Today’s column will add to the collection because we’re going to look at Iceland’s remarkable system of personal retirement accounts.
We’ll start with two charts.
Here’s a look at private retirement assets as a share of GDP. As you can see, OECD data shows Iceland leads the world.
Even more impressive, there is also OECD data (page 223/225) on government retirement spending in developed nations.
Once again, the country with the best outcome (i.e., smallest burden of government outlays) is Iceland.
These two charts show the amazing results of Iceland’s system.
Now let’s look at some details of how the system works. It began in 1969, but became universal in 1997 and required a total of 12 percent of income to be set aside for retirement.
The Pension Act No. 129/1997 provides for a mandatory affiliation to the pension fund provided for in the applicable collective agreement, for all workers between the ages of 16 and 70. The membership of a workers’ pension fund is determined by the collective agreement on which the basic wages for each worker are determined. The minimum contribution is 12%, of which 4% are deducted from the worker’s wages and 8% which is added by the employer. The contribution base is comprised of all types of wages or compensation for work which is subject to income tax. …The workers 4% contribution is deducted from his income before taxes are levied. The tax liability is postponed in the sense that the pension benefits are taxed as income from employment when they are eventually paid out.
Since then, the employer contribution has been increased from 8 percent to 11,5 percent, meaning the overall rate of mandatory savings is now 15. 5 percent.
On July 1, the contribution rate paid by private-sector employers under Iceland’s mandatory occupational pension program rose from 10 percent of an employee’s gross earnings to 11.5 percent. The increase is the last of three rate increases approved by the Icelandic Confederation of Labor and the Confederation of Icelandic Employers (which represent private-sector workers and employers, respectively) in a 2016 collective agreement. The previous rate increases were from 8 percent (the statutory minimum) to 8.5 percent in July 2016, and from 8.5 percent to 10 percent in July 2017. The rate increases are intended to raise additional revenues for Iceland’s pension funds and to harmonize occupational pensions for public- and private-sector employees; the 11.5-percent contribution rate paid by private-sector employers now matches the rate paid by the government for its employees.
I’ll close with three comments.
First, all labor economists agree that mandates on employers are actually paid by employees. As such, the employer contribution rate (originally 8 percent, now 11.5 percent) is actually paid by workers.
