This Background Paper examines the medium-term economic outlook (1997–99) for Norway. The central feature of Norges Bank’s reference case projection for the medium term is that the expansion of mainland output will slow from 3.3 percent in 1995 and 2.8 percent in 1996 to an annual average of 2 percent in 1997–99. Overall GDP growth will also slow from about 4 percent in each of 1995 and 1996 to 2 percent in 1997–99. Inflation is forecast to remain low, at 2 percent in 1996 and on average 2.3 percent per year in 1997–99.

Abstract

This Background Paper examines the medium-term economic outlook (1997–99) for Norway. The central feature of Norges Bank’s reference case projection for the medium term is that the expansion of mainland output will slow from 3.3 percent in 1995 and 2.8 percent in 1996 to an annual average of 2 percent in 1997–99. Overall GDP growth will also slow from about 4 percent in each of 1995 and 1996 to 2 percent in 1997–99. Inflation is forecast to remain low, at 2 percent in 1996 and on average 2.3 percent per year in 1997–99.

VI. The Norwegian Social Insurance System 1/

1. Introduction

The National Insurance Scheme (NIS), along with the Family Allowance Scheme (FAS), 2/ forms an integral part of the Norwegian welfare and redistribution system. The NIS covers basically all Norwegians and persons working in Norway and is financed on a pay-as-you-go basis through contributions and from general tax revenue. It provides a host of benefits, including old-age, survivors and disability pensions, occupational injury and rehabilitation benefits, medical and cash benefits in case of sickness and maternity and funeral grants, as well as unemployment benefits. 3/

With rather generous levels of benefits 4/, the costs of the NIS are not insignificant. In 1994, total NIS expenditures amounted to 29 percent of central government expenditure, or around 14 percent of GDP. 5/ Also in 1994, 940 thousand persons, or close to 22 percent of the population, received pension benefits from the NIS, with old-age pensioners (620 thousand) and disability pensioners (230 thousand) accounting for more than 90 percent of the total.

In a 1995 white paper on the future of the Norwegian welfare system, the Government committed itself to the maintenance of the basic elements of the NIS for the future but also proposed some reforms at the margin. 6/

This chapter reviews the main elements of the NIS (excluding unemployment benefits), with a particular emphasis on old-age and disability pensions. The first section discusses NIS benefits and their financing. The next section describes some basic data about the costs and the number of beneficiaries of the NIS. The final section reviews some of the welfare system reforms the Government proposed in its 1995 white paper.

2. National insurance scheme benefits and financing 1/

Public pensions play a very important role in Norway. In 1992, NIS pension entitlements accounted for more than 80 percent of all accrued pension rights, with occupational (primarily in the public sector) and individual pensions accounting for the remainder. 2/ Any assessment of NIS pensions needs to take this into account.

Long-term benefits from the NIS are determined in relation to a basic amount, which is adjusted by parliament once, or more often, each year, in accordance with changes in the general income level; this implies that benefits are in effect indexed to the general income level. On January 1, 1995, the basic amount was Nkr 38,080, or the equivalent of about US$6,200.

Old-age pensions essentially consist of two parts, a basic pension and a supplementary pension; in addition there are special supplements for persons with low retirement incomes and means-tested supplements for dependent spouses and children. Earned income after retirement that exceeds the basic amount reduces the pension paid by 50 percent of the income in excess of the basic amount; in general, earned income plus pension should not exceed pre-retirement income.

Any person, who has contributed to the NIS for at least three years between the age of 16 and 66, is entitled to the basic pension. 3/ The basic pension is independent of previous income or contributions paid. However, a full basic pension requires a contribution period of 40 years. 4/ For a single pensioner, the full basic pension is equal to the basic amount for that year. For a couple, both having reached retirement age, the full basic pension is 75 percent of the basic amount for each. Additional provisions relate to different family situations (a spouse, who is not a pensioner; children under the age of 18; etc.).

