Higher pension savings linked to higher debt in Denmark, study finds

A steep incline in pension savings in Denmark since the 1990s has coincided with a strong rise in household debt, a study by Danmarks Nationalbank, the European Stability Mechanism, and several economists has found.

It found that on average, a DKK 100 increase in pension wealth leads to a DKK 26 increase in total debt. The study has concluded that there may several explanations as to why higher pension savings and higher debt go hand in hand.

It may be that pension funds invest in real estate and mortgage bonds, which could cause house market prices to go up and homebuyers to become more indebted. Another explanation could be that household behaviour changes when households are forced to save for retirement, something that the economists have looked into.

The Danish pension system consists of three pillars: tax-funded pensions (old-age state pension), mandatory pensions (occupational pensions) and voluntary, savings-based pensions. Occupational pensions have been part of the collective agreements system since the 1960s. They became prevalent in the private labour market in the early 1990s following the conclusion of pension agreements under collective agreements between the social partners (LO, Danish Trade Union Confederation, and DA, Confederation of Danish Employers).

Analysis by the economists looked at when mandatory occupational pension schemes were introduced at different times in the public and private sectors. They examined the debt level of people with identical job titles who have been employed in the public and private sectors at different times.

The study found that the gradual introduction of mandatory pension schemes means that some people have saved more for retirement than others. The analysis shows that people with higher pension savings also tend to have higher debt and that an increase in pension savings may be due to both mandatory occupational pension schemes and higher contributions to private pension schemes.

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