Since 2011, Norway’s national pension provider has been calculating the life expectancy of those turning 61 as part of pension reforms introduced at that time. It then factors the calculation into the pension benefits people in that cohort will receive.
The National Insurance Scheme, which is the standard public pension Norwegians pay into during their working lives, implemented the change as part of reforms to address Norwegians’ increasing longevity. Each year, the scheme calculates the life expectancy of the new cohort of Norwegians turning 61. The longer their life expectancy, the higher the divisor used to calculate their pension entitlements.
The National Insurance Scheme is a large source of retirement income for people with modest earnings, says Vidar Pedersen, national pension practice leader for Aon in Norway. The life expectancy rule also applies to the Avtalefestet Pensjon, an early retirement pension scheme that covers all public sector employees and about half of Norway’s private sector workers. As such, through one scheme or another, most Norwegians will see an impact on their pension income from the change, although other private plans aren’t subject to the rule.
“When the life expectancy of the population increases, one will have to work a little longer in order to be entitled to the same annual pension, because the pension entitlement one has earned will have to be divided on a longer life expectancy,” Norway’s Ministry of Labour and Social Affairs noted in a 2015 document on the issue.
Boosting labour participation
Norway’s move to take life expectancy into account when determining pension payouts is part of a larger labour strategy aimed at boosting workforce participation, says Pedersen.
The issue in Norway isn’t necessarily about unemployment but, rather, the low numbers of people seeking to enter the workforce. Women, for example, have a very healthy representation in the labour market, says Pedersen. As a result, there isn’t a large cohort of people waiting for a chance to participate in the economy, he notes.
Young people in Norway are also taking longer to complete their education and, as a result, are entering the workforce later and spending less time in it overall, says Pedersen. That means they’ve had less time to build up pension entitlements throughout their careers. “If you’re going to be receiving . . . social welfare when you grow up, you go to school, you go to universities, you take out all sorts of benefits from the social welfare system and then you’re going to be a retiree for 20 to 30 years. You simply don’t have enough years to finance [retirement] if your work life is only 30 to 35 years,” says Pedersen.
As a result, the government has been looking to encourage Norwegians to spend a few extra years on the job, says Pedersen. Another part of the reform that works in tandem with the life expectancy changes allows those nearing retirement more options. Older Norwegians can now work while collecting their pension from the National Insurance Scheme as of age 62. They can collect the pension at a rate of 20, 40, 50, 60 or 80 per cent, according to Ole Christian Lien, head of section at the department of research and analysis in the benefits budget unit for Norway’s directorate of labour and welfare. They can also continue to contribute to their pension entitlement by working longer, while simultaneously partially withdrawing from the scheme, until age 75 and without penalty.
“There’s a quite significant increase in the participation in the age group around 60 plus,” says Pedersen of the effects of the changes. “Particularly, 62- through 64-year-olds participate in the workforce to a much higher extent now than they used to.”
Seniors are now staying about two or three years longer in the workforce, which eases the increased liabilities the National Insurance Scheme was experiencing, says Pedersen.
Christian Lien agrees the changes made in 2011 have had a significant effect on how older Norwegians approach retirement. “The possibility to withdraw your pension already at age 62 and continue working full-time has been a very popular choice so far.” He noted that while 40 per cent of qualifying pensioners begin to withdraw at age 62, 60 per cent of those in that group continue to work.
“It has been argued even that increased tax revenue from the increased work participation has financed the increased pension takeout entirely. So it’s been a plus for the government,” says Pedersen. Indeed, data from Eurostat, the statistical office of the European Union, shows that in 2016, Norway’s seniors were particularly active in the economy. According to the data, 18.9 per cent of Norwegians aged 65 to 74 were economically active, which put the country behind first-place Iceland at 40.6 per cent and Estonia at 26 per cent.
When it comes to participation in the workforce, employers are, of course, a key part of the equation. So how are employers reacting in Norway where, despite the encouragement to work longer, seniors now have the option of retiring at 62 instead of waiting until age 67? One study that looked at the issue showed Norwegian employers tend to respond positively to a lower retirement age. The report, authored by Trond Vigtel and published by the Ragnar Frisch Centre for Economic Research at the University of Oslo in 2018, showed that with the retirement age reduced by just one year, the probability of employers hiring workers aged 50 to 61 rose by 4.2 per cent. The report found a lower retirement age alleviates employers’ concerns about having older employees with health problems who may be less productive as they age.
Gaps in the pension system do remain, according to Pedersen. One issue with making an adjustment based on life expectancy is the difference between the longevity of men and women, he says. In Norway, life expectancy for seniors at age 65 was 21.6 years for women but only 18.9 years for men, according to 2015 data from Eurostat.
As such, there has been an ongoing debate as to whether women should have a higher divisor for life expectancy, says Pedersen.
Another concern, according to Pedersen, is the fact the new rules make pension calculations too complex for many people to grasp. While enough seniors have understood the benefit of working longer for the changes to have made an impact, many won’t be able to check for themselves whether their pension amounts are correct or understand how they work, he says.
“Today, everything is automatically digitalized. If a rule is incorrectly implemented in the system, it affects everybody. And you have no real recourse and no proper way of complaining or having your case looked over. You can have some challenges like that when you implement a system that is decidedly quite complex for ordinary people to understand.”
Martha Porado is an associate editor at Benefits Canada.