu bnd lic pension fraction for different households with 2 pillar coverage. The table illustrates how the relative st

nd

importance of 1 and 2 pillar pensions differs substantially between households across the income span. While the basic pension remains important to households at all income levels, its role is absolutely crucial to low and mid-income workers. Table 10 (right section) also illustrates how the targeting of the basic pension assists replacement rates for lower income households. While the lowest income households receive a pension supplement close to the full benefit, higher income households will receive a much lower benefit and for the highest income households the pension supplement will be zero. Table 10: Public pension fraction (left section) and pension supplement proportional to full su pnd plement (right section) for full time employed couples with 2 pillar pension coverage

Low income

0.60

Semi-low income

0.54

0.49

Mid income

0.46

0.42

0.36

High income

0.31

0.28

0.25

Low income

Partner 1

Partner 1

Low income

Partner 2 Semi-low income Mid income High income

0.20

Partner 2 Semi-low income Mid income High income

Low income

0.96

Semi-low income

0.84

0.72

Mid income

0.66

0.54

0.36

High income

0.18

0.06

-

-

Source: Calculations by ATP 2015.

Page 27

Most young pensioners are married or co-habitants while the majority of older pensioners are living as singles. Consequently, the image presented in tables 9 and 10 is a temporary one. M any pensioners will experience changes to their financial situation as they age and particularly so if they become single. Some of this risk is picked up by the basic pension. For many full time employed pensioners their first retirement years may be well imaged by tables 9 and 10 while their later retirement years are better d escribed by table 4 – noting that the real private benefits are likely to decrease with age (cf. section 6.2). The couple may have signed up with the voluntary early retirement scheme . If so, they will receive a tax free premium when they retire in order to compensate for the fact that they actually did not retire early. The tax free premium is quite substantial as is shown in table 11. The premium represents more than a full year’s net-retirement income for low income couples and more than 2/3 for high income couples. Table 11: Tax free premium for a full time employed couple who had access to early retirement but did not use the option

Partner 1

Low income

Partner 2 Semi-low income Mid income High income

Low income

1.21

Semi-low income

1.15

1.10

Mid income

1.07

1.03

0.96

High income

0.91

0.87

0.82

0.68

Source: Calculations by ATP 2015.

Table 12 shows the relative net-income position of the model couples before and after retirement

21

and it

shows how the relative income differentials narrow when moving from active years into retirement. Table 12: Net-income relative to the net-income of a mid-income couple in last active year (left section) and in first retirement year (right section)

Low income

0.54

Semi-low income

0.66

0.77

Mid income

0.77

0.89

1.00

High income

0.97

1.09

1.20

Low income

Partner 1

Partner 1

Low income

Partner 2 Semi-low income Mid income High income

1.40

Partner 2 Semi-low income Mid income High income

Low income

0.80

Semi-low income

0.84

0.88

Mid income

0.90

0.94

1.00

High income

1.06

1.10

1.18

1.42

Note: Net-incomes are calculated after tax and payment of social security contributions. The pension age is indexed to longevity. In this case it is 73 years. Source: Calculations by ATP 2015.

It appears that the income position of the highest income couple has improved relative to the mid -income couple. The somewhat strange reason for this is that this couple has such a high income that they do not receive income tested benefits. Due to the fact that their marginal income is not affected by income tests, their situation improves at a higher rate when their private income increases.

21

The tax free ERB premium is not taken into account as it requires voluntary affiliation and a lengthy contribution record.

Page 28

Once again it should be noted that the calculations may not provide a true picture of the distribution of financial living conditions. The calculations do not take account of the housing benefits and other social benefits targeted at the elderly. Such benefits are important to many low income pensioner couples. Similarly the modelling does not include other wealth. Other wealth may be very important to higher income couples.

5.2 Adverse labour careers and income in retirement The following sections look at the post-retirement net-income effects of life events and life choices for couples. In order to reduce the complexity, the tables will bring data for equal income households only.

5.2.1 Part time work This first section considers a couple where one partner works part-time (50 pct.) throughout the work life. The households’ aggregate lifetime labour input is thus reduced by 25 pct. Table 13 shows how the reduced life time labour input leads to reduced savings and hence lower private pension benefits at pension age. The table goes on to show how the reduced private pension wealth translates into a lower net-income in the first year of retirement. However, the table also shows that the net-income reduction is much smaller than the reduction of the private pension – 6 pct. versus 24 pct. for the low income couple and 18 versus 24 pct. for the high income co uple. Comparing table 13 and table 11 shows how a higher public pension fraction and a higher pension su pplement moderates the net-income effect of a lower private pension. As can be expected, the effects vary according to household income level. Table 13: Accrued private pension, net-replacement rate, public pension fraction and pension supplement for a retired couple with one partner having been working part-time Low income couple

Semi-low income couple

Mid income couple

High income couple

Accrued pension wealth at pension age

0.76

0.76

0.76

0.76

0.98

0.75

0.65

0.60

0.94

0.93

0.91

0.82

0.67

0.57

0.46

0.25

0.64

-

Net replacement rate Net income in first retirement Public pension fraction Actual income tested pension supplement as compared to full supplement

1.00

0.91

Source: Calculations by ATP 2015.

5.2.2 Maternity and part-time work in relation to child rearing This second scenario considers a couple with two children. The children are born when the mother is 28 and 30 years respectively and the child births are followed by maternity leaves and parental leaves in line with Danish standards. After the second maternity one of the partners works part-time for 15 years (50 pct.) before returning to full time employment. The households’ aggregate lifetime labour input is thus reduced by app. 8 pct.

Page 29

Table 14: Accrued private pension, net-replacement rate, public pension fraction and pension supplement for a retired couple with two children and one partner having been working part -time for 15 years Low income couple

Semi-low income couple

Mid income couple

High income couple

Accrued pension wealth at pension age

0.92

0.92

0.92

0.92

0.64

0.56

0.55

0.98

0.97

0.94

0.51

0.39

0.22

0.45

-

Net replacement rate

0.84 Net income in first retirement

0.98 Public pension fraction

0.62

Actual income tested pension supplement as compared to full supplement

1.00

0.78

Source: Calculations by ATP 2015.

