The reform also imposed longevity adjustment, meaning that the accumulated pension stock is divided between the years as a retiree, determined by claiming age and expected remaining lifetime. The strength of the longevity adjustment will gradually continue to increase in the years to come, because of general health improvements and increased life expectancy in the population.
The pension reform did not fully solve the challenge imposed by the combination of fixed age limits and increasing effects of the longevity adjustment. Longevity adjustment implicitly involves that an employee must work longer to achieve a satisfactory pension benefit level, which in turn will lead to a gap between the age that most workers will choose to claim pension benefits and the age limits that the pension system is enforcing. Another weakness of static age-limits is that they tend to create a norm and may therefore halt the evolvement of the labour market exit age.
Meanwhile, the disabled cannot adjust to the increasing longevity adjustment in the current system. They are instead forced to claim their old age pension benefit at age 67, and they accumulate pension only until the age of 62. If the non-disabled workers adjust to the longevity adjustment by working longer, it will lead to a growing gap between the pension benefit level of former disability pensioners and the pension benefit level of the non-disabled.
The minimum pension benefit level is indexed according to the wage growth, but subtracted the effect of the longevity adjustment, capped to 0,75 percent in any given year. This involves the value of the minimum pension benefit gradually decreasing relative to the regular wage level in the society. Since the pension reform in 2011 this has constantly been compensated for through “discretionary” measures to increase the minimum level. This policy can be viewed as a shielding of the minimum level relative to wages.
We sketch a solution to these challenges, by letting the age limits in the pension system increase gradually, linked to the growth in life expectancy and the longevity adjustment. This will create a balanced development between the age that the non-disabled should work to achieve a satisfactory pension benefit level, and the age interval that the pension system is pointing towards as the “possible” age span to choose from. Additionally, this could give a certain shielding against the longevity adjustment for the disabled if the age limit for the disabled persons’ transition to old-age pension is tied to the same regime. Such a reform could also to some extent shield the minimum benefit level from the longevity adjustment.
The report documents effects from quantitative calculations of a reform of the pension system if the age limits are gradually increased. To this end, we have used the microsimulation model MOSART. Increasing age limits will increase pension expenditures, and this is mainly driven by increased expenditures towards former disability pensioners and paying disability insurance to disabled past the age of 67. However, the results show that increased age limits increase labour supply, and thereby the tax base, which dampens the negative budget effects. Compared to continuing with the current system, but permanently shielding the minimum benefit level from the longevity adjustment, it is strikingly more efficient to also increase the age limits. This is because increased age limits push more workers to earn a higher income pension for themselves, pushing them up from the guarantee pension and minimum pension levels.