In Denmark the official retirement age is 65, but on average most people retire at age 61. Around 8%-9% of GNP is spent on government income transfers to the elderly. Among men between the ages of 55-65, only Sweden, the U.S., and Japan have higher labor force participation (LFP) rates. Why do we see such high LFP in Denmark (which is generally seen as having a very generous social insurance system)?
The reason for this is that pensions generally range from 40%-70% of average prior wages (adjusted for inflation). The proportion is closer to 70% for low wage earners and closer to 40% for high wage earners. Thus, we see the earliest retirement among people in the manufacturing and service industries who generally have lower wages.
I will now briefly describe the retirement programs in Denmark:
Old Age Pension (OAP)
This is a pay-as-you-go system which has a residency and age criteria as its only requirements. At first this program gave a base amount to everyone 67 years and older but “from 1993 forward, this amount has been means tested against earnings from work, but not against capital income.” OAP is financed from general tax revenues.
Social Disability Pension (SDP)
This is a disability program in which eligibility depends on health criteria, although these eligibility rules have become more flexible over time. Individuals enrolled in SDP automatically switch to the OAP program once they reach 67 years of age. Like OAP, this program is financed from general tax revenue.
Post Employment Wage program (PEW) or Efterlhn
The goal of this program was to allow elderly workers to retire early to open up jobs for younger workers. In reality, the PEW program has become one of the major means by which Danes are able to take early retirement. On can enter the PEW program at age 60 as long has the individual has a minimal employment attachment when they apply.
The Transitional Benefits Program (TBP) gives an early retirement option for workers aged 55-59 who are members of an Unemployment Fund and who have been unemployed for 12 of the last 15 months. In 1994, this benefit was extended to individuals 50-54 years old as well.
Public Employees have a Public Employee Pension (Tjenestemandspension) which is a defined benefit program as well.
The Special Pension Program was enacted in 1999 in which 1% of wages go towards a defined contribution fund. The program currently represents a small portion of the overall retirement needs of the elderly but may grow in importance in the future.
How to get to retirement?
- If you are under age 50, your only option is to apply for disability through the SDP program.
- Between 50 and 59 years old, one can still apply for disability (SDP) or an individual can apply to the TBP program if they meet the requirements.
- Between age 60 and 66, retirement is popular because 1) one can enroll in the PEW program and 2) many labor market pensions give their employees benefits beginning in this age range. This is the route most people take; the average age of retirement in Denmark is 61.
- At age 67, nearly all individuals in Denmark are retired. All citizens and most residents are eligible for the OAP program once they reach age 67.