Income growth over the life cycle

In the Norwegian public pension scheme, pension accruals are regulated in accordance with the Basic Amount (“grunnbeløpet”), and therefore in accordance with the average annual wage growth for all wage earners, while pension benefits are adjusted in accordance with the general wage growth minus 0.75 percentage points. As wage growth is generally expected to be lower towards the end of the career than at earlier stages, it is not clear a priori whether the regulation of pension benefits implies that pensions will tend to increase more or less than wages increased over the final years prior to retirement.

This report summarizes the results of a descriptive study of income growth over the life cycle for different groups defined on the basis of gender, education and sector affiliation. The analysis is primarily focused on income growth towards the end of the working life, and the main purpose is to provide an answer to the following question: How does the growth in wage income over the final years prior to retirement compare to the regulation of pension benefits? The report is focused on income rather than wages, despite the fact that the regulation of pension benefits is linked to the average wage growth. This choice is the due to a desire to track individual trajectories over time, and comes as a consequence of the available data for income being significantly more comprehensive than the data on wages. Two different income measures are used: Pensionable income, defined as the sum of labour income and income from self-employment, and transfers replacing such incomes, and labour income, defined as the sum of all cash payments to an employee over a full calendar year.

The main findings of the report can be summarized in two points, which hold for different birth cohorts and for both income measures, and hold true for different groups based on gender, educational level and sector affiliation, and emerge from analyses of pensionable earnings for the period 1991-2009 and wage income for the period 1999-2009: (i) The average growth in nominal incomes remains positive until retirement. (ii) The average growth in deflated incomes (income measured in units of the Basic Amount) is slightly negative from age 55, and the median growth over the last years prior to observed retirement is approximately equal to the average increase in the Basic Amount, minus 0.75 percentage points.