Table 14 shows how the reduced lifetime labour input translates into 8 pct. lower pension savings at pension age and hence a lower private pension benefit. The table goes on to show how the reduced private pension wealth translates into a lower net-income in the first year of retirement. However, the table also shows that the net-income reduction is much smaller than the reduction of the private pension – 2 pct. versus 8 pct. for the low-income couple and 6 versus 8 pct. for the high-income couple. The lower sections of table 14 detail this process by looking at the public pension fractio n and at the size of the income tested pension supplement. The basic pension, its design and the income test reduce the net-pension effects related to family formation. The effects vary according to household income level.

5.3 Complex labour career scenarios Two different complex scenarios have been analysed. They both concern a couple with two children. The children are born when the mother is 28 and 30 respectively, and after the last childbirth one of the par tners works part-time (50 pct.) for 15 years before returning to full time employment at the age of 46. The other partner experiences 10 weeks of unemployment every year. In both scenarios both partners retire early – i.e. three years before the pension age. In scenario I both partners have access to ear ly retirement benefits. In scenario II this is not the case. In both scenarios, the partners will draw on their private pension savings during the early retirement period in order to achieve a gross replacement rate of 0.8. Table 15 summarizes the results. Comparing the results – especially the results for scenario II - with results for the single event scenarios described above shows how the retirement income effects stack and create much more severe results. Comparing the two scenarios in table 15 indicates that the decisive factor is early retirement and – for mid and low income couples - that of access to early retirement benefits.

Page 30

Table 15: A couple with two children, one partner working part-time for 15 years and the other unemployed for 10 weeks every year retiring at the early retirement age – with (scenario 1) and without (scenario 2) ERB benefits Low income couple Complex scenario I

Semi-low income couple

Complex scenario II

Complex scenario I

Complex scenario II

Mid income couple Complex scenario I

High income couple

Complex scenario II

Complex scenario I

Complex scenario II

Accrued pension wealth 0.77

0.26

0.63

0.27

0.54

0.34

0.50

0.40

Net replacement rate 0.85

0.76

0.63

0.56

0.52

0.47

0.44

0.42

Net income in first retirement year 0.95 0.85

0.90

0.80

0.83

0.76

0.69

0.66

Public pension fraction 0.65

0.61

0.76

0.54

0.66

0.38

0.42

Actual income tested pension supplement as compared to full supplement 1.00 1.00 0.99 1.00 0.85

1.00

0.41

0.55

0.81

Source: Calculations by ATP 2015.

Low-income couples retiring early with access to early retirement will have a net -income at the pension age not much different from that of a full time employed full career couple. The reason is that the r eplacement rate provided to low-income households during early retirement is so high that they do not need to draw too heavily on their private pension during early ret irement benefits. The picture is very different for higher income groups as they all experience a rather dramatic reduction of the private pension available at pension age. The early retirement benefit is targeted towards low income workers, and higher income households will need to draw more on private pension benefits in order to achieve a reasonable replacement rate during early retirement. These relations translate into rather severe net-income reductions. E.g.: For high-income couples the modelled early retirement scenario I leads to a 31 pct. reduction of the net-income in retirement compared to that of a full time employed full career retired couple. But not only that - the replacement rate is low – 0.44. The interaction of public and private pensions mitigates some of this effect. This is indicated by higher public pension fractions and higher income tested supplements. However, this mitigation far from neutra lizes the effect. Hence, these results indicate relatively strong dis-incentives for early retirement. Moving to scenario II, the support of early retirement benefits disappear and consequently the hous eholds will draw more on their private pensions in order to achieve a reasonable replacement rate during the early retirement period. Especially for lower income groups, the picture changes quite dramatically in the absence of early retirement coverage. The pre-retirement spending of private pension wealth is substantial – in all four scenarios more than half of the accrued private pension wealth will be spent before the pension age. The consequence is rather dramatic private pension losses and significant reductions of net-replacement rates and net-income when they finally reach the pension age. This aspect is particularly important for lower income groups. In context of these rather dramatic effects, access to early retirement benefit can be interpreted as a way of insuring private pension benefits , should early retirement become relevant for one or another reason.

Page 31

These effects are less dramatic for higher income groups because the early retirement benefit – due to its targeted character - has less potential to start with for these groups.

5.4 The relative income position of couples The examples described above compare model type couples with similar in come levels – i.e. the analysis illustrates the “cost” in terms of net-income loss stemming from various life events and life choices. Table 16 lists the relative income positions of the model type couples in some of the scenarios analysed above. Table 16: Relative net-income positions for retired couples compared to the minimum pension income for couples (upper section) and compared to the net-pension of a full time employed couple (lower section)

Complex scenario II

Maternity and part time

Complex scenario I

Complex scenario II

Maternity and part time

Complex scenario I

Complex scenario II

1.08

1.39

1.36

1.25

1.20

1.59

1.54

1.32

1.20

2.25

2.12

1.56

1.48

0.85

0.84

0.81

0.73

0.65

0.64

0.59

0.52

0.57

0.56

0.48

0.43

0.58

0.55

0.40

0.38

0.46

0.45

0.44

0.39

0.50

0.49

0.45

0.40

0.57

0.56

0.48

0.43

0.81

0.77

0.56

0.54

Full time

Complex scenario I

1.20

Full time

Maternity and part time

1.24

Full time

Complex scenario II

High income couple

Complex scenario I

Relative to the net income of a still active full time employed couple at same wage level Relative to the net income of a still active full time employed couple at average wage level

Mid income couple

1.26

Full time Relative to the minimum pension

Semi-low income couple

Maternity and part time

Low income couple

nd

Note: Index 1.0 equals the net-income of a couple without any 2 pillar pension coverage – i.e. a couple receiving the Danish minimum pension. Complex scenario II and III are similar to the ones documented above. The scenarios include early retirement with and without ERB. Source: Calculations by ATP 2015.

