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The Danish pension system is, according to the American rating agency Mercer, the best in the world. After retiring, every Dane can be sure that a peaceful life awaits them – and this even if they worked for minimum wage or not at all!
How is that possible?
We begin by noting that the Danish pension system consists of two main elements: the state pension plus payments from a pension fund.
The state pension is a classic type of social benefit. That means a person who worked their whole life and accumulated considerable savings in the bank receives the minimum wage. If that person earned little and saved nothing, they would receive an even higher pension.
While the state pension helps prevent poverty, the pension from a pension fund is calculated according to a model more familiar to us: it is proportional to income earned while working.
If a person has no pension savings, they receive the so-called basic pension and a bonus. If they live alone, this amount is around 18,000 Danish kroner (approximately 2,400 euros). It is interesting that some taxes must be paid from this amount, but people still have enough money for a decent life.
Poverty among older people in Denmark is therefore rare
It usually occurs among immigrants who came to the country at an older age: they can only count on a certain amount of the state pension.
The pension of the average “poor” Dane represents about 65–70% of their working income. This allows them to maintain a normal standard of living, taking into account that some expenses disappear in retirement. In addition, pensioners have other benefits.
These include, for example, a housing allowance and free medical care. Visits to the doctor are fully paid by the state and medicines — depending on a person’s pension. A pensioner can get all the necessary medicines without giving up ordinary expenses: no one has to set money aside for worse times just to take care of their health.
The second important element of the Danish pension system is a savings program
“For example, you work in a private company and 12% of your salary is transferred to a pension fund: you pay 4% of that and the employer pays 8%,” explains financial consultant Mark Hansen.
One must also mention the famous Scandinavian tax system. According to Hansen, the average tax in Denmark is approximately 40%, but with income above a certain amount it rises to 57%. He says:
“Of course, for some this may be a lot, but thanks to these taxes we have a reliable social system. If you find yourself in an adverse situation – for example, you are unable to save for retirement – you will receive a state pension that comes from the taxes that people pay.”
In other words, the state pension creates a kind of lifeline for every citizen. Regardless of where a person worked or what hardships they encountered in life, even if they had no money left in old age, the taxation system guarantees that they will receive a dignified state pension.
On the other hand, the savings system encourages people to save for retirement. Those who have the opportunity can decide for themselves how much to save and what kind of old age awaits them in retirement.
By the way, the cumulative system was introduced in Denmark relatively recently. The government encourages people to save for retirement and has added tax reliefs for this purpose: given the high level of taxation, this turned out to be a beneficial step for many people.
As a result, by the end of the 1990s the current version of the funded system was formed. The vast majority of Danes are satisfied with the result and employers, who bear the main tax burden, do not complain at all. Nobody wants to abolish it.
Torben Andersen, professor of economics at Aarhus University, says
“In Denmark everyone worried about one problem: you pay into a pension fund and it then invests that money somewhere else. But where?
In fact, this problem did not become a big issue at all. Pension fund managers quickly realized that they should serve people’s interests, meaning it is attractive for people to invest their money there. Now the operation of pension funds is very transparent: there are many rules to prevent situations where the money would be used for other purposes.”
Currently, people in Denmark retire at the age of 65. Recently, however, it was decided to raise the retirement age to 67 and in the future it will change according to expected life expectancy.
Even this fact does not cause people to protest against the system: the life expectancy of Danes is continually increasing and the quality of life in Denmark is one of the highest in the world, as all international rankings show.
In conclusion, we can state that the Danes are willing to pay high taxes because they see that they are managed sensibly and their money goes to the right things. This is an important element that in Denmark is referred to as the “welfare state” …
Do you think such a system will ever be implemented in our country?
