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Norway: an imperfect pioneer

Norway reformed the pension system in 2011 facing the ageing of population problem, but still has some challenges ahead 

By Malena Ramajo

Sidsel and Odd Vaagland are a retired couple that live in the southern Norwegian town of Arendal. They live in a wooden house on a high point of the city, where they have spent almost all their life. Odd is standing in the living room, waiting for Sidsel while he laments how polluting planes are and the high cost of travelling by train. Sidsel is setting the table for lunch, and brings in different platters with some of the country essentials: salt-cured salmon, crispbread or kraftkar cheese.

Odd and Sidsel
Sidsel (75) and Odd (79): “In the way we understand it we are lucky, we have an easy living”

They were born during the Second World War period, and nowadays can be considered as average Norwegian pensioners. The following generation, so called baby boomer, is now reaching retirement age, and that intensifies the problem of ageing of population.

The increase of the share of old people within society means that the proportion of the working force shrinks while the group of pensioners increases, challenging the economic sustainability of European welfare states. To curb this trend, Norway made a big reform in their pension system in 2011.

Norway’s pension model

Norway’s pension system is built over three pillars. The main one is the National Insurance Scheme (folketrygden) that constitutes around an 80% of the overall income for old-age pensioners.

On top of this there are the occupational pensions (tjenestpensjon), that are a mandatory scheme by which the employers contribute with a minimum of 2% of the salary to increase the savings. Odd and Sidsel, that used to work as a high school teacher and a nurse, got these pensions from the public sector.

Finally, workers can choose to have their own individual pension savings in agreement with a bank or an insurance company. This is not so popular between Norwegians and the Vaaglands are good example: “we trusted the public state and we thought that the best thing to do was to not have the loan” says Sidsel.

Click (+) to explore in-depth the Norwegian pension system.

What was the reform about?

There were multiple changes. It was introduced a flexible retirement age, that substituted the former statutory age of 67. Now, it is possible to retire from the age of 62 and start to take out a full pension income or part of it, in smaller percentages. At the same time, it is possible to keep working until the age of 72 to keep accumulating more benefits.

Another cornerstone was the introduction of a life-expectancy adjustment mechanism in the distribution of the pension in the life-time. That is that benefits accumulated during the working life are divided by the number of years the person is expected to live according to its year of birth. This means that every new generation will need to work longer to get the same amount of income than the previous one.

There were also introduced new rules to the indexation of pensions. Normally, pensions are adjusted according to prices or wages index to help maintain the purchasing power of pensioners when economic changes take place. In Norway pensions are indexed to the average wage growth while are accumulated and in the moment of withdrawing them an annual fixed percentage of 0,75 is deducted, which is supposed to be the average between wage and price growth.

The aims of the reform were to stimulate labour supply and incentive the postponement of retirement. It had an immediate effect after it came into force. Many of the affected workers decided to stay in their jobs for a bit more than a year to counteract the reduction of their pension.

So, how does this help to reduce the state expenditures?

Nils Martin Stølen, researcher at Statistics Norway explains it: “There are two large effects. One is a tightening effect produced by the life-longevity adjustment. The other one is caused by the increase of tax revenues when people postpone retirement, but it is more dependent on the individual behaviour.”

He has estimated that the reform will contribute to delay the budget deficit until 2050, while with the old system the expenditure would have surpassed the government revenues in 2035. Still, he warns that “the reform is of good help, but the government budget will be rather tight in the decades ahead and taxes will probably have to be increased in the long run.”

statistics-pensioners

Increasing inequalities

The encouragement for postponing retirement can favour the wealthiest and penalize those who are already poorer.

“You can stay in the workforce if you are an academic, but if you work in healthcare or factories you might have to leave earlier” says Eyvind Frilseth, from The Norwegian Association for Pensioners.

He considers that the government should use distribute the wealth from the richest to the poorest. “There should be compensating measures for those who can’t stay in the workforce, you can’t punish them.”

Selje Aslaksen, senior advisor at the Government’s Pension Department says that “it’s a concern and we should pay attention to the outcomes”, but they refuse introducing any kind of redistributive measures. “We should make sure that people working on low income occupations have better terms so that they can work longer.”

In the private sector, unions have come up with a temporary solution to this challenge. They have created a new scheme for those who can’t work after 62  and will provide them an extra benefit until they get their old-age pension.

Eystein Gjelsvik, research director at LO Norge (Norwegian Confederation of Trade Unions) says “if you are able to work you will get this money  out for working, but for those who can’t this will make a difference.” Although it will be of support for these pensioners, Gjelsvik points out that “is not sufficient and it won’t last for many years because we don’t have a great funding for it.”

The gulf between sectors

The income Norwegians get with their pensions represents on average a 51,6% of the previous salary. Frisleth points out that there are big differences. “Someone who has worked in the public sector usually gets an income equivalent or higher to a 66%, while someone in the private sector gets it worst.”

LO Norge is currently in negotiations with the employers and the government to make some changes in the private sector schemes that can help improve it and make it more efficient. Gjelsvik says “it is a big discussion because it will cost more money.”

A very popular claim is to get the “pension from the first krone.” It asks for a change of the occupational pension because the 2% contributions are not applied to incomes lower than 100.000 NOK. “Every work hour should count, occupational pensions should pay for all wages”, states Gjelsvik.

Arendal
Sidsel: “we have money to go for theatres, concerts, movies… in Arendal the living cost is low.”

An adequate purchasing power

The newly introduced automatic indexation is also a problem for retirees. Gjelsvik explains that “the 0.75% is not working because the wage growth has been small the last years.”

The Norwegian Association for Pensioners is also against it. They claim that “because the regulation is done with automatic percentages, the elderly will always get less than the working people”. For this reason, they want to have negotiating rights to discuss this adjustment.

But the Ministry does not contemplate negotiations as a possibility and trusts that “over time, within a decade the 0,75 value will match with the average of wage and price, but if in 5 or 10 years it doesn’t match it might be lowered.”

 

A privileged exception

The elderly poverty rate of Norway is one of the lowest within the OECD countries, with a ratio of less than 0.05, so it is evident that despite all the issues that can arise, the Norwegian Pension System works. What differs then between Norway and other countries?

They found oil by the end of the 1970s and today they possess the largest sovereign wealth fund in the world,valued at more than 10 billion NOK. Every year, the government can only spend the equivalent to the net return of this Pension Fund, which is around a 3%.

The return is part of the general budget but is not set aside for any especial activity. However, the fund revenues are almost the same as the yearly expenditures for old-age pensions. In 2020, the government estimates to use 243.6 billion from the Fund, and to spend 244,3 billion in paying for the pensions.

As Nils Stølen points out, “it’s a considerable magnitude. And of course, it’s much easier for us than for other countries.” In spite of this obvious advantage, the effort of Norway in looking for solutions can be something that other countries can look up to.

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