The upper section compares the income of different couples to the net-income for a couple receiving the bare minimum pension (equal for everyone – cf. section 2.1). Net-income positions span from slightly above 1.0 for low income couples in a complex scenario involving early retirement without the support of early retirement benefits - to 2.25 for the full time employed high income couple. The middle section of the table compares the income of different retired couples to the net -income of a still active full time employed couple at each income level – i.e. the net-replacement rate measured against the potential full time work income. The maximum net-income differential relates to a complex scenario involving early retirement without the support of early retir ement benefits – i.e. a scenario involving substantially lower work input and substantial pre-retirement spending of pension savings. The differentials range from some 15 pct. for low income couples to around 35 pct. for high income couples. The lower section of the table compares the income of different retired couples to the net -income for a still active full time employed couple at average wage – i.e. how are the modelled retired couples doing compared to an average wage active couple. The modelled retir ed couple with the lowest retirement income – a low income couple in a complex scenario involving early retirement without the support of early

Page 32

retirement benefits will be at 0.39, while a retired full time employed full career high income couple will be at 0.81. As mentioned earlier, it should be noted that the calculations do not include housing benefits and that they do not include other wealth.

Page 33

6. Systemic risk The role of private pensions in the Danish pension system is increasing and will continue to d o so for a number of decades to come. As the importance of private pensions increase, the importance of risks and uncertainties related to private pensions also increase – e.g. the quality of pension management, the quality of private pension products, market risks, administration and investment costs and the design of the pay-out phase. Such systemic risks are to some extent off set by the interaction of public and private pensions. Thereby the risk is in part shifted from pension funds and individuals onto the public pension system and hence the general tax payer.

6.1 Pension fund performance This point is illustrated by example in table 17 below. Simulations have been completed for a full time employed, full career, average wage retired single worker. In a high-end performance scenario the costs of the company are significantly lower compared to the base scenario and the returns on investment are systematically higher. In a low-end scenario costs are substantially higher and returns to investments are systematically lower. In the examples, the private pension accrued in the high-end scenario is almost 65 pct. higher than the benefit accrued in the low-end scenario. The aggregate net-income differential is substantial, albeit much smaller - some 20 pct. higher. Table 17: Net-incomes in scenarios with adversely performing pension funds Low-end performance

Standard scenario

High-end performance

Pension wealth at pension age relative to the standard scenario

0.79

1.00

1.29

Net replacement rate

0.63

0.68

0.76

Net-income in first retirement year relative to the standard scenario

0.93

1.00

1.11

Public pension fraction

0.54

0.45

0.36

Pension supplement relative to full supplement

0.81

0.68

0.50

Note: The high-end scenario assumes admin and investment cost of 0.5 pct. while the returns to investment are higher (+1 pct. on equity and +0.5 pct. on fixed income). In the lo w-end scenario the costs are 1.5 pct. and returns are systematically lower (-1 pct. on equity and -0.5 pct. on fixed income) than in the base scenario. Single average wage worker with a pension contribution of 12 pct. Source: Calculations by ATP 2015.

As stated earlier, the mechanics of the Danish pension system is in fact quite simple: If for one or another reason you end up with a lower private pension, some of that disappointment will be compensated for by way of higher public benefits - no matter what caused the lower private pension. This is also the case in this context. The analysis shows how a substantial part of the operational risk and performance risk related to the choice of pension provider and the success of this provider is mitigated through the interaction of public and private pensions. This means that some of this risk is shifted from the provider and the individual onto society at large and hence the general tax payer.

Page 34

On the one hand this practise may affect pension provider behaviour. On the other hand the practise may be justified as individuals generally do not choose their own pension provider.

6.2 Post-retirement income development The scenarios described and discussed above all focus on the first retirement year. However, the dur ation of an average retirement period is much longer – in many cases 30 years or even more. On average retirement takes up 1/3 of adult life. The individual’s income situation will not remain unchanged throughout the pension period. During the first retirement years, the individual may have other sources of income – part-time work income, investment income etc. – and there may be other financial resources available. Later in retirement such other sources of income may have ceased or decreased substantially and hence the pension income’s role in the overall income picture increases. But not only that - as the individual grows older the role of public pensions may increase even further because private pension benefits cease (lump sums and fixed term annuities) or be cause their real value decrease due to indexation short of the wage index or even inflation. Typically, changes to the individ ual’s household status – becoming single – will further strengthen this process. These perspectives add further challenges to the issue of pension design and to the design of the interaction of public and private pensions. If other private pensions and other private income sources deteri orate, the relative role of public pensions may become more important by age. In the Danish case, this aspect is further strengthened by the interaction of public and private pensions. Little is known about the post-retirement development of private pension benefits – in Denmark as well as other countries. Data is scarce and typically a real cohort analysis is not possible. Chart 4 summarizes an analysis (ATP 2012a) looking at the experience of pensioners who a) retired before 2003, b) received a supplementary private pension benefit in 2003, and c) were still alive 10 years later by year -end 2012. 22 The research looks at their income experience between 2003 and 2012 . The chart shows that for 9 out of 10 of those pensioners the real value of the private benefit had d ecreased. For 3-4 out of 10 the benefits decreased in nominal terms and for 2 out of 10 t he benefits had ceased. At first glance, these numbers may appear alarming from the perspective of the individual pensioner. However, the analysis also showed that more than half of the entailed net -income loss was compensated for by a higher basic pension – mainly through the income test of the pension supplement (ATP 2013c).

22

The analysis covers a little more than 80,000 individuals. Nevertheless a caveat s hould be noted: The analysis looks backward

at the results of historical pension savings behavior. The structure of future pay-outs may be different especially as private pension coverage is on the increase driven by collective labour market schemes focusing mainly on old-age support

Page 35

Chart 4: Development of the purchasing power of private pension benefits in payment in 2003 over the ten-year period 2003-2012

Note: The chart summarizes the experience related to private pension over the period 2003-2012 for pensioners who retired before 2003, who received a supplementary private pension benefit in 2003 and were still alive 10 years later by year-end 2012. The chart presents an update of ATP 2012a. Source: Calculati ons by ATP and Statistics Denmark 2015.

The design of the pay-out phase of private pensions defines their capacity as life-long support systems, and arguably, it is essential to keep the life-long perspective as a key guiding principle in that context. As it is, providers and individuals have quite some latitude as regards this issue in the Danish case and the analysis displays a highly varied outcome. The analysis also shows how the interaction of public and private pensions mitigates the consequences of design decisions leading to a front loaded pay-out phase. To some extent the income effects of short sighted design decisions is shifted from the provider and the individual onto society at large and the general tax payer.

