NORWAY - If pension reform is not forthcoming, Norway faces an unsustainable budgetary situation in the long term, according to the latest Organisation for Economic Co-operation and Development (OECD) economic survey on Norway.
The report said: “If the current public sector reform programme does not rein in spending soon or if a pension reform is agreed in 2004 that is not ambitious enough, the current framework will be too loose and policy will have to be reversed to ensure long-term fiscal sustainability.”
Without reforms, total age-related government spending will rise by around 13 percentage points of GDP between 2000 and 2050, among the strongest in the OECD area. Another major labour market issue is the worrying drop in the effective retirement age, although it is still high in international comparison.
The OECD said it remains to be seen whether the latest pension committee – the third one in six years – will come up with such adequate ideas for pension reform. This committee will provide a comprehensive review of the Norwegian system, including the possible use of the Government Petroleum Fund for funding pensions.
In 2001, the government allocated more than NOK250bn (17% of GDP) to the Government Petroleum Fund, increasing the size of the fund by two-thirds. Nevertheless, it is still only half the size of the largest European pension fund (the Dutch ABP) and the largest American pension fund (CalPERS).
Due to the stock market meltdown, the rate of return on the fund’s currency basket was negative (–2.4%) for the first time, while the appreciation of the krone made the return even more negative (–5.3%) in local currency. Since 1998, the real return has been 3.6% per year, slightly below the real return of 4% expected in the fiscal policy guidelines.
The OECD said: “In the view of the managers of the fund, there are hardly grounds for expecting that the high returns recorded in the 1990s will be repeated this decade.”
It added: “Objectives other than maximum return have become more important since 2001 as an Environmental Fund of NOK 1bn was created – it had a more negative return in 2001 – and as a council was established to evaluate whether the fund’s investments comply with international law.”
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