What We Can Learn From Norway About Retirement
Pension reforms in The Land of the Midnight Sun are worth emulating
During his first TV debate with Hillary Clinton for the Democratic nomination, Sen. Bernie Sanders remarked: "We should look to countries like Denmark, like Sweden and Norway and learn from what they have accomplished for their working people." Clinton didn’t buy it. "We are not Denmark," she replied. "I love Denmark. We are the United States of America, and it's our job to rein in the excesses of capitalism so it doesn't run amok."
Of course, Clinton’s right; the U.S. isn’t Denmark, or Norway or Sweden. But that doesn’t mean we shouldn’t learn from public policies that work there (or anywhere else) and see if they’re worth adopting here. Case in point: retirement.
In the past few years, Norway, in particular, has made a few smart changes to its retirement system that have been a huge help to its residents and to its employers. Norway was No. 1 in the 2016 Natixis Global Retirement Index, a data-driven ranking of retirement security in 43 countries that my Next Avenue colleague, Richard Eisenberg wrote about in July.
Pensions: Common in Norway, But Not Here
In Norway — as well as Sweden, Denmark, Germany and the rest of the major industrial nations — public- and private-sector workers are covered by some kind of pension. Yet in the U.S., about half of corporate employees lack access to an employer-sponsored retirement plan.
“When I go to conferences in Europe and I tell them that half of American workers don’t have pensions they’re shocked,” says Anthony Webb, research director of the Retirement Equity Lab at the Schwartz Center for Economic Policy at the New School for Social Research.
Norway has a government-provided retirement pension along the lines of Social Security. But in 2011, the country did something pretty clever that went beyond it. Norway overhauled its private-sector pension system known as AFP to encourage older Norwegians to stay employed.
How Norway Improved Its Retirement System
Most Norwegian companies are required to provide AFP pensions to workers in retirement. But before 2011, those workers could retire between age 62 and 67, the size of their AFP pension benefits depended on their employment earnings (means testing) and there was no financial reward to postpone receiving the benefits until age 67. No surprise, most workers started taking their pensions around age 62.
Starting in 2011, however, the AFP pension benefit was no longer means-tested based on employment earnings, so Norwegians wouldn’t be penalized if they wanted to keep working while earning retirement benefits. And the size of the pension now grows each year a worker delays filing to claim it, until age 75. (You can learn more about this by reading the research paper, “How Does Retirement Behavior Respond to Drastic Changes in Social Security Rules? Lessons from the Norwegian 2011 Pension Reform” by economists Christian Brinch of Norwegian Business School, Ola Vestad of University of Chicago and Statistics Norway and Josef Zweimüller of University of Zurich).
So what was the result of these reforms? The percentage of AFP-eligible workers who claimed benefits at 62 rose from 30 percent to 50 percent, but the fraction who continued working after claiming at 62 shot up by about 13 percent.
In other words, the traditional connection between the decision to file for a pension and to stop working was severed. Welcome to the new world of unretirement.
“The most important lesson is when you remove the earnings test and give people flexibility over when to start their benefits, people are much more likely to continue working past their early retirement date,” said co-author Vestad. “People seem to appreciate the opportunity to take their benefit and continue working.”
Retiring as a Norwegian Would
I see two lessons from the Norwegian experience for the U.S.:
First, the desire to file early for retirement money is powerful, but that doesn’t mean people want to leave the job market when they get the cash.
Almost 40 percent of U.S. workers claim Social benefits as soon as they can — at 62. Yet an analysis by the Economic Policy Institute (EPI) found that not all workers claiming the benefits before their Full Retirement Age of 66 leave the job market. In a 2011 study, EPI economist Monique Morrissey estimated that nearly half of individuals and married couples age 62 to 64 also had earnings from work and those earnings made up nearly one-fourth of their income. “Many people use retirement benefits to supplement income from a full- or part-time job and therefore are not ‘retired’ in the conventional sense,” wrote Morrissey.
Second, the Norwegian experience suggests to me that retirement money in the U.S. should be designed with an eye toward supporting phased retirement, or what I call unretirement.
For example, retirement experts have been eyeing a number of potential changes to let people collect some of their employer-sponsored pensions while working part-time. (The federal government has a new phased retirement program along these lines.)
Eliminating the Social Security earnings test could be another helpful move. The earnings test — which withholds a portion of your benefits if your earnings exceed $15,720 in 2016 and you're claiming before normal retirement age — exacts an unnecessary financial penalty for those who need to supplement their work income in their early 60s.
Combining a universal 401(k) or an IRA for all workers with improved Social Security payouts is an efficient solution.
Who Wants to Work in Retirement
In a series of detailed studies, Joseph Quinn, economics professor at Boston College, Kevin Cahill, research economist with the Sloan Center on Aging and Work at Boston College and Michael Giandrea, economist at the U.S. Bureau of Labor Statistics have documented that a majority of older Americans earn an income in their so-called retirement years. The scholars note that these people typically reduce the number of hours worked, change employers later in life, reenter the labor market after an initial period of retirement and, in many cases, follow some combination of those three paths.
Their research also shows how older workers prefer part-time work. They found the prevalence of part-time bridge employment to retirement was highest among those age 71 to 81 —52 percent of men and 64 percent of women that age. The lowest percentage of part-timers was among younger boomers, age 59 to 64 — 26 percent of men and 39 percent of women.
In other words, stop thinking that working older Americans are the exception. They’re the new normal.
Think Norway! The growing popularity of unretirement in the U.S. means policy makers should recognize that more people will want to combine work income and retirement savings to support themselves well past 62. When it comes to reforming Social Security, pensions and retirement savings, the mantras should be “universal,” “flexible” and “choice.”