Page 36

7. Structural risks – alternative financial scenarios The analyses presented above are based on a set of specific financial assumptions in a deterministic scenario. However, the choice of financial assumptions influences both private pension outcome, aggr egate pension results and their composition. Therefore the viability of the results presented above is tes ted by way of simulations under alternative financial scenarios. This part of the analysis follows two diffe rent approaches. The first part is focused on the sensitivity of the results presented above and applies alternative deterministic financial scenarios - a low and a high growth scenario respectively - to the simulation model. The second part is focused on the importance of the interaction of public and private pensions to the shari ng of structural risks related to business cycle fluctuations. This is done by way of applying 500 different stochastic financial scenarios to the simulation.

7.1 Sensitivity The first round of analysis considers two key parameters – the net-replacement rate and the public pension fraction – under varying assumptions. In these scenarios all assumptions but one are equal to those applied in the base scenario (cf. appendix). The variation is applied simply increasing/decreasing each of the four variables – inflation, wage growth, fixed income return and equity return – one by one. The results for a retired full time mid-income worker are summarised in table 18. Table 18: Pension results for retired full time workers under alternative assumptions

Base scenario Inflation +1%-point Inflation -1%-point Wage growth +1%-point Wage growth -1%-point Fixed income return +1%-point Fixed income return -1%-point Equity return +1%-point Equity return -1%-point

Net-replacement rate Public pension fraction 0.70 0.45 0.67 0.48 0.78 0.47 0.65 0.53 0.82 0.42 0.75 0.38 0.66 0.52 0.71 0.43 0.68 0.48

Gross replacement Gross replacement rate full basic pension rate based on ATP and without ATP and 2nd 2nd pillar pension pillar pensions alone 0.44 0.38 0.44 0.35 0.50 0.42 0.44 0.31 0.50 0.49 0.44 0.47 0.44 0.32 0.44 0.41 0.44 0.36

Gross replacement rate 0.70 0.68 0.80 0.65 0.84 0.76 0.66 0.72 0.69

Source: Calculations by ATP 2015.

Focusing on the two left columns in table 18, it is hardly surprising that higher investment return leads to higher replacement rates and a lower public pension fraction and vice versa. The effects related to higher/lower inflation or wage growth are much more complicated. The table indicates that lower inflation and lower wage growth both leads to higher replacement rates and vice versa. The explanation is that changes on these two parameters affect the indexation of public pe nsion benefits. Furthermore changes to these assumptions affect the potential of private pensions. High wage growth leads to a higher public pension fraction and vice versa. The reason is once again that both the indexation of public benefits and the potential of pr ivate pensions are affected.

Page 37

However, the effect of changes to the inflation assumption on the public pension fraction is anything but straight forward – both higher and lower inflation assumptions lead to a higher public pension fraction. The explanation is related to the indexation principles for public pensions. The three right columns in table 18 take the analysis a step further by disaggregating the gross replac ement rate. The first of the three columns provides the gross replacement rate provided by t he full state funded basic pension (the PAYG element of the system), while the second column describes the gross nd

replacement rate provided by the sum of ATP and 2 pillar pensions (the funded elements of the system) in the absence of the full state funded basic pension. The last column provides the aggregate gross pension. A first observation is, that the latter is not the sum of the two former replacement rates. The income tests applied simply reduce the gross replacement rate. A second observation is tha t the contribution of the PAYG element and the funded elements vary rather dramatically depending on the assumptions applied. A third observation is, that the variation in this contribution follows a somewhat contra -intuitive pattern. It should be noted that the net-replacement rate addresses the issue of income variation across the pe nsion age. Among the scenarios described the most well off pensioner in absolute terms is not necessarily the pensioner with the highest net-replacement rate.

7.2 Replacement rates and pension composition under alternative deterministic scenarios In this section a low and a high growth deterministic financial scenario is applied to the model. The results of this exercise are generally the same for all work -life scenarios and for singles as well as couples. Therefore the tables below only present results for a single pensioner, and only two different work -life scenarios – full time employment and a maternity scenario – are covered. The first set of simulations concerns a retired full time employed full career single pensioner. The results are summarised in table 19. As could intuitively be expected, the high growth scenario does lead to a higher replacement rate. Ho wever, this is not a systematic effect. Whether that actually happens depends on the structure of the growth scenario – i.e. the relationship between after tax capital market returns and wage development. If wage growth is relatively high compared to after tax investment returns , the effect will be smaller and vice versa. Perhaps surprisingly, the net-replacement rates are higher in the low growth scenario. This effect stems from a higher public pension fraction combined with the fact that the state funded basic pension is fully indexed to wage growth if wage growth is low (cf. section 2.1). This leads to a second general observation. On the one hand financial development influences pension st

nd

outcome. On the other hand, it also affects the relative importance of 1 and 2 pillar benefits substantially. The importance of the state funded old-age pension will increase under adverse market conditions and decrease if the economy performs better.

Page 38

nd

Table 19 also indicates that the importance of 2 pillar coverage increases in a favourable financial scend nario and vice versa. Hence, the difference between the net-replacement rate with and without 2 pillar coverage increases under the high growth scenario and decreases under the low growth scenario. Table 19: Pension results for retired full time workers in three different financial scenarios Low income worker

Semi-low income worker

Mid income worker

High income worker

Net-replacement rate with 2nd pillar pension coverage Base scenario 1.08 Low growth scenario 1.19 High growth scenario 1.16

0.81 0.88 0.89

0.70 0.75 0.78

0.63 0.66 0.77

Public pension fraction Base scenario Low growth scenario High growth scenario

0.67 0.72 0.58

0.57 0.63 0.47

0.45 0.52 0.35

0.24 0.32 0.16

Pension supplement relative to full supplement Base scenario 0.98 Low growth scenario 1.00 High growth scenario 0.88

0.86 0.93 0.72

0.68 0.79 0.48

0.21 0.41 -

Net-replacement rate in absence of 2nd pillar pension coverage Base scenario 0.87 0.61 Low growth scenario 0.98 0.68 High growth scenario 0.89 0.62

0.46 0.52 0.47

0.37 0.37 0.34

Source: Calculations by ATP 2015.

