This is a continuation of the Denmark explorations. This time around, we’ll be checking out Denmark’s pension system. Some basic information about Denmark’s public pension system, from Pensions at a Glance/2013 - OECD and G20 indicators, (hardly a ‘glance’ – the thing is 368 pages long!). Denmark has four types of government-funded or government-mandated pension programs:
Basic Pension Benefit: full basic pension amount is DKK 5713 per mo ($857), equivalent to around 17% of average earnings but a lot less for higher earners. (DKK = .15 US $)
Targeted Supplemental Pension Benefit: pension supplement is up to DKK 5933 ($890) per mo – for the poorest pensioners who have few other financial resources.
Occupational Pension Scheme: fully funded defined-contribution scheme (like 401Ks) agreed between the social partners. Coverage is almost universal. Contributions are typically between 10% and 17% of earnings.
The Other Defined Contribution Pension Scheme: statutory, fully funded, collective insurance based. Contributions are split, with two-thirds paid by the employer and one-third by the worker.
Taking the 4 types together, net earnings replacement rate for median earners in Denmark is 83%; in US, it’s 50% (but for US, that’s SS only).
Denmark’s pension system takes up 6.1% of GDP, compared to 7.8% OECD average and 6.8% of GDP in US. It is one of the most highly rated pension systems in the world. Denmark’s system is not currently is danger of going bankrupt (although low birth rates and aging of the population will likely require future adjustments for it to remain financially solvent).
One reason for the financial soundness of the Danish pension system is that except for the Basic benefit, which everyone receives (pretty small amount) and the Targeted benefit (which relatively few people receive), much of the system is paid through defined contributions, rather than “defined benefits”. Pension funds are also conservatively invested, primarily in safer bonds (80%, compared to just 20% in riskier stocks).
Bottom line: Denmark’s pension system is generous and well-run. It is financed through defined contributions and high taxes. There are trade-offs of course: Danes pay a lot to live in relatively comfort in old age. So they have a lot less money to spend in the prime of life. Then again, most Danes can expect to live a decade or two after retirement. And who needs all that stuff anyway?