2006 Welfare Agreement in Denmark
Like many other countries, Denmark is experiencing a trend of population ageing, which results in pressures on public finances, especially through the pension system. The Danish government has sought to combat this challenge through the 2006 Welfare Agreement (and later on through the 2011 Agreement on Later Retirement). The reform programme was an important step towards reducing the burden of an ageing population on public finances by promoting longer working lives and enhancing employment rates among older people.
The reform had a positive public impact and was partially successful in achieving its goals. Despite this overall success, the Agreement has received some criticism due to a perceived lack of stakeholder engagement and a general tightening of the terms of pension provision.
he 2006 Welfare Agreement, along with the 2011 Agreement on Later Retirement, were key reforms through which the Danish government has sought to reduce early retirement and enhance employment among the elderly.
The Danish government presented its proposal for reform of the Danish welfare system in April 2006. In this agreement it put forward five key objectives:
- “Later retirement from the labour market - making public finances more robust with respect to increasing life expectancy
- “Enhanced labour market policies to increase labour supply in the shorter run
- “Targeted efforts to strengthen employment among immigrants and their descendants
- “Earlier study completion
- “Investments in the future: secondary education for all, more young people with tertiary education, strengthened adult retraining and education, more resources for research and development as well as strengthened innovation and entrepreneurship.”
With regard to the first and second objectives, the reform comprised negative and positive incentives, also known as “carrot and stick”. This entailed increasing the pension age, reducing pension payments, and tightening eligibility conditions on the one hand, while offering education and assistance to elderly people in finding employment on the other.
As part of the negative incentives, the age limit for the state old age pension was to be gradually increased from 65 to 67 years between 2024 and 2027. From 2025 onwards, further changes in the age limits for Voluntary Early Retirement Pay (VERP) and the state old age pension would be implemented if life expectancy were to increase further. The size of VERP remained unchanged, while the contribution period was increased from 25 years to 30 years, providing that it should start no later than the age of 30. Further means testing - linking assistance to personal wealth - was also built into the voluntary early retirement scheme, making it less attractive the more labour market and/or voluntary private pension savings a person was able to build up. The previous right to prolonged unemployment insurance benefits (UIBs) of five years for people over the age of 55 was abolished for those born in 1953 or later.
In terms of positive incentives, or activation policies, the 2006 Welfare Agreement included measures both to keep older people in employment and to integrate unemployed individuals into the labour market. The “seniorjob” scheme concerns the latter objective. This scheme obliged municipalities to offer a seniorjob with a normal wage to all unemployed persons whose UIB had expired and who were entitled to a VERP within the next five years. These public sector jobs are located in the municipal sector of the individual's place of residence.
The Prevention Fund, which was established in 2007, aimed at preventing early retirement through concrete self-help tools. The Fund grants financial assistance to enterprises and organisations interested in initiating innovative measures, namely self-help kits to reduce attrition in working life and to improve occupational health and safety in the workplace. The self-help kits were launched in January 2011 and provide step-by-step instructions on how to improve not only employees' health but also health and safety conditions in industries where workers are at a high risk of burnout.
The 2011 Agreement on Later Retirement, which was passed in the context of the global economic crisis, furthered the goals of the 2006 Welfare Agreement of balancing public finances to sustain the Danish welfare system through pension reforms. With a change in government in the same year, the 2011 agreement also slightly shifted its emphasis towards more focus on education. However, given the budget constraints due to the financial crisis, the changes remained limited, and “sticks have been preferred to carrots”, with the government generally pursuing the same path as its predecessor - tightening criteria for receiving benefits combined with a gradual lowering of the benefits.
Like many other countries, Denmark is facing a trend of population ageing. The ratio of the population aged 65 and over to the population aged 20-64 is projected to increase from 30 percent in 2012 to 43 percent in 2050. As the proportion of older people in Denmark is constantly growing, public finances are coming under pressure. While the employment rate for the age group 55-64 in Denmark was at 59.5 percent in 2005, well above the OECD average (51.6 percent), it remained well below the target rate of 70 percent and the rates in neighbouring Iceland, Norway and Sweden.