Table 19 concerns a full time full career worker focusing on replacement rates and pension composit ion. Table 20 – and a comparison with table 19 – takes the analysis a bit further by focusing on the same dimensions in light of the risk mitigation role represented by the interaction of pillars. Table 20: Pension results for a single pensioner with a labour market career disrupted by maternities and part-time work in three different financial scenarios Low income worker Net-replacement rate Base scenario Low growth scenario High growth scenario

1.05 1.07 1.08

Semi-low income worker 0.78 0.80 0.82

Mid income worker 0.66 0.68 0.71

High income worker 0.58 0.59 0.67

Net pension in first retirement year compared to the net-pensin of a full time employed pensioner Base scenario 0.97 0.96 0.95 0.92 Low growth scenario 0.97 0.96 0.95 0.94 High growth scenario 0.96 0.95 0.94 0.88 Public pension fraction Base scenario Low growth scenario High growth scenario

0.67 0.74 0.62

0.57 0.66 0.52

0.45 0.56 0.40

0.24 0.36 0.18

Pension supplement relative to full supplement Base scenario 1.00 Low growth scenario 1.00 High growth scenario 0.92

0.92 0.97 0.79

0.77 0.85 0.58

0.39 0.51 0.01

Source: Calculations by ATP 2015.

Consistent with the conclusions drawn from table 19, the table indicates that the strength of the risk mitigation effects are affected by the performance of the economy. Net-income effects of life choices and life events are somewhat greater in the high growth scenario and slightly smaller in the low growth scenario.

Page 39

7.3 Business cycle sensitivity – 500 variable financial scenarios 23

In this section, 500 different stochastic financial scenarios are applied to the model simulation . This exercise illustrates the importance of the risk sharing elements to income predictability and to the robustness of the pension system. It also highlights the certainty/uncertainty facing individuals and the i mportance of the risk sharing elements in relation to the systems’ overall ability to deliver on workers’ expectations. 24

The results are shown in chart 5 . The chart tells an interesting story. First of all it confirms the observation made earlier: while the replacement rate level is relatively stable across the scenarios, the variation st

as to the relative importance of 1 and 2

nd

pillar benefits is greater.

Chart 5: Aggregate net-pension and public pension fraction – full time employed single worker at average wage in 500 (450) stochastic financial scenarios

Note: The red dot shows the standard scenario position, while the blue dot shows the median scenario position. The chart concerns an average income full time full career single worker at average wage. Simulations have been co nducted for 500 different variable interest rate scenarios generated by a capital market model. Annuitization at pe nsion age is based on the average return rate for the five years before retirement. 10 pct. of the scenarios - the 25 scenarios with the lowest respectively the highest net-replacement rates - have been omitted. Source: ATP 2015.

The replacement rate observed for an average worker in the base scenario was 0.70. The variability shown in chart 5 ranges from 0.6 to 0.84 – the replacement rate of the median scenario is equal to that of

23

The scenarios are generated by ATP’s capital market model based on historical data and assuming convergence towards an interest rate of approximately 3 pct. in the very long run. 24 The modelling suffers from two caveats. Firstly, the model keeps the asset allocation of funded pension schemes constant regardless of financial market development. Secondly, the discount rate defining the annuity at pension age is based on the int erest rates observed around the year retirement. It is essentially not possible to address the first caveat in a systematic way. The cav eats are addressed by omitting the 25 “best” and “worst” scenarios and by annuitizing using the average interest rate during t he last five years before retirement as discount rate.

Page 40

the standard scenario. The public pension fraction for an average worker in the base scenario is 0.44 while the variability shown in chart 5 ranges from 0.30 to 0.75. The median scenario has more or less the same net-replacement rate as the standard scenario while the public pension fraction is substantially higher. The analysis has been taken a step further in order to assess the importance of the interaction of public and private pensions in this context. Hence another simulation has bee n made for the same average pay full career and average pay worker. In this version the income tested elements of the pension system has been replaced by a higher private savings effort. Calculations show that the worker needs to increase his pension contr ibution from the present 13.5 pct. to 18.4 pct. in order to achieve the same replacement rate in the standard scenario. A multi -scenario simulation has been completed for this situation. The results are shown in chart 6. Chart 6: Aggregate net-pension and public pension fraction – full time employed single worker at average wage in 500 (450) stochastic financial scenarios with higher private pension contributions and no income tested public benefits

Note: The red dot shows the standard scenario position, while the blue dot shows the median scenario position. The chart concerns a situation where the income tested elements in the public pension system has been abolished and ‘replaced’ by higher private pension savings. The simulation concerns an average inco me full time full career single worker at average wage. Simulations have been conducted for 500 different variable interest rate scenarios gene rated by a capital market model. 10 pct. of the scenarios - the 25 scenarios with the lowest respectively the highest net-replacement rates - have been omitted. Source: ATP 2015.

Chart 6 shows that the variability of the replacement rate has increased dramatically compared to the situation presented in chart 5. The variability ranges from 0.48 to some 0.94. Compared to the standard scenario, the median scenario provides a substantially lower replacement rate.

Page 41

The dynamics behind this development is the fact that the private pension elements have been given a much more prominent role. Consequently, risks related to private pensions also become more important and manifests themselves as increased uncertainty. Furthermore, the risk sharing embedded in the inte raction between public and private pensions - and in the income test in particular – has been suspended. This leads to a rather dramatic privatization of risks and substantially weaker system robustness if co mpared to the present situation. This result is important because it suggests that policy steps intended to strengthen e.g. savings incentives may have great influence on the pension system’s ability to deliver on other important objectives and to the distribution of risk between generations. The findings indicate that the combination of PAYG and full funding, public and private and the design of st nd the 1 and the 2 pillars greatly influence post-retirement income distribution, the sharing of macroeconomic risks and uncertainties between generations and the ability to share such risks and uncertai n25

ties over time .

25

Based on an overlapping generations modelling analysis Bohn 2013 arrive at similar observations for the US case. Bohn argues that future productivity development is in fact one of the greatest retirement income risks confronting workers..

