What Is the Cost of Total Pension Provision and Who Pays the Bill? Cross-National Comparison of Pension Contributions

Kokonaiseläke 2016 Kokonaiseläke FINNISH CENTRE FOR PENSIONS, 09 REPORTS 2016 Katsaus työeläkkeen, kansaneläkkeen ja verotuksen määräytymiseen ja verotuksen kansaneläkkeen työeläkkeen, Katsaus What is the cost of total pension provision and who pays the bill? Cross-national comparison of pension contributions MIKA VIDLUND MARJA KIVINIEMI ANTTI MIELONEN NIKO VÄÄNÄNEN FINNISH CENTRE FOR PENSIONS, 09 REPORTS 2016 What is the cost of total pension provision and who pays the bill? Cross-national comparison of pension contributions MIKA VIDLUND MARJA KIVINIEMI ANTTI MIELONEN NIKO VÄÄNÄNEN Finnish Centre for Pensions FI-00065 ELÄKETURVAKESKUS, FINLAND Telephone +358 29 411 20 E-mail: [email protected] Eläketurvakeskus 00065 ELÄKETURVAKESKUS Puhelin: 029 411 20 Sähköposti: [email protected] Pensionsskyddscentralen 00065 PENSIONSSKYDDSCENTRALEN Telefon: 029 411 20 E-post: fö[email protected] Juvenes Print – Suomen Yliopistopaino Oy Helsinki 2016 ISBN 978-951-691-253-3 (s-b) ISBN 978-951-691-254-0 (PDF) ISSN 1238-5948 (printed) ISSN 1798-7490 (online) Subscribe to our Newsletter (at http://www.etk.fi/en/newsletter/) that present highlights of Finnish pensions and make international comparisons. FOREWORD This report provides new and comprehensive information on pension contribution levels in different European countries. The report is an updated and extended version of previous comparisons published in 2003 and 2008. The comparison is based on country data compiled by the writers of this report. We wish to express our thanks for the comments given and the data provided to us by the following persons: Peter Foxman from the Danish Insurance Association, Arnauld d’Yvoire from Observatoire des Retraites, Cécile Volkleber-McPherson from AGIRC-ARRCO, Yves Guegano from Conseil d’Orientation des Retraites, Nicolas Vanni and Julie Tréguier from Ministry of Social Affairs and Health for France, Markus Sailer from the German Pension Insurance, Ole Christian Lien from NAV and Dag Gausdal from SSB Norway, Sibylle Reichert and Anika Kattemölle from the Federation of the Dutch Pension Funds, Inger Johannisson and Hans Karlsson from the Swedish Pensions Agency, Daniel Wallentin from Försäkringskassan, as well as Salome Schüpbach from Swiss Federal Social Insurance Office BSV and Christine Mayrhuber from WIFO in Austria. We also wish to thank our following colleagues at the Finnish Centre for Pensions for their input: Ismo Risku, Marjukka Hietaniemi, Risto Vaittinen, Susan Kuivalainen and Kati Kuitto for their comments; Suvi Pohjoisaho for preparing the manuscript for publication, and Lena Koski for checking the language. We also extend our gratitude to Mauri Kotamäki from the Ministry of Finance for providing valuable background information. As the authors of this report, we take sole responsibility for the interpretations presented in it and for any possible inaccuracies. SUMMARY In this report we compare the level of pension contribution income in nine different European countries; Austria, Denmark, Finland, France, Germany, Netherlands, Norway, Sweden and Switzerland. The aim of the report is to give a comprehensive picture of the total costs of basic and earnings-related pensions. Therefore, individual savings or so called third pillar pension provision is not included in the analysis. Our focus is on the contribution income of statutory and occupational pensions together with the general tax revenues allocated to pension provision. This type of comprehensive comparisons is seldom conducted. Typically international statistics and comparisons only include statutory pension expenditure and contribution income. In addition to the contribution level, another aim of this report is to study the decomposition of the contributions into the employer’s and the employee’s shares as well as the share of general tax revenues in pension financing. There are significant differences in how pension provision is structured, not only between countries but also within a country. In this report, we focus only on a macro-level comparison. The pension contributions have been compared first and foremost in relation to GDP at market prices and to the compensation of employees. For reference the results are also calculated in relation to wage sum and GDP at basic prices. Details about scheme- specific differences in pension financing can be found in the report’s country fiches. In general, the total pension contribution is roughly at the same level in all of the compared countries. The highest contribution levels were found in Denmark and Austria: 16 and 15 per cent of GDP respectively, or 30 per cent of the employee compensation. Correspondingly, the two countries with the lowest pension contributions are Sweden and Germany, even though their position varies somewhat depending on the indicator. The contribution level amounted close to 13 per cent of GDP in both countries. The average level was around 14 per cent of GDP, corresponding to 28 per cent of the employee compensation. On average, the level of pension contributions has increased compared to the results of the previous study almost a decade ago. This is largely due to the ageing population with increased expenditure of old-age pensions. Our main observation concerns the convergence of the contribution levels of the different countries, when taking into account all basic and earnings-related pension schemes. One of the key results of our report is that, in cross-national studies, it is important to take into account different structures of pension provision and to be aware of the total pension provision. Both significantly affect the results. Thus, a straightforward comparison of statutory pensions is not sufficient since there are comprehensive supplementary pension schemes which are of growing importance in many countries and, in some countries, even broadly equivalent to earnings-related statutory pension schemes. A decomposition of contributions reveals that employers’ contributions tend to represent the greatest share of contributions with the exception of Denmark where the share of tax revenues is dominant. The tax revenues’ share of the premium income is significant also in Austria and Germany. Employees contribute the most in the Netherlands and Switzerland and the least in Denmark and Finland. CONTENTS 1 Introduction ...................................................................................................................................................7 2 Data and methodology ......................................................................................................................... 11 3 Overall structure and financing of pension provision ............................................................ 12 3.1 Structure, coverage and level of old-age pension provision ............................... 12 3.2 Financial structure of pensions ......................................................................................... 16 3.2.1 Financing of the statutory pension schemes .................................................. 16 3.2.2 Financing of occupational pensions ................................................................... 18 4 Main results ................................................................................................................................................ 20 4.1 Pension contributions in relation to wages and GDP ............................................. 20 4.2 Division of costs – who pays the bill? ............................................................................ 22 4.3 Pension contributions and expenditures ..................................................................... 24 5 Discussion .................................................................................................................................................. 26 6 Conclusions ............................................................................................................................................... 31 References ......................................................................................................................................................... 33 Annex 1. GDP, compensation of wages and salaries in 2010–2014 ..................................... 37 Annex 2. Pension schemes covered in the study ........................................................................... 39 Annex 3. Differences between indicators ........................................................................................... 40 Annex 4. Pension contribution income in relation to wage sum and GDP at basic prices in 2014 .............................................................................................................................. 42 Country fiches .................................................................................................................................................. 44 What is the cost of total pension provision and who pays the bill? – Cross-national comparison of pension contributions 7 1 Introduction Pension systems are one of the main components of any European welfare state. Pension insurance forms the lion’s share of social insurance expenditure, and it is financed through a variety of mechanisms that differ across countries, combining both public and private actors. Their financing touches upon the very core of the welfare state as boundaries between adequacy, sustainability, equality, solidarity and intergenerational equity need to be addressed. Thus, pension systems are

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