One reason for this lower rate of old age employment was the pension system, which incentivised early retirement - a legacy from a time when jobs were mostly focused on physical labour. The challenge was therefore to help the ageing labour force become more active in the job market, enabling them to contribute to the pension system for longer, while at the same time relieving the burden on public finances. This reflects an EU-wide policy orientation, which views successful reform as a priority for the long-term sustainability of public finances and, more recently, as one of the determinant factors to achieve the 75 percent employment target laid out in the Europe 2020 strategy.
The public impact
The 2006 Welfare Agreement, along with the 2011 Agreement on Later Retirement, have been widely successful in increasing employment for older people, despite not reaching the levels of Denmark's Scandinavian neighbours. The measures were also effective in cushioning the effects of the global financial crisis on the Danish job market.
Owing to the outbreak of the global financial crisis, which hit Denmark relatively hard, labour force participation of those aged between 55 and 64 decreased between 2006 and 2008. However, the 2006 welfare reform and, later, the 2011 agreement ensured a quick recovery and subsequent growth in employment for this age group, from 59.9 percent in 2008 to 70.6 percent in 2016. The employment rate among people aged 65 and older has also increased, albeit much less dramatically, from 5.1 percent in 2006 to 8.4 percent in 2016. While these numbers are high in comparison with the EU average (5.7 percent employment of the population older than 65 in 2016), they remain below the OECD average (14.5 percent) and that of their Nordic neighbours (Iceland 40.5 percent; Norway 18.8 percent and Sweden 16.1 percent).
A relatively rapid phasing-in of the shorter maximum duration of UIBs, combined with a difficult labour market in the context of the global financial crisis, made the activation programmes especially important in preventing a growth in unemployment. Indeed, the global financial crisis and the abrupt decrease in the maximum duration of the UIBs led to a rapid inflow to the seniorjob scheme. In addition, people who exhausted their rights to UIBs in 2013 were eligible for a special education allowance: this benefit has a maximum duration of twelve months for those who become unemployed in the first half of the year, and of six months for those who become unemployed in the second half of the year.
The overall impact of self-help kits provided by the Prevention Fund was also found to be positive. The enterprises' own judgment as well as evaluators' critical analysis showed that the kits improved the methods used to achieve physical and psychosocial occupational health and safety, as well as occupational health and safety outcomes.
Written by Mirjam Buedenbender
This case study is part of a series of international policies that focus on easing the transition to retirement and later life. The case studies and the accompanying report were produced for the Calouste Gulbenkian Foundation (UK Branch).
Evidence concerning stakeholder engagement in preparing the 2006 Welfare Agreement is mixed. On the one hand, the Danish government appointed an independent commission to include the voices of different stakeholders in the reform process. On the other hand, traditional social partners - trade unions and employers' organisations - were excluded, as part of a more general shift away from Denmark's tradition of social corporatism, which was based on a social partnership between the interests of the state, employers and workers.
The policies of the 2006 Welfare Agreement were based on studies conducted by an independent Welfare Commission. The commission was set up by the Danish government and operated between 2004 and 2006. It comprised of a chairman and eight expert members, primarily from the academic world and the business sector, and had an independent secretariat of 15 to 20 persons. In addition to thoroughly analysing the situation and advancing reform proposals, the commission represented an effort by the government to create a basis for a broad public debate. To this end, the commission invited different stakeholders to share their suggestions in the form of reports and conference contributions.
Despite these attempts to engage stakeholders in the design of the Welfare Agreement, traditional social partners were not formally represented in the Welfare Commission. Instead, they were given the role of informal advisors who could give input via their own reports and events. The changing role of social partners from members of the public administration to informal advisors represented a more general departure from Denmark's strong social corporatist tradition. Both trade unions and employers' organisations opposed this shift.
Protesting against the exclusion of social partners from the commission and its perceived neoliberal trajectory, Social Politisk Forening - the then Danish social policy association, part of the international professional association of social policy workers - set up an Alternative Welfare Commission, which aimed at engaging in a broader debate and publishing its own reviews and policy suggestions.
The political commitment of the Danish government and most parties represented in parliament to the Welfare Agreement was strong. On the basis of the report by the independent Welfare Commission, the ruling conservative People's Party presented its policy proposals for the Welfare Agreement in April 2006. In June of the same year, parliament passed the reform, with the support of the Social Democrats, the Danish People's Party, and the Social-Liberal Party. A broad majority of 158 of the 179 members of parliament therefore backed this agreement.