Page 42

8. Conclusion The Danish pension system exemplifies a structured multi-pillar approach. It ranks among the most well26 designed and well-functioning pension systems in the world and it scores high on overall objectives such as financial sustainability, poverty alleviation, adequacy, incentives to defer retirement, security, equity, income smoothing and risk sharing. A particular hallmark of the Danish system is a relatively clear division of responsibilities between its’ st different elements and between the involved actors. The 1 pillar addresses the triple objectives of 1) poverty protection through the provision of a minimum pension income for all, 2) the provision of a basic pension income upon which complementary and supplementary schemes can build, and finally 3) the nd

provision of risk mitigation mechanisms provided mainly through targeting of public benefits. The 2 pillar supports the provision of reasonable replacement rates in old-age through savings based labour market rd

schemes providing individual income-related supplementary benefits. The 3 pillar allows individuals to 27

st

make additional savings, should they want or need to . While the 1 pillar combines PAYG and full fundnd rd ing, the 2 and the 3 pillar are all fully funded DC-schemes with or without insurance elements. The Danish version of the three pillar model exemplifies the basic point that in order to meet the three key objectives of any pension system – sustainability, adequacy and insurance - a combination of elements with different characteristics is needed and as part of that, public as we ll as private pensions will play important roles (OECD, 2011). Success will depend not least on the complementarity and interaction of these systems. Danish 2

nd

pillar pensions are set up by the social partners as an entirely private undertaking. They are

compulsory for anyone working under a specific wage agreem ent, but they are not statutory. Such schemes apply a straight forward what-you-pay-is-what-you-get approach. The individual will know his/her own contributions and there will always be a direct relationship between contributions paid and the investment yields earned on the one hand and the rights and benefits accrued on the other. The schemes are collective and allow a high level of risk sharing as regards named and well-defined insurable risks – i.e. disability, death and longevity - but essentially each generation of members will pay for its own rights. These features have policy implications. Social solidarities or other policy objectives involving redistrib und

rd

tion within or between generations can only be served outside the 2 and 3 pillars. This can happen st either through the tax system or inside the 1 pillar or through the interaction between public benefits and other elements. In the Danish case, the key measure is the targeting of the basic pension and the application of other targeted social benefits to assist elderly in need. The mitigation effects are facilitated by a combination of different elements. Firstly – and this is by far the most important element - the basic pension reduces the aggregate income effect of private pension variations through its’ mere existence. Secondly, the income test of the basic pension reduces effects further.

26

See e.g. Mercer 2014. Mercer has named the Danish pension the best in the world three years in a row – since Denmark was included in the survey. 27 A set of social assistance benefits supports the most needy pensioners, and relatively generous housing benefit s assists wider groups.

Page 43

Thirdly, the progressivity of the tax system will reduce effects even a bit further. Finally – and outside the scope of this analysis – social benefits assist the most needy pensioners and pensioners with special needs further. These effects are thoroughly documented in the analysis presented in this report. It is documented how private pension differentials are turned into more modest net-income differentials, and it is documented how the design of the pension system narrows the income distribution and narrows relative net -income differentials when moving from active employment into retirement. The analysis also documents the multifaceted role of the targeting measures. Typically the targeting measures in the Danish system are interpreted as simple poverty alleviation measures – redistribution from rich to poor. The analysis shows that while the poverty alleviation aspect remains important, the targeting measures have much broader implications and importance in terms of providing risk mitigation, income stability, responsiveness and robustness. The risk sharing features of the Danish pension system are particularly important to women. Bearing the current employment and income patterns among men and women - and the differences between them in mind, the income tested benefits have particular importance for women because they live longer, ge nerally earn less, have a generally lower life-time labour input and generally end their lives by spending a number of years living as singles (ATP 2015a, ATP 2013b). The analysis exemplifies this point by showing how the interaction of public and private pension provides a relatively strong mitigation of net-income effects stemming from maternity and part-time work in relation to child rearing. It may be argued however, that the current set up dis-incentivizes the return to full time employment for women after maternity. On the other hand, concerns over the financial situation here and now may be more important to behaviour than incentives related to pension income another 30-40 years down the line. Pension considerations may simply be opaque and too abstract to really shape behaviour. A particular point of interest is the incentives for early retirement. The analysis shows how early retirement typically will imply substantial pre-retirement spending of private pension assets and how it will affect the subsequent retirement income in a rather dramatic way. On the one hand the analysis demonstrates how the interaction of public and private pensions does compensate some of the involved income loss. On the other hand, the analysis suggests that the effect is limited in this context. In fact, the analysis indicates that early retirement – especially in light of recent early retirement reforms - will be a very expensive choice for most people in terms of its consequences for post-retirement purchasing power. Recent reforms have limited access to early retirement benefits and changed the benefit design. The level and design of early retirement benefits for those who have access create relatively strong disincentives for early retirement for everyone but workers at the very lowest income level. In fact, for the vast majority of older workers the most effective choice when it comes to improving the financial situation in old-age is indeed that of deferring retirement. Risk sharing is a defining objective of any pension system and in that context the applied definition of risk becomes important. In the Danish case, the income test is indifferent to the cau ses of private income reduction. E.g. a private pension loss stemming from an active choice – i.e. leisure over work – is treated

