The Danish penstion system - the interaction between social and private pensions

Specialeforsvar ved Stine Storm Galsøe

Titel;  The Danish pension system - the interaction between social and private pensions

Abstract: As a citizen it is important to secure the old life financially by saving for retirement. The Danish Welfare State guarantees a state pension to every Danish citizen which aims at providing an universal minimum pension. Though, the state pension is often not sufficient enough to preserve reasonable living standards throughout the retirement years. For that reason most Danish citizens save up for retirement during their working life. At this point the problematic concerning the interaction between the social and private pensions arises since too large an income from private pension schemes results in a deduction in the state pension. This thesis investigates how the premium for a private pension scheme should be determined to preserve different consumption patterns under the fairness criteria. In particular the scenario of maintaining a constant consumption level throughout life is investigated. For a 25-year-old individual entering the labour market with an yearly earned income at 400.000 DKK the premium constitutes 12.3 % of the earned income when disregarding deduction in the social pensions, if the individual retires at the state pension age of 65 years. The premium are determined based on the earned income, the social pensions, the mortality rates, the interest rate and the state pension age. Examining the sensitivity in the premium towards changes in the parameters involved it is shown that only an increase in the earned income implies a larger premium. Increasing the social pension rates the premium is lowered as a consequence of the compensation from the public authorities. Extending the simple set-up to include earned income from employment while retired or disabled as well as the public deduction parameters, the complexity is increased due to interdependence in the social and private pensions. In this case the premium is determined on different intervals based on the earned income while retired and disabled given the magnitude of the private pension benefits. Moving the focus away from the individual's point of view the reserves that the pension company and the Government have to provide for a single individual are determined based on Thiele's differential equations. The profiles for the pension company and the Government differ as a result of the payments. The pension  company receives premium payments from the individual while the state pension is financed through a pay-as-you-go system. In extension of the simple set-up the individual is allowed to choose an optional pension age different from the state pension age. The longer the individual chooses to stay active in employment, the smaller a yearly premium has to be paid. If the individual defers the state pension, the state pension is further increased by a waiting percentage. As another extension the individual is married. The household derives benefit from economies of scale when both the husband and wife are alive. The premium is determined when requiring different consumptive regulations in case of death. Finally, the optional pension age is combined with the pension scheme for a married couple. For a husband and wife with an age difference of two years who retire at the same time, the wife has to pay a significantly larger premium each year than the husband in order to maintain 70 % of the household's consumption in case that she is left a widow.

Vejleder: Mogens Steffensen,  
Censor: Ninna Reitzel Jensen, ATP