The 2011 Later Retirement Agreement was also proposed by the conservative government. However, following the September 2011 election, the reform was passed by the new governmental coalition of Social Democrats, Socialists, and Social Liberals, demonstrating the strong cross-party political support for pension and welfare reforms.
Public confidence in the Welfare Agreement was mixed. On the one hand, it appears that there was significant political support for reform. According to the political scientist Robert Henry Cox, political leaders specifically framed welfare reforms “in ways that generated widespread support for reform initiatives”, for instance by praising work and individual achievements over the solidaristic values of the traditional Danish welfare state. The National Reform Programme First Progress Report published by the Danish government in October 2006 also identified strong popular support, stating that: “A number of opinion polls show that the new agreement focusing on Denmark's future prosperity and welfare has been positively received by a clear majority of Danish citizens”.
On the other hand, different social actors expressed public criticism of the welfare reform and the shift from social solidarity to contribution-based assistance. For instance, the shortening of the benefit period and the loss of rights for welfare state support following the 2011 reform caused strong protests among social activists and trade unions. Dr Preben Brandt, founder and director of the social NGO Project Outside, also viewed the welfare reform critically, suggesting that “today, the system … has effectively changed from a system rooted in solidarity to one rooted in individualism”.
Denmark's social democratic Prime Minister, Helle Thorning Schmidt, under whose rule the 2011 Late Pension Agreement was passed, made clear that the reforms were not about popularity but were an issue of necessity: “I think we have found the right formula, not to be popular... but to do the right thing… Reforms are necessary and we will not stop”.
Clarity of objectives
The 2006 Welfare, and subsequently the 2011 Late Retirement Agreement, had the clearly set out the goal of promoting employment, especially among the older population, in order to reduce the burden of an ageing population on public finances. This objective reflected the European Union's employment strategy, which promoted increased employment and quality of work together with a strengthening of social cohesion.
On the basis of the analysis and recommendations of the independent Welfare Commission, the Danish government pursued this overarching objective through the five goals set out above in The Initiative.
To achieve the first goal, of later retirement from the labour market, it identified the following targeted measures:
- Increasing the age thresholds for the voluntary early retirement scheme and pensions by two years in the periods of 2019-2022 and 2024-2027
- Indexing the age thresholds in the retirement system to life expectancy of 60-year-olds, so that the expected period of total retirement will be maintained around 19½ years.
The second goal - enhanced labour market policies to increase labour supply in the short run - was pursued through the continuation of the labour market reforms of previous decades and a further increase in activation measures, such as the seniorjob scheme.
The Danish government, the European Commission and the OECD constantly monitored these measures, the results of which were then published in different documents, including Denmark's National Reform Programme Progress Reports. This allowed the government to review and adjust its policies in order to ensure the success of its long-term goal.  The direction of the 2006 and 2011 reforms, namely promoting longer working lives and tightening pension benefits, have since become the basis of several reforms and other initiatives through which Denmark aims to achieving the overall targets in the Europe 2020 strategy.
Strength of evidence
Evidence underpinning the design of the 2006 Welfare Agreement was based on the 2003-05 multi-country OECD review of ageing and employment policies, the 2005 OECD report Ageing and Employment Policies: Denmark, and subsequent research conducted by the Danish independent Welfare Commission.
The OECD multi-country review studied 21 countries and put forward an agenda for reform in the following three broad areas where policy action was deemed necessary to encourage work at an older age, namely:
- Strengthening financial incentives to carry on working
- Tackling employment barriers on the side of employers
- Improving the employability of older workers.
The Welfare Commission started with the findings of the OECD study and then analysed ways to reform the Danish welfare system, especially with regard to labour supply and employment policies and possibilities of financing the new system. In order to do so, it drew on national level statistical data, such as the Labour Force Survey (LFS) - which is conducted quarterly and is based on a sample of the population of 85,000 Danes a year, aged 15 to 74 - and the statistical models provided by the DREAM group, an independent semi-governmental institution which conducts a variety of statistical and descriptive analyses of the Danish economy. The Welfare Commission also studied how other countries addressed the challenges of population ageing and pension reforms.