The supplementary pension scheme was introduced in 1967 with the aim of preventing a marked decline in the standard of living upon retirement. A person is entitled to a supplementary pension if her annual income exceeded the average basic amount in any three years after 1966. Full pension credit is given for income up to six times the basic amount while income between six and twelve times the basic amount receives 1/3 credit and higher incomes none. 1/ The amount of the supplementary pension depends on the number of pension-earning years and the yearly pension credits. A full supplementary pension requires 40 pension-earning years, and is reduced proportionally for fewer years. The supplementary pension is calculated on the basis of the basic amount and the average pension credit for the twenty best income years. Under current arrangements, the maximum supplementary pension entitlements that can be accrued are about three times the basic amount. 2/

As the supplementary pension scheme was introduced only in 1966, older age groups have had no possibility to earn full entitlements. For these age groups special transitional provisions, that allow an accelerated accumulation of pension credits, have been introduced that supplement their entitlements. Furthermore, insured persons with no, or only a small, supplementary pension are entitled to a special supplement. For a single pensioner, this special supplement amounts to about 62 percent of the basic amount. Again special provisions apply to different family situations and for surviving spouses and children.

As a result of the basic pension and the special supplement, the minimum annual pension provided by the NIS to a single person is about 160 percent of the basic amount for annual incomes up to two and a half times the basic amount (Chart 6.1). For incomes between two and a half and six times the basic amount, the annual pension rises rapidly to about three times the basic amount; it rises more slowly for incomes between six and twelve times the basic amount to a peak of almost four times the basic amount, whereafter it is flat. In terms of replacement ratios, the aftertax pension for a single person declines from around 80 percent for incomes below two times the basic amount to just above 30 percent for incomes ten times the basic amount. Similar relationships hold for other family situations.

Disability benefits consist of three parts, basic benefits, attendance benefits and disability pension. Basic benefits are granted if the disability involves significant extra outlays; there are five basic benefit rates (up to about 50 percent of the basic amount), which are adjusted each year by parliament. Attendance benefits are granted if the disabled person needs special attention or nursing; there are four attendance benefit rates (up to about 130 percent of the basic amount), which are also adjusted by parliament each year. Additional provisions apply to these benefits.

CHART 6.1
CHART 6.1

NORWAY: RETIREMENT INCOME OF SINGLE PENSIONERS AS OF JANUARY 1, 1995

(Basic amount = NKr 38,080)

Citation: IMF Staff Country Reports 1996, 015; 10.5089/9781451829624.002.A006

Source: Ministry of Health and Social Affairs.

A person between 16 and 66 years old, whose working capacity is permanently reduced by at least 50 percent due to illness, injury or defect, is entitled to a disability pension if she has contributed to the NIS for at least three years up to the contingency. The structure of disability pensions is similar to that of old-age pensions; they consist of a basic pension and a supplementary pension, and a special supplement is provided for those with low incomes. The supplementary pension is based on the income earned before the disability occurred, taking into account pension entitlements that would have been earned through the age of 66. Special provisions apply to those born disabled or who become disabled before the age of 24; these persons are guaranteed a minimum supplementary income corresponding to an earned income of a little more than four times the basic amount. 1/

The NIS provides a host of benefits in addition to old-age and disability pensions. These include occupational injury and rehabilitation benefits, medical and cash benefits in case of sickness and maternity, family allowances, benefits to single families and funeral grants. For example, in the case of sickness, employees are entitled to daily cash benefits equal to 100 percent of pensionable income (up to six times the basic amount) for a period of one year; the employer is responsible for the first two weeks of cash benefits and the NIS the next fifty. In the case of maternity, a woman, who has worked six out of the ten months preceding confinement, is entitled to daily cash benefits of 100 percent of earned income for 42 weeks, or 52 weeks at 80 percent of earned income; couples have wide latitude in the manner in which they take advantage of maternity leave. Family allowances are cash benefits paid to families with children under the age of 16; they amount to 25-30 percent of the basic amount for each child, with additional benefits for children under the age of 3 and families living in the arctic regions of Norway.