Page 44

on equal terms with a pension loss stemming from materialised social risk – e.g. long-term unemployment. It could be argued that the indifference to cause hampers employment incentives and creates incentives for choosing leisure over work. Furthermore, it may very well affect pension design decisions and lead to excessive front loading and it may affect pension operator behaviour. Therefore, it could be argued that a selective approach should replace the current generalised one (ATP 2013b). However, such a strategy may prove difficult in context of the Danish policy legacy. The state–funded basic pension is non-contributory, tax-financed, universal and fundamentally it is flat rate – all elements which are considered hallmarks of the Danish welfare model as such. A further conflict with the Danish policy tradition may arise from the fact that such a practice may be construed as a (re-)introduction of a moral judgment related to historic events and choices into the eligibility assessment of the basic pension . On a political and cultural level, targeting measures probably resonate well with the widely shared view that public benefits should first and foremost be paid to the most needy citizens. As a basic principle, targeting will most probably be widely accepted as an important tool in that respect. On a systemic level, the interaction of public and private pensions facilitates solidarities within and b etween generations that cannot be provided by private insurance schemes. Hence, the interaction of pu blic and private pensions enhances the adequacy, responsiveness and robustness of the Danish pension system. While the value of the risk sharing and mitigation element in all its’ forms is undoubtedly substantial – to individuals and their families as well as to society as a whole - it is hard to assess, as most of the risks involved are idiosyncratic - and therefore uninsurable - and as many of them only unfold over very long time and can only be assessed ex ante. In fact, these wider social rationales do not always align well with an individual rationale. The analysis shows that this is particularly so if the individual action – saving for retirement - is segmented into rows of single actions and if the rationale of these individual actions is evaluated in soli. The greater social considerations may not always align well with a narrow and immediate individual concern. Hence, a particular strength of the Danish system – its’ highly effective risk sharing and its’ responsiveness and robustness – also becomes its’ weakness. Targeting leads to higher implicit tax rates and it makes self-help rather expensive. The implicit marginal tax rates in the Danish system for low and mid-income pensioners exceed the marginal tax rates of high income pensioners. It is even possible to show that alternative savings strategies might overall be more attractive - especially late in the individuals’ work life. Hence, there are challenges of weak incentives – and possibly undesirable behavioural effects - facing the Danish pension system. This issue ranks high on the current political agenda in Denmark as it may undermine popular acceptance and support for the savings based elements of the pension system. The Danish government has announced a pension reform focusing on expanding pension savings participation and improving the utility of pension savings. The reform is to be launched in spring 2016.

Page 45

The analysis suggests that the interaction of public and private pensions is the turning point of the political economy of pensions in the Danish case. The current modus operandi is that of targeting through income tests. Arguably however, the combination of a strong political commitment to the three key pensions system objectives mentioned above – sustainability, adequacy and insurance - and the particular nd design of the Danish 2 pillar pension schemes leave very few other options. The targeting measures could be removed altogether either by paying the same high benefits to ever yone or by abolishing the income tested benefits altogether. While the first strategy will lead to dramatically higher public pension expenditure and embarrass the long term sustainability of public finances, the latter option can – all else equal - have substantial distributional effects before as well as after retirement, leading to e.g. significantly increased savings requirements for lower income groups, reduced netincomes for lower income groups in active ages, increased old-age poverty and increased pressure on special social benefits for the elderly, much less risk sharing and significantly weaker responsiveness and robustness for the pension system overall. Hence, such radical approaches may seem problematic, and their relevance in face of the Danish policy legacy may seem somewhat redundant unless a radical policy change and a very different political view on the well-being of the elderly is accepted. A particular challenge for the Danish system is the fact that income testing affects the vast majority of pensioners and that it is set to continue to do so. Some of this predicament is closely linked to the combination of high income taxes and high public benefits. The highest aggregate marginal tax rates are found for lower income pensioners with levels in the upper 50’s while the lowest possible rate is app. 38 pct. (the lowest income tax level applied in Denmark). The closer the highest implicit tax rate gets to the 38 pct. – the less effective the targeting. A less radical approach may be to adapt a more conventional view on the challenges facing Government and view these from an analytical stand-point, the key issues may not be about the modus operandi as such but rather about the policy balance struck between various incentive concerns on the one hand and the host of risk sharing and insurance concerns discussed in this analysis on the other. Most of the risk mitigation and redistribution in the Danish pension system takes place after the retir ement age. One option may be to shift some of this redistribution into a pre -retirement effort based on increased pension contributions for low income earners and social security recipients. Such a strategy might reduce the need for post-retirement redistributive efforts and it may be a prerequisite if a more s elective approach to risk mitigation is desired. On the one hand, such a strategy would probably require substantial contribution subsidies - or other compensatory efforts – for the groups involved in order to arrive at an acceptable pre-retirement income distribution. On the other hand however, such subsidies would affect incentives to work and hence labour supply negatively. Further macroeconomic challenges may arise. Subsidies would mean that public pension expenditure is brought forward creating short and mid-term financial pressures and the strategy involves a short and mid-term double payment problem. Pension systems should tend to many different – and often contradictory - objectives simultaneously, and therefore it may make little sense to prioritize one particular objective at the expense of others. Rather, the need may be for a balanced approach - changing as much as necessary, and as little as possible. Viewed from an analytical stand-point, the key objectives may be three-fold and about 1) avoiding non-

Page 46

participation and free-riding and 2) about changing minute design details with the view of improving the rationale of saving for retirement while 3) keeping the basic structure intact, preserving a significant risk sharing element, safe-guarding the legitimacy of targeted social benefits and maintaining responsiveness and robustness. However, while coming to grips with the technical and political issues discussed above, is important, it may not be enough. The further need may be for a strong and clear communication of the system and its merits and for the formation of a holistic and relevant narrative around system. The paradox is that the factors’ weakening incentives are the same factors that provide effective risk mitigation, responsiveness and robustness. In return for the high implicit tax rates the individual is provided with a high level of income security and risk protection. A pension system free of distortions is unthinkable. The question of how mitigation and risk sharing should be balanced against incentives is political rather than technical. Risk sharing and mitigation of various net-income effects are arguably key pillars in any pension system, but the priority given to such aspects can of course be greater or smaller. Despite its’ many and strong merits, serious challenges are facing the Danish pe nsion system. When thinking about possible roads forward there will surely be strong elements of path dependency at play and the possible adjustments – let alone alternative strategies – may be few. The irony is, that no matter what answer is chosen in this balancing act, the dilemma will remain.

Page 47

Appendices Simulation model Calculations on pension and net-replacement rates are based on 2014-wage levels for modeled individuals. The individuals enter the labor market at age 25, in 2014. They retire at the age of 73 in 2062. The following assumptions regarding the economic development scenarios are applied: It is assumed that the modeled individuals have the same wage level – the same full time reference pay – throughout their entire labor career. The individuals pay contributions to ATP according to present regulation in relation to employment and transfer income reception. During employment periods, individuals pay labor market pension contributions. The individual pays 1/3 of the contribution herself, while the remaining fraction is paid by the employer. ATP and 2nd pillar pension institutions spend a fraction (3 and 25 pct. respectively) of the current contr ibutions on social risk insurance – disability and survivors insurance. The incoming pension contribution net of labor market tax and social risk insurance is used to accumulate a deferred annuity. Existing and adopted future tax regulations are applied along with existing and adopted future regulation, regarding social security benefits and public old age pension. At pension age the a life-long benefit from ATP and the 2nd pillar fund, is calculated. Benefits are indexed in line with inflation. The resulting benefit from ATP and from the 2nd pillar fund is integrated with the state funded old age pension in a calculation of the individuals’ aggregate gross and net-pension.

