DENMARK - The Organisation for Economic Co-operation and Development (OECD) has urged the new Danish government to rethink some of the reforms to its pension system, claiming that the attempt to simplify the system will prove counterproductive to efforts to get people back into work.
The Danish government is trying to get more of the country’s disabled back into the working world via ‘flexi-jobs’ with wage subsidies.
Whilst the number of flexi-jobs is rising, the OECD claims that the “generous” pensions and benefits system will dissuade people to take up these positions. The new system was characterised as being “more attractive than the current one for many of those with the best work prospects. In this sense, the change in the benefit structure may run counter to the objective of boosting employment.”
At the moment, 260,000 Danes are on early retirement benefit pensions - equivalent to 7% of the working-age population - and associated gross public outlays amounted to almost 2% of GDP.
At present, Danes have a vast array of potential benefits, and programs such as the early retirement pension system, sickness benefit, cash benefit and rehabilitation have overlapping target groups and eligibility criteria. Moreover, no central body exists to co-ordinate benefits and pensions - the Danish government shifted both fiscal and administrative responsibility for these benefits to local authorities in 1992.
Also, the disability pension system is overly complex, with three different types of pension depending upon an individual’s level of impairment, several potential supplements depending on family status and income, a mix of taxable and non-taxable benefits and a non-transparent interplay with other elements of the transfer system.
The coexistence of three different types of pension has meant that many Danes that receive the low-level benefits constantly apply for a reassessment in order to obtain a higher benefits. The OECD claims that this is reinforced by the fact that eligibility for benefits from private insurance schemes is often linked to receipt of the intermediate or highest benefit level.
Under the disability pension reforms, the current three tier system will be scrapped in favour of just one pension type. From next year, applicants whose ability to work is reduced by two-thirds or more will be entitled to a pension which varies only according to civil status and total family income.
Despite this, other structural changes to the country’s pension system were praised by the OECD. At present, all employees contribute 1% of their gross wages, while the benefits are paid out as a lump sum.
The Danish government wants to redesign the present set up and establish an actuarially fair system, where individuals’ benefits match their contributions. If enacted, this will change the scheme from being a tax to being a private pension, technically increasing disposable household income and giving a boost to the economy.
Additionally, the OECD report found that falling equity markets have eaten into the Danish government’s budget surplus. The OECD’s research found that Denmark’s actual budget surplus shrank to 2% in 2001, a result it explains by the weakness in tax revenues, particularly the shortfall in taxes on pension fund yields due to the “evolution” of equity prices.
The OECD also notes that Denmark’s finances are increasingly sensitive to equity prices as it increased the tax rate on pension fund earnings from shares from 5 to 15%.
By Geoffrey Ho
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