The Danish Pension System in a Long-Term Perspective
Thank you, Jesper, and thank you for inviting me to be here tonight.
It is a pleasure for me to be among prominent academics from home and abroad and executives from the pension sector.
Being a central banker involves much travelling — and many conversations with fellow central bankers from around the world.
One experience from these exchanges is that Denmark is not always easy to explain.
Perhaps we are simply too small to attract much attention.
Or perhaps I lose my audience when I try to explain our fixed exchange rate policy.
Recently, though, interest has grown. Our economic performance stands out — whether you look at employment, growth or the strength of our public finances.
Looking at Denmark from abroad has made me appreciate how much our economic performance owes to institutions that combine shared responsibility with a long-term perspective.
Our pension system is a particularly revealing example.
These conversations often make me look at developments here through a foreign lens: How would they be perceived abroad?
I found myself doing just that last week, when I attended the opening of the annual meeting of the Danish Trade Union Confederation.
What struck me about the chair’s speech was how it combined an emphasis on purchasing power and competitiveness.
The openness to international labour - in an organized manner.
And the importance of technology for productivity growth and real wages.
The message on AI was equally clear: we cannot stop it, so let us make the most of it.
This went hand in hand with a strong emphasis on employees having a say in their working lives, low inequality and high-quality public services.
It was a positive speech.
It made me reflect on a broader feature of the Danish model: disagreement can coexist with a shared responsibility for the economy.
I often disagree with the unions, as I did when I worked at the Ministry of Finance, on fiscal policy, retirement and other labour market issues.
But viewed from abroad, our approach to decision-making on labour market issues has much to recommend it.
Pensions: security and a share in capital income
Our pension system — and occupational pensions in particular — illustrates this well.
It matters at three levels: for retirement incomes and savings, for the public finances, and for the way investment risk is borne.
For the individual, the system provides high average replacement rates — the proportion of earnings replaced by income in retirement.
That represents a substantial welfare gain.
The state pension and ATP provide redistribution and basic financial security. Occupational pension schemes add another layer of retirement income.
There is also an interesting contrast with the debate in the 1970s.
Back then unions wanted their members to acquire ownership stakes in the companies they worked for and to influence their management through board representation.
This was known as ØD — economic democracy.
That vision did not materialise.
But occupational pensions have given employees a different form of participation in capital ownership. Through pension funds’ equity investments around the world, particularly in the United States, Danish employees have acquired a share of global corporate profits.
Their lifetime income is therefore more diversified: through their pension savings, Danish workers receive not only wages but also a share of the returns on capital.
This also matters because the labour share of income appears to have declined over the longer term — a trend that AI could amplify.
Occupational pension schemes are still maturing.
Most people retiring today have contributed for fewer years than their younger colleagues will have when they retire.
Older generations began contributing later in their working lives and contribution rates rose only gradually.
Younger generations will also retire later as the state pension age is linked to life expectancy.
In fact, the occupational pension system will not be fully mature until 2080.
Nevertheless, last year median pension wealth among people aged 60–64 stood at around €240,000. That is more than three times medium annual income.
Even before the system has fully matured, this represents substantial savings.
And these assets continue to earn returns during retirement.
Pensions and the wider economy
The benefits extend beyond the individual.
By increasing overall savings, pension schemes – together with the consolidation of public finances and tax reforms - have helped transform Denmark from a persistent debtor nation into a sizeable creditor nation.
They have also reduced structural pressure on public finances by shifting pension financing from taxpayers to individuals.
Forty years ago, publicly funded state pensions and civil service pensions accounted for more than 75 per cent of total pension payouts.
Today, they account for around 60 per cent. Their share is expected to fall below 40 per cent once the system is fully mature.
That shift is particularly important as the population ages. It leaves Denmark in a different position from that of many other European countries.
A feature of the system is that contributions are tax deductible while benefits are taxed when paid out. This incentives pension saving. And it also has the effect that retirees continue to make a substantial contribution to tax revenues.
But this feature has to be watched carefully, as politicians regularly attempt to bring forward these future revenues to alleviate present prioritizations.
Returns and risk
The third dimension is risk.
The high allocation to equities and other riskier assets has been made possible by a substantial shift from guaranteed return schemes to more market-based schemes.
This has allowed pension providers to build portfolios with higher expected returns.
And, of course, higher risk.
This is particularly relevant now.
A correction in equity valuations is a risk both for AI companies and for other companies benefiting from the surge in AI investment.
I cannot say how likely such a correction is. But if it occurs, it should also be viewed in the light of past investment gains.
To illustrate: S&P 500 have more than doubled since 2020.
Over the last ten years, dividends and valuation gains have actually accounted for 70 per cent of the increase in pension assets, while contributions have accounted for 30 per cent.
I was struck by how little public debate the heavy pension losses in 2022 generated.
Of course, it helped that valuations recovered relatively quickly. Many pension providers could also smooth the impact on individual payouts, taking into account the higher interest rates.
Reforms that reinforced one another
The development of occupational pension schemes followed an agreement between unions, the government and employers in 1987.
It is a good example of what a shared commitment to the long term can achieve.
But it was not an isolated reform. Looking back, what strikes me is not just the individual decisions, but how they reinforced one another.
When I discuss the Danish economy with international colleagues — if they are patient and can’t get away — I often start with the crisis of the 1970s and early 1980s.
Denmark faced persistent balance-of-payments deficits, high unemployment, large public deficits and high inflation.
The economic policy strategy had broken down.
Our finance minister famously warned that we were looking into an abyss.
Over the following 30 years, starting in 1982, a series of reforms changed that trajectory.
The fixed exchange rate policy, substantial fiscal tightening, and reforms of taxation, labour market policy and retirement all played a part.
In my former roles, I was part of that journey. But only in the past five to ten years have I fully appreciated how these decisions complemented one another and helped bring us to where we are today.
I believe the crisis helped create a shared determination — across political divides, unions, employers and the wider public — not to return to that situation.
The lessons of that crisis became part of Denmark’s institutional memory.
Some years ago, I worked at the European Investment Bank, and one of my responsibilities was our operations in Greece.
At an informal lunch with the then Greek finance minister, I told him about Denmark’s crisis around 1980.
He did not believe me!
He knew only the Denmark of strong economic indicators.
But once I had convinced him, he found the story encouraging.
It showed that a country could change its economic direction for the better over time.
Preserving the long-term perspective
My concern today is that this institutional memory may be fading.
Large, unexpected increases in revenue from corporate taxes, equity income and pension assets, together with high employment, can make fiscal discipline seem less urgent.
Yet a shift from a public surplus of 4 per cent of GDP in 2024 to an expected balance next year - during a period of full employment - should give us pause — even allowing for the sharp rise in defence spending.
That concern is difficult to explain abroad when gross public debt is below 30 per cent of GDP and our public finances are sustainable over the long term.
But today’s strong position is precisely what a long-term perspective has helped us achieve.
Twenty years ago, I worked for a finance minister who was famous for some rather strange quotes.
But some were good. I particularly remember one.
It was during a period with high public surpluses just before the Global Financial Crisis.
He was criticised for not allowing higher spending. And he said: “We only have the money because we did not spend them”.
This was, I think, both very simple and very wise.
To round it up,
Reforms seldom come without conflict.
But they are easier to sustain when people have a say and when they can see that overall economic progress benefits them too.
Denmark’s experience is absolutely not a story of agreement on everything.
It is a story of disagreement within a shared commitment to the long term.
And, ultimately, this is what is most difficult to explain to my foreign colleagues.
Thank you.