Benefits from the NIS are generally taxed as earned income. 2/ However, some special provisions apply. Old-age and disability pensioners with incomes below a certain minimum level are not liable to pay tax or national insurance contributions on their income. Pensioners with incomes exceeding the minimum level are subject to special tax limitation provisions; their income tax and NIS contributions are limited to 55 percent of their income in excess of the minimum income level, and they are also entitled to a special deduction from income before tax. In addition to these special tax provisions, pensioners pay lower national insurance contributions than economically active persons (see below).

As mentioned above, the NIS is a pay-as-you-go system that is financed through employee and employer contributions and from general state tax revenue. Contributions from employees are based on pensionable income; income below about 40 percent of the basic amount is exempt. For employees, the contribution rate is 7.8 percent of gross wage income. 1/ The combination of a uniform contribution rate and rapidly declining pension entitlements as a function of income (see above) bear witness to the redistributional intent of the NIS. The contribution rate for other taxable income, such as pensions, is 3 percent. Employers’ contributions are assessed as a percentage of paid wages and are differentiated according to the regional zone in which the employees reside. There are five regional zones defined by geographical location and level of economic development. The contribution rates vary from 14.1 percent of paid wages (Oslo region in central part of the country) to 0 percent (northern most part). Employer’s are exacted an additional contribution of 10 percent on wages exceeding sixteen times the basic amount.

In 1994, contributions covered about 69 percent of the costs of the NIS, whereas state grants amounted to 31 percent of the costs.

3. Costs and the number of beneficiaries of the NIS

As NIS benefits have been broadened and become more generous over time, their cost has also grown. (Tables 6.1 and 6.2)

Table 6.1.

Central Government Transfers to Households 1/

(In percent of total expenditure)

article image
Source: Statistics Norway

Excluding unemployment benefits.

Central government transfers to households, which largely correspond to NIS benefits, rose from 30 percent of total expenditure in 1980 to 38 percent in 1993. Over this period, pension payments (both for old-age and disability), which have accounted for about two-thirds of transfers to households, rose from 18 percent of all central government expenditure to 23 percent. Other components of the transfer system showed a similar increase.

Looking at central government transfer expenditure in relation to GDP gives the same picture. Total transfers rose from 13 percent of GDP in 1980 to 17 percent in 1993, with pension payments rising from 8 percent of GDP to 11 percent over this period.

Table 6.2.

Central Government Transfers to Households 1/

(In percent of GDP)

article image
Source: Statistics Norway

Excluding unemployment benefits. For comparability un-revised estimates of GDP were used in calculating the entries in this table.

Underlying part of the rise in the cost of pensions has been an increase in the number of pension recipients (Tabulation).

Table 6.3.

The Development of the Number of NIS Pension Recipients

(In thousands of persons)

article image
Source: Ministry of Health and Social Affairs

Includes, inter alia, recipients of survivor’s pensions.

The number of pension recipients rose from just above 700 thousand in 1980 to above 900 thousand in 1994, representing an increase of 28 percent over this period. In relation to the total population, the number of pension recipients rose from 18 percent in 1980 to 22 percent in 1994. The increase in the number of disabled persons is particularly striking, almost 50 percent, and it appears to have taken place mostly in the 1980s but has since slowed.

A number of factors have been cited as possible explanations for the rise in the number of disabled persons, including the increased labor market participation of women (which appear to have a larger incidence of disability), the increased use of disability pension as an early retirement option among elderly employees, a laxer application of eligibility rules, and inadequate effort in monitoring (long-term) sickness absences and rehabilitation. For a time during the mid-1980s, the incidence of new disability pensioners was such that if extrapolated to the whole population indicated any person stood about a 50 percent chance of becoming disabled during a forty year working life. This incidence has since come down, inter alia as a result of a tightening of eligibility, to bringing the overall likelihood of disability for any individual during his working life down to around 30 percent.

