The Danish Old Age Security System in 2020

By Martine Stagelund Hvidt, University of Copenhagen

The cornerstones of the Danish statutory state pension that exists today were laid in 1891 with the law on old age support for elderly persons in need. The first old age pension was tax-financed and was subject to many reforms. In 1922, the pension became contribution-based and a means test was introduced to receive old age pension benefits. The means test was abolished in 1933, but the obligation to contribute was preserved. The pension reform of 1956 introduced a universal contribution-financed but means-tested public pension. In 1964, a universal tax-financed public pension was re-introduced and this reform was fully implemented in 1970. This structure remains in force today. In parallel with the abovementioned reforms that led to the current public pension scheme, supplementary occupational pensions gained importance for guaranteeing a ‘standard level of protection’. Occupational pension schemes are rooted in 1849, and were initially intended for Danish government officials. During the 1960s and 1970s, the scope was primarily reserved for public sector employees, but a joint declaration from 1987 between the government and the social partners enabled occupational pension schemes to flourish throughout the public and private labour market. Pension benefits can be ‘topped up’ through voluntary participation in private pension schemes, which have existed and developed concurrently throughout history. A ‘minimum’ level of protection is guaranteed through a pension supplement of the public pension scheme. Other social assistance supplements are available for pensioners in need.

Standard Protection in Old Age

The public Danish pension scheme, the so-called state pension (Folkepension), provides a statutory universal pension which is tax-financed out of the state budget. The state pension benefit consists of two components: the so-called state pension basic amount (Folkepensionens grundbeløb) and the means-tested state pension supplement (Folkepensionens pensionstillæg) for the financially most disadvantaged. The state pension covers all Danish citizens and persons with legal residence in Denmark who have resided in Denmark for at least three years between the age of 15 and the statutory retirement age. To accrue a full basic pension amount, persons must have accumulated at least 40 years of residence in Denmark (for persons who reach the retirement age before 30 June 2025) or must have resided in Denmark for at least 9/10 of the time (for persons who reach the retirement age after 30 June 2025) between the age of 15 and the statutory retirement age. Persons who do not meet these requirements might be entitled to a prorated pension. The state pension provides a lifelong flat-rate old age pension benefit.

In addition to the state pension, a Danish labour market supplementary pension (Arbejdsmarkedets Tillægspension, ATP Livslang Pension) was introduced in 1964 as a statutory, fully funded, collective insurance-based, defined-contribution pension scheme. All employees between 16 and 66 years of age who work at least nine hours per week are mandatorily insured in this scheme. The contributions are usually paid by the employer and the employee and are a fixed amount regulated by law based on the number of hours worked. The pension scheme also covers individuals on social security benefits with contributions being paid by the benefit recipient and the state. Contributions qualify for full tax deduction, but benefits are taxed as income at the time of payout.

Occupational pensions (Arbejdsmarkedspensioner) play another important part for the financial protection in old age. In the Danish public sector and in large parts of the private labour market occupational pensions are based on collective agreements between the social partners which make participation mandatory for the employee. Occupational pensions also include insurances against other risks as they provide, for example, a spouse and child pension in the event of death of the insured person and insurance benefits to the insured person in the event of disability before retirement. The pension schemes are contribution-based with contributions being paid by the employer and the employee. The self-employed can join occupational schemes on a voluntary basis. Civil servants are protected by a special occupational scheme, the civil servants’ pension (Tjenestemandspension), which provides a statutory lifelong supplementary pension. Benefits are based on the civil servant’s seniority and salary level at the time of retirement. The maximum pension amount is achieved after 37 years of employment. Civil servants earn the right to a pension only if the termination of employment is due to age, infirmity or any other cause that is not attributable to the civil servant.

In 2020, the mandatory pension scheme  (Obligatorisk Pensionsordning) was introduced for individuals receiving social security benefits with the objective of strengthening savings-based pensions also for persons not mandatorily insured in occupational pension schemes. Contributions are paid by the Danish state and the amount depends on the social security benefit. The contribution will increase yearly from 0.3% of the social security benefit in 2020 to 3.3% in 2030.

Top-Ups

To top up benefits of the state pension and occupational pension schemes, individuals have the option of joining one or more voluntary private pension schemes (private pensionsopsparinger). Top-ups from different schemes can be combined. In 2012, new types of old age pension savings and insurance planswere introduced with effect from the income year 2013. The savings can be paid out as one-off payments, as partial payments, as an instalment pension or as an annuity. The schemes can be set up either as a privately subscribed scheme or as an employer-administered scheme in an employment relationship. The schemes are called ‘old age savings’  (Aldersopsparing) if the pension plan is set up in a financial institution, and ‘old age insurance’ (Aldersforsikring) if the plan is set up in a pension company. There is no tax deduction on contributions; however, pension benefits are not taxed at the time of payout.

The supplementary labour market pension scheme for disability pensioners (Supplerende Arbejdsmarkedspension, SUPP) was introduced in 2003 and is a voluntary top-up pension for individuals who receive a health-related early retirement pension. It is contribution-based with the contributors being both the individual and the Danish state. Contributions are subject to tax deductions until retirement age has been reached.

Minimum

The state pension supplement (Folkepensionens pensionstillæg) guarantees, together with the state pension  basic amount, a minimum pension income for the financially most disadvantaged pensioners. It is a means-tested benefit determined on the basis of all sources of personal income and the spouse’s/cohabitant’s income. Benefits of the state pension (incl. the state pension supplement) can be further supplemented by various means-tested social assistance measures, so-called supplementary pension benefits (Tillægsydelser til folkepension), such as the elderly cheque (Ældrecheck), media cheque (Mediecheck), heating supplement (Varmetillæg), health supplement (Helbredstillæg), housing supplement (Husholdningstillæg) and personal supplement (Personligt tillæg). Benefits are provided upon application. Persons must have reached the statutory retirement age and have to fulfil other financial and/or health-related requirements. The social assistance supplements are statutory and fully tax-funded.