Ambitious retirement age indexation ensures sustainable public finances in Denmark

By Mikkel Hermansen, Denmark desk, OECD Economics Department

Denmark has a long tradition of reforms delivering sound public finances and strengthening economic growth. One foundation of long-term fiscal sustainability was the decision taken in 2006 to index statutory and early retirement ages to life expectancy. Projections of public finances suggest that in this case (the baseline scenario) the government budget will remain close to balance and debt stay well below 60% of GDP (Figure 1). However, if indexation where to be stopped from 2030, persistent deficits and fast rising debt are projected. 

The indexation mechanism works by raising the statutory retirement age by up to one year every five years to keep the expected number of years in retirement constant (Figure 2, Panel A). Experience from the first adjustment of the early retirement age starting in 2014 has been encouraging. Many seniors have chosen to stay in their job, which has supported a significant rise in the employment rate among 55-64 year olds (Figure 2, Panel B). There is still scope for improvement as the senior employment rate in Denmark remains below those of Norway and Sweden. 

In the coming years the statutory retirement age will be increased from 65 to 67 years. Assessing whether the affected workers remain active will provide another indication of whether the long-term fiscal strategy is on track. Current projections indicate that the statutory retirement age will reach 73 by 2060. This is an ambitious path and the highest planned retirement age across OECD countries. Still, since additional years lived are generally in good health such a rise is achievable, but requires policies to retain seniors in the labour market. 

The recent OECD Economic Survey of Denmark commends Denmark for its impressive reform track record and sound public finances. The indexation of retirement ages to life expectancy should become a pillar of the economic policy framework and useful guide for other countries undertaking their own reforms. Nonetheless, successful reform requires full implementation and more could be done to ensure the functioning of the labour market does not discriminate against seniors as well as helping those with reduced work capacities to remain in employment (OECD, 2015).  

References

Danish Government (2018), Denmark’s Convergence Programme 2018, Copenhagen.

Danish Ministry of Finance (2018), Opdateret 2025-forløb: Grundlag for udgiftslofter 2022 (Updated 2025 projection: Basis for expenditure ceilings 2022), Copenhagen.

OECD (2019), OECD Economic Surveys: Denmark 2019, OECD Publishing, Paris, http://dx.doi.org/10.1787/eco_surveys-dnk-2019-en.

OECD (2015), Ageing and Employment Policies: Denmark 2015: Working Better with Age, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264235335-en