The Danish Pension System in an International Comparison

Abstract

AbstractThe Danish pension system is attracting international attention for its structure and outcomes. Notably it involves a transition towards a more funded pension system, it delivers high replacement rates, and it is financially robust. The main characteristics of the Danish pension system are presented with outset in the theoretical literature on pension system design and how to address the three main objectives of a pension system: coverage (distribution), adequacy (consumption smoothing), and insurance. This calls for a multipillar pension scheme, which in the Danish case is based on defined benefit public pensions and defined contribution funded occupational pensions. The key elements of this system are presented, and the outcomes in terms of poverty alleviation, replacement rates, and macroeconomic consequences are discussed. The Danish pension system is compared in terms of structure and outcomes to those of the other Nordic countries; a comparison which is interesting since these countries share similar welfare models and yet have adopted very different pension systems. Finally, the robustness of the system in relation to changing demographics and market returns is discussed.