The feasibility of the 2006 Welfare Agreement was supported by strong political commitment, appropriate legislation, and financial investment. The fact that the 2006 and 2011 agreements were quickly passed by parliament indicates the strong legislative and political support for the reforms.
Denmark allocates a significant part of its GDP to social expenditure. Most of the initiatives linked to the 2006 reform were financed first through national funds, while the EU Social and Regional Funds have also contributed. Denmark's tradition of high welfare spending - its ratio of public social spending to GDP was above 25 percent in 2014, the fourth highest in the OECD  - also meant that the country did not have to reorganise its budget fundamentally to allow for the funding of the reform package.
The 2006 Welfare Agreement was managed through a complex multilevel system - reaching from the European Commission to regional labour market councils across Denmark. However, central power lies with the country's parliament, which has the power to adopt or reject legislative changes and which decides on the total allocations for labour market measures.
Before the reform package was presented to parliament, the Ministry of Employment drafted policy and legislation with advisory assistance from the National Labour Market Council (NLMC) and by considering the input of additional organisations, such as the independent Welfare Committee, and work by supranational institutions such as the European Commission and the OECD. The National Labour Market Authority (NLMA) then determined the state-level targets and the results to be achieved at the regional level, in consultation with the NLMC.
Within the national framework, the Public Employment Services (PES) is the executive branch that implements the policy guidelines set out by the NLMA and the regional Labour Market Councils. Administratively, the PES sits under the NLMA. The 14 regional directors are appointed by the Minister of Employment and have the ultimate legal responsibility for ensuring that the decisions made by regional Labour Market Councils comply with state legislation rules and regulations. Formally, the regional director is secretary to the regional Labour Market Council, and the 14 regional head offices of the PES serve as secretariats to the Councils.
Operationally, reforms were implemented through 91 job centres, which are responsible for the unemployed; most of the job centres have a shared leadership of state and municipal representatives. One crucial change since the 2006 Agreement is the reduced power of unions in the management of labour market polices and reforms. Social partners are no longer part of public administration, instead being only given advisory roles.
Drawing on national statistical data and feedback from regional Labour Market Councils, the Annual National Reform Programme Progress Reports published by the government systematically reviewed the effectiveness of the measures implemented to achieve the reform objectives. The OECD also published follow-up documents, such as the Ageing and Employment Policies: Denmark 2015 report, in which it analysed reform progress and identified areas requiring further attention or policy revisions.
In addition, stakeholders and non-governmental research bodies examined the effectiveness of specific measures. For example, the effectiveness of the self-help kit launched by the Prevention Fund was evaluated in 2014 by leading independent thinktank, Oxford Research, and the Danish research and development company, Kubix.
The government continuously revised its reform measures in line with the findings of the different review mechanisms. For example, reacting to the National Programme Progress Report of 2006, the government launched new senior policy initiatives including a knowledge base of good senior practices and further financing mechanisms to promote the retention of elderly employees in the labour market.
A number of measures supported the alignment of the actors and stakeholders involved in the 2006 reform programme. For example, different stakeholders were invited to contribute suggestions and research to the annual Programme Progress Reports. This information was then available for improvements in subsequent years. In addition, the government launched various programmes to ensure that employers, employees and jobseekers were given platforms to actively cooperate in realising the reform measures. For example, a number of job banks where unemployed persons and employers could meet in an informal way were set up throughout Denmark, ensuring their effective collaboration at a local level. Efforts were also made to measure the satisfaction and wellbeing of employees, as well as encouraging an active dialogue between employers and persons on long-term sick leave regarding the reasons of absence.
However, the exclusion of social partners from formal positions in the public administration of the reforms somewhat weakened this alignment. Decentralisation also created some tensions between the central state and the municipalities concerning control over the implementation of reforms. While municipalities have full responsibility for employment and retirement policies, they are strictly controlled by national-level performance checks, benchmarking, and the use of new public management techniques. This has turned them primarily into deliverers of national services, without much autonomy for local political decision-making, which caused criticism from job centre executives, frontline workers, and the unemployed themselves. Danish researchers described the situation created by the reforms as follows: “The municipalities are fully responsible for activities, but at the same time the state is strengthening its control arrangements and its power potentials … - but in a schizophrenic way”.
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