4. Proposed reforms

The main message of the welfare white paper is that the Government intends to maintain the basic features of the NIS. The Government regards the NIS as the most important instrument for providing social security and income redistribution. The pension system in particular will be preserved in its present form, with a basic pension and a supplementary pension providing formerly economically active persons an additional compensation in relation to their income during their working lives; 1/ the NIS system would continue to be the main provider of retirement income for Norwegians. 2/ However, the Government also recognizes that looming pressures on the pension system related to the aging of the population, as well as the maturing of the system, make any changes that significantly increase costs or shift an undue burden to future generations impossible. 3/ The Government has specifically rejected the idea of lowering the general retirement age from 67; in fact, the white paper states that one of the main aims of pension reform should be to raise the effective retirement age from 61.

The main specific proposal aimed at raising the effective retirement age calls for a reduction in the penalty associated with earned income once a pension is drawn. Earned income above the basic amount should no longer reduce pension payments by 50 percent of the income in excess of the basic amount. Furthermore, the limitation that earned income and pension should not exceed pre-retirement income should be lifted. Against this, the Government also proposes that the beneficial tax treatment of pensioners with medium and high incomes should be gradually abolished (see above); however, pensioners receiving only the minimum pension will continue to escape taxation.

Regarding disability pensions, the Government places greatest emphasis on preventing temporary disability from turning into permanent disability through rehabilitation and on creating an environment that will allow partially disabled persons to engage in economic activities. Support for single parents should also aim for their prompt return to the work force by being relatively more generous, but of shorter duration, than at present.

The white paper contains a long list of additional proposals that relate inter alia to improvements in the administration of the pension system and in the provision of social services. Overall, the proposals the Government has put forward do not amount to a radical departure from existing pension and social security arrangements but rather reflect a rationalization and refinement of the current system.

1/

Prepared by Birgir Arnason.

2/

The FAS provides cash benefits to families with children. Although governed by different legislation than the NIS, here it is for simplicity subsumed in the NIS.

3/

Unemployment benefits are discussed in Chapter 4.

4/

Norwegian benefit levels are generally somewhat lower than in Sweden but on a par with those in Denmark and Finland.

5/

Including unemployment benefits but excluding family allowances.

6/

Ministry of Health and Social Welfare, St. meld. Nr. 1. Velferdsmeldingen, June 1995. An summary in English is available as Welfare towards 2030. This white paper was partly motivated by the looming challenge to the pension system associated with the aging of the population in the next century; that issue is dealt with in chapter y.

1/

This section draws on Ministry of Health and Social Affairs, The Norwegian Social Insurance Scheme. A Survey, January 1995.

2/

Some tax advantages are provided for pension saving in occupational and private plans.

3/

The formal retirement age in Norway is 67. Retirement may deferred until the age of 70. While there are no provisions for early retirement under the NIS, the effective retirement age is in fact 61.

4/

For shorter periods, the basic pension is reduced proportionally.

1/

This arrangement places a strict ceiling on the pension credit that can be gained in any particular year. Prior to 1992, income up to 8 times the basic amount was given full pension credit and income between 8 and 12 times the basic amount 1/3 credit.

2/

Under earlier arrangements it was possible to earn entitlements up to 4 times the basic amount.

1/

This implies that this latter group is guaranteed a disability pension of around Nkr 85,000 per year, or the equivalent of US$14,000.

2/

Family allowances are not taxed.

1/

For self-employed persons, the contribution rate is 10.7 percent for incomes up to twelve times the basic amount and 7.8 percent of income between twelve and thirty four times the basic amount; no contributions are made on incomes beyond this level.

1/

Indexing pensions to prices rather than to wages was rejected as this would essentially lead to a flattening out of pensions.

2/

The tax advantages associated with occupational and private pension schemes would generally not be extended.

3/

See Chapter 8 for a discussion of some of the long-term challenges Norway faces.

Norway: Background Paper
Author: International Monetary Fund