Applied financial assumptions The financial scenarios apply the following assumptions:

Inflation

Wages

Fixed income return

Equity return

Base scenario

0.02

0.03

0.04

0.07

Low growth secenario

0.01

0.01

0.02

0.04

High growth secenario

0.02

0.04

0.06

0.09

The stochastic modelling applies 500 different variable scenarios generated by ATPs Capital Marke t Model. The 25 “worst” and “best” simulation results have been omitted.

Modeltype indiduals The modeling covers three model persons individually and possible household combinations of the four. The persons are defined using an average income worker as a s tarting point and the applying two additional workers with wage levels of 50 pct., 75 pct. and 150 pct. of the average wage respectively.

Page 48

2nd pillar contribution rate

Gross wage (euro) Low income worker

25,000

12 pct.

Semi-low income worker

37,500

12 pct.

Mid income worker

50,000

15 pct.

High income worker

75,000

18 pct.

The pension contribution is a percentage of taxable income. The contribution is split 1:2 between e mployee and employer. The listed full time annual wage is less employers’ pension contributions

References Andersen, T.M., 2014: Robustness of the Danish Pension System. CESifo DICE Report 2/2015: Munich. Andersen, T.M., 2015: Det danske pensionssystem – incitamenter og forsikring. Finansinvest no. 5-2013. ATP, 2015a: Abolishing income tested benefits would be costly to women. ATP’s newsletter Faktum no. 143 (available at www.atp.dk). ATP, 2015b: Færre ældre får boligydelse. ATP’s newsletter Faktum no. 137 (available in Danish only at www.atp.dk). ATP, 2015c: Income tested elements in the first pillar provides security and predictability. ATP’s newsletter Faktum no. 136 (available at www.atp.dk). ATP, 2014a: 85-årige har markant større indtægt end de havde som 70-årige. ATP’s newsletter Faktum no. 134 (available in Danish only at www.atp.dk). ATP, 2014b: Financial security for pensioners in Denmark and three other countri es. ATP’s newsletter Faktum no. 133 (available in Danish only at www.atp.dk). ATP, 2014c: Økonomisk gode eller dårlige tider – kun lille betydning for din pensionsdækning. ATP’s newsletter Faktum no. 131 (available in Danish only at www.atp.dk). ATP, 2014d: Høj marginalskat – men lav samlet skat. ATP’s newsletter Faktum no. 128 (available in Danish only at: www.atp.dk). ATP, 2013a: To ud af tre pensionskroner kommer fra det offentlige og ATP. ATP’s newsletter Faktum no. 120 (available in Danish only at www.atp.dk). ATP, 2013b: Kvinders pension stort set upåvirket af barsel, orlov og deltid. ATP’s newsletter Faktum no. 113 (available in Danish only at www.atp.dk). ATP, 2013c: Folkepensionen dækker halvdelen af tabet, når de private indtægter forsvinder. ATP’s newsletter Faktum no. 112 (available in Danish only at www.atp.dk). ATP, 2012a: Private pensionsindtægter mister værdi dag for dag. ATP’s newsletter Faktum no. 111 (available in Danish only at www.atp.dk). Bohn, H. 2013: Who bears the risk? An intergenerational perspective. In: Blitzstein, D, Mitchell, O. S. and Utkus, S. P. 2013: Restructuring retirement risks. Oxford University Press: Oxford. Bill no. 10 12-01-2015 (the Danish legislation on public pension) (available in Danish only at www.retsinformation.dk).

Page 49

Danish Economic Council, 2008: Dansk økonomi, Forår 2008. (available in Danish only at www.dors.dk). Danish Economic Council, 2014: Dansk økonomi, Forår 2014. (available in Danish only at www.dors.dk). Danish Economic Council, 2013: Dansk økonomi, Forår 2013. (available in Danish only at www.dors.dk). Danish Economic Council, 2011: Dansk økonomi, Forår 2011. (available in Danish only at www.dors.dk). Danish Economic Council, 2008: Dansk økonomi, Forår 2008. (available in Danish only at www.dors.dk). Danish Government, 1987: Fælleserklæringen. Danish Welfare Commission, 2005: Fremtidens velfærd. (available in Danish only at: www.fm.dk). Linaa, J.; Haagen L. and Sørensen P.B. 2010: Den effektive beskatning af opsparingsafkast i Danmark. Secretariat of the Danish Economic Council: Copenhagen (available in Danish at www.dors.dk). Mercer, 2014: Melbourne Mercer Global Pension Index. Mercer: Melbourne. Ministry for Children, Equality, Integration and Social Affairs, 2014: Vejl edning om ændring af vejledning om regulering pr. 1. januar 2015 af satser på Ministeriet for Børn, Ligestilling, Integration og Sociale Forholds område. (available in Danish only at www.retsinformation.dk). Ministry of Economics and the Interior, 2014: Familiernes Økonomi – fordeling, fattigdom og incitamenter. (available in Danish only at: www.oim.dk) Ministry of Taxes and Revenue 2014: Kommissorium for Pensionskommission en. (available in Danish only at www.pensionskommissionen.dk) Money and Pension Panel, 2012: Basispension – den automatiske løsning i arbejdsmarkedspensioner. (available in Danish only at www.ppp.dk). OECD, 2011: Pensions at a glance. OECD: Paris. Petersen, K. and Petersen, J.H., 2012: Dansk velfærdshistorie, Vol. 5 ch. 4. Syddansk Universitetsforlag: Odense. Sørensen, O.B. 2015: Balancekunst for viderekommende. In: På kryds og tværs i velfærdsstatens univers. Festskrift til Jørn Henrik Petersen. Odense Universitetsforlag: Odense. Sørensen, O.B. & Keldorff, S.T. 2015: Housing allowances for old-age pensioners and their incentive and behavioural effects – the Danish case. Who, what, when and why?. ATP: Hillerød (available at www.atp.dk ).

Page 50