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Abstract
The pension system in Iceland is chiefly characterised by the operation of occupational pension funds. Although the minimum contribution rate is set by law, the system is not a pure defined contribution system as the minimum benefits are also stipulated in the pension law. The system is thus a hybrid between a defined benefit and a defined contribution system. The age distribution among the Icelandic population is relatively favourable, compared with continental Europe, and the number of retirees, compared with the working age population, is currently low and is estimated to remain so for the next few decades. The asset-building nature of the current pension system therefore makes it unlikely that a higher dependency ratio will result in a fund shortage or require higher taxes to finance retirement schemes in the future. This paper describes the Icelandic pension system in detail.
Keywords: Iceland, pension arrangements, occupational pensions
Overview
The pension system in Iceland is chiefly characterised by the operation of occupational pension funds. These funds became general in 1969 and mandatory by law in 1974. This resulted from general wage settlements after tri-party negotiations between labour unions, the Federation of Icelandic Employers and the state. Under the agreement, every wage earner working in the private sector is obliged to contribute a minimum of 10 per cent of their wages to an occupational fund of their choice or, in most cases, a fund predetermined by their trade union. However, more than half of the burden is carried by the respective employer, who currently contributes a minimum of 6 per cent of the total contribution. Although the minimum contribution rate is set by law, the system is not a pure defined contribution system as the minimum benefits are also stipulated in the pension law - the minimum replacement ratio for a 40-year contribution is 56 per cent. If the benefits go below this threshold, the contributions have to be raised. The system is thus a hybrid between a defined benefit and a defined contribution system.
State employees have a similar, but more generous, arrangement as full pensions rights are earned by contributing for 32 years, compared with 40 years on the general labour market. The state employee system is a defined benefit system -...