1. Projected effects of the Norwegian pension reform Ole Christian Lien Directorate of Labour and welfare Norway ole.christian.lien@nav.no

2. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 2 Agenda  The Norwegian pension system and the 2011 pension reform  TRIM: A micro simulation model for pensions  Projected effects of the reform

3. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 3 Current Norwegian pension system National Insurance Scheme: Covers the entire population Most important pillar – covers approx. 80 percent of total pension income for old age pensioners Occupational pensions: Compulsory from 2006 – covers the entire working population Individual pensions Occupational pensions from age 67 ys. Contractual early retirement scheme (AFP) from age 62-66 ys. Old age pension from age of 67 ys. Disability pension from age 18-66 ys. (National Insurance Scheme) Individual pensions: Of little importance in Norway

4. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 4 1967: 3.9 2009: 2.7 2060: 1.7 Number of labour force participants relative to the number of pensioners

5. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 5 Pension reform from 2011 – Flexible retirement from age 62-75 based on actuarial neutrality – Pensions are adjusted for expected remaining life expectancy – The longer one defers retirement, the higher the annual pension – Pensions are directly related to overall lifetime income – Those born after 1954 will accumulate a pension account (18,1% of income), which at the time of withdrawal will be divided by a life expectancy divisor – Old age pension and labour income can be combined without an earnings test – A guaranteed minimum pension (as in the old system)

6. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 6 Replacement rates after tax before and after reform (private sector employees entitled to contractual early retirement)

7. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 7 Is the new Norwegian pension system an NDC- system? What are NDC Pensions systems - Börsch-Supan (2006): An accounting mechanism that credits all life-time earnings  A mechanism linking the final balance with the demographic and macroeconomic environment An actuarial rule converting the final balance into an annuity Claims on future benefits are not collaterized with real capital but promises by a government-related entity

8. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 8 Agenda  The Norwegian pension system and the 2011 pension reform  TRIM: A micro simulation model for pensions  Projected effects of the reform

9. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 9 Advantages of (dynamic) micro simulation  Complex benefit rules can be exactly reproduced  Can model (intertemporal) behaviour of individuals and households  Useful when different parts of the population face different rules  Can calculate distributional effects

10. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 10 TRIM – a dynamic micro simulation model  Data for the entire population for the years 1967–2007 on: – Income – Age at withdrawal of disability pension or contractual early retirement pension – Births and deaths – Marital status  Projections for these variables for the next 50 years – Projections based on historical observations, using matching techniques and estimated transition probabilities  Changes in labour supply due to reform modelled as exogenous assumptions

11. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 11 Agenda  The Norwegian pension system and the 2011 pension reform  TRIM: A micro simulation model for pensions  Projected effects of the reform

12. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 12 Only 40 per cent actually affected by the incentives of the reform? Distribution of new old age pensioners in 2009 according to status before retirement

13. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 13  The expenditure of the public pension scheme will still be financed pay-as-you-go, and as an integrated part of public finances  Disney (2004) proposes to measure the fiscal burden of the public pension scheme as: “the average rate (on earnings) that would be required to finance current spending on public pensions without budgetary transfers or the accumulation or decumulation of public pension funds”  Contribution rate (CR): Adequate tax rate on labour and pension income in order to finance public pension expenditure Sustainable reform?

14. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 14 Sharp increase in adequate tax rate, even with reform

15. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 15 Distributional effects Annual pension in 2050 by percentile, without effect of flexible retirement and life expectancy adjustment

16. Technical Seminar of the ISSA Technical Commission of Statistical, Actuarial and Financial Studies Montevideo, Uruguay. –April 27-28, 2010 16 Thank you for your attention! Some reports in English: Christensen A., Fredriksen D., Lien O. and N. Stølen (2010), «Pension Reform in Norway» NOSOSCO (2008): «Old-age Pension Systems in the Nordic countries»