Parliament approves a leaner, meaner early retirement

Cushy national early retirement programme scaled back, burying six years of political wrangling

Years of public debate ended on Wednesday when parliament passed a bill that will gradually raise the retirement age to 69 and pare down the once commodious early retirement programme called efterløn.

Since 2006, efterløn has been Denmark’s white elephant, the expensive state-subsidized early retirement goodie that would-be reformers only handled at their own peril.

The political right, the then government, made eliminating efterløn its project, while the opposition political left – supported by the labour unions whose blue-collar members make up the largest part of efterløn’s partakers – based their election challenge on protecting efterløn.

Negotiations over the Venstre-Konservative (VK) government’s proposed plan to eliminate efterløn began in early 2011, but the government lacked the majority it needed to carry the plan.

In the end, the centrist Radikale (R) party broke with their bloc, to negotiate with VK and its right-wing ally Dansk Folkeparti to trim the efterløn programme and save the state an estimated 16 billion kroner in outlays per year. Their agreement to reform – but not eliminate – efterløn was reached in May 2011.

That agreement marked a defining moment in the run-up to SeptemberÂ’s parliamentary election.

Voters rewarded, rather than punished, R for breaking with its left-wing bloc. Meanwhile, Socialdemokraterne (S) and Socialistisk Folkeparti (SF) – who had refused to negotiate – were forced to concede that a majority of Danes were no longer diehard supporters of efterløn. As a result, R emerged as, in some ways, the power partner in the new S-R-SF government.

The early retirement programme was introduced in 1979 with hardly as much controversy. The reasoning at the time was that people working very physically or psychologically demanding jobs should have the opportunity to retire early, even if they were not so ill or ‘worn out’ that they could qualify for disability.

A second justification for efterløn was to encourage mature workers, who were still a few years short of the retirement age, to leave the workforce early and free up jobs for the younger generations.

When efterløn was first introduced, it was assumed that some 17,000 people would retire early. In actuality the number quickly shot upwards of 100,000. In 2009, 135,503 Danes were on efterløn at an estimated cost to the state of some 37 billion kroner per year, taking into account lost tax revenue from the reduced workforce, according to the Finance Ministry.

Although efterløn is partly financed by personal contributions, the state also makes a sizable contribution. As the population aged, the political will to reform efterløn began to germinate – at least among the right-of-centre parties.

A study of the efterløn programme and the people in it was undertaken in 2006 by a commission appointed by the former VK-government. The study revealed that people who went on efterløn tended to be just as healthy and vigorous as those who continued to work until retirement age. Although, that conclusion was challenged by the trade union confederation LO, which claimed that the people who took efterløn generally took two to three times as many sick days per year before they went on early retirement as others did.

The study also revealed that a majority of people on efterløn did it to have more time for hobbies, family and friends, rather than due to any physical or mental exhaustion that prevented them from continuing to work.

Proponents of reform thus argued that the efterløn programme, in essence, financed voluntary early retirement on the public’s bill – and the majority of the people taking it were blue-collar workers.

Now that the reforms were ratified by parliament on Wednesday, workers who have been making contributions to personal efterløn accounts will have the opportunity to withdraw their money in one tax-free lump sum, as long as they do it between April 2 and October 1, 2012.

However, some financial analysts have cautioned against withdrawing the funds, as doing so disqualifies one from the seniorjobordning, a council-provided salary subsidy for working seniors.

Those who leave their money in the trimmed-down programme, will have the option of taking the shorter and smaller early retirement package, or a tax-free bonus of up to 143,400 kroner, in 2011 figures, if they decide to continue working until retirement age, reports Jyllands-Posten.

The payout for taking early retirement will now be much smaller, especially for those born after 1955. For example a teacher born in 1955 who decides to take the new three-year-long early retirement will receive 196,860 kroner per year in 2011 figures. A teacher born in 1975, on the other hand, will now receive just 80,100 kroner per year for three years, according to the DREAM economic simulation model.

Under the reforms, someone born before 1954 can still take early retirement at age 60 and full retirement, with pension benefits, at age 65. But someone born after 1967 will first be allowed to take early retirement at age 66 and full retirement at age 69.