The Danish retirement income system scored 82 on the 2022 Mercer CFA Institute Global Pension Index, and an A grade in overall index value after evaluating the retirement income system’s adequacy, sustainability, and integrity. The Danish retirement income system comprises a public pension scheme, a means-tested supplementary pension benefit, a fully funded DC scheme with lifetime income at the occupational level, and mandatory occupational DC schemes.
National Level
The national pensions consist of two old-age pension schemes: the public pension (folkepension) and the Labour Market Supplementary Pension (ATP).
The public pension is a universal, residence-based scheme on a pay-as-you-go basis. The total cost of this public pension is financed by government. The pension consists of an earnings-tested basic pension and an income-tested supplemental pension. This benefit is available to those with at least 40 years of residence in the country from age 15 to the normal retirement age and is prorated for those with fewer years of residency. The retirement age will rise from its current 65 to 67 between the years 2019 to 2022, then to 68 by 2030, rising based on life expectancy starting in 2035. The flat-rate amount is tested against income above a significant level. The supplement is tested against earned, capital, and pension income, which is targeted to the pensioners with little to no income besides the full old-age pension.
The ATP is a statutory, fully funded, collective, insurance-based, defined-contribution scheme that applies to all workers who work more than nine hours a week. The contributions are mandatory, but vary according to the number of hours worked, with a full-time employee paying DKK 3,408 per year in 2021. An employee pays one-third of the contribution while the employer provides two-thirds. At retirement, the account may be taken as a lump sum if it is below a threshold or a taxable annuity. ATP membership is voluntary for the self-employed.
The Senior Pension is a new pension scheme providing early retirement for individuals with diminished work capacity. It is available for people up to 6 years before reaching the normal retirement age as long as they have worked at least 20 to 25 years in full-time employment and are unable to work more than 15 hours per week in their most recent jobs. A monthly pension of up to 19,092 kroner (US$2,861.13) if single, or 16,229 kroner (US$2,432.08) if married or partnered, is available in 2020. This amount may be reduced depending on levels of external income.
Occupational Level
Occupational pensions include company-specific and agreement-based pensions. Financing, contributions, and benefits for the former vary depending on the plan. Agreement-based plans are significantly more common and typically cover one particular industry. Contributions vary between 10% and 18% across industries, with a default rate of 12%. Those plans are fully funded by not-for-profit life insurance companies that have shared ownership between employer associations and unions. Actual contribution levels for employees and employers vary; however, employer contributions are mandatory with employers and employees funding two-thirds and one-third, respectively. Early retirement with a lower pension is possible beginning at 60 years of age.
Since 2018, all employees over age 26 have been required to contribute at least 0.25% of income toward retirement savings, which would gradually increase to 2% by 2025. This savings requirement would be waived for individuals already contributing 6% or more to an employer-provided retirement plan, while not requiring employers to contribute on behalf of the individual.
Individual Level
Other private products complete this system. These plans and financial products vary in contribution, regulations, and benefits. These accounts can be created by an individual or through an employee’s company and receive favorable tax treatment. Investment flexibility is largest among these products compared to the other levels. It is common for these plans to have much-higher administrative costs compared to the ATP or occupational pensions.
On January 1, 2018, Denmark implemented reforms to the voluntary old-age savings program that had been passed in the Danish parliament on December 19, 2017. The reforms include adjusting annual contribution limits, expanding payment options, raising minimum and maximum pensionable ages, and eliminating public benefit reductions or cessations. These reforms represent the first part of a larger reform agenda (commonly referred to as the 2025 Plan) aimed at reducing financial pressures on the public pension system by encouraging longer working lives and more private savings.
Summary Sources
European Commission. “Pension Adequacy Report 2018, Current and Future Income Adequacy in Old Age in the EU, Volume 2 – Country Profiles.” 2018. Accessed 02/04/2021.
Life in Denmark. “State Pension.” Accessed 02/04/2021.
OECD. “Pensions at a Glance 2019.” December 5, 2017. Accessed 02/04/2021.
OECD. “Pensions at a Glance 2021: Country Profiles – Denmark.” December 8, 2022. Accessed March 28, 2022.
Social Security Administration. “Denmark Implements Reforms to Voluntary Retirement Savings Program.” February 2018. Accessed 02/04/2021.
Social Security Administration. “International Update.” January 2020. Accessed 02/04/2021.
Social Security Administration. “Social Security Programs Throughout the World: Europe, 2018 (Denmark).” September 2018. Accessed 02/04/2021.
Current Issues
On December 21, 2020, the Danish government reached an agreement to fund early retirement for certain workers by introducing an extra tax on the financial industry. Individuals who have at least 42 years of employment by age 61 can now qualify for a new early pension (tidlig pension) up to three years prior to the normal retirement age of 67 (individuals who have worked for 42 years qualify for 1-year early retirement, those with 43 years qualify for 2 years early retirement, and those with 44 years qualify for 3 years of early retirement). If ATP contributions are paid on earnings, both periods of employment and self-employment will count toward an individual’s minimum employment requirement, as well as periods of work outside of Denmark, compulsory work training, and social security benefit receipt. Those who qualify will receive an early pension equal to the full state pension (folkepension) normally granted to single individuals at the national retirement age and will only be reduced if a pensioner has gross annual earnings exceeding 24,000 kroner (US$3,957.91) or pension assets exceeding 2 million kroner (US$330,000). When the individual reaches the national retirement age the early pension will end and they will begin receiving the normal state pension which may be adjusted based on marital status or a spouse’s financial resources.
By granting early retirement to eligible individuals, this agreement aims to help workers in industries with physically demanding labor conditions and who tend to have entered the workforce earlier. Over 41,000 individuals will qualify for this pension, and the government estimates that 24,000 of these individuals will apply for it, thereby costing 2.2 billion kroner (US$363 million) for its first year and 3.1 billion kroner (US$511 million) a year by 2025.
Summary Sources
Jepser Starn. “Denmark Agrees to Let Banks Fund Early Retirement for Workers.” Bloomberg. October 10, 2020. Accessed 2/4/2021.
Jacob Gronholt-Pedersen. “Thousands of Danes could retire early under government pension reform.” Reuters UK. August 18, 2020. Accessed 2/4/2021.
Danforth, Ben, John Jankowski, and David Rajnes. “International Update, January 2021: Denmark Approves Early Pension.” Social Security Research, Statistics, and Policy Analysis. January 2021. Accessed 07/08/2021.
Source: Georgetown University’s Center for Retirement Initiatives
Last Updated 3/28/22