Norway’s new public pension system: is it robust against unexpected life expectancy developments?

Nico Keilman, University of Oslo
Lisa Keller, Ministry of Justice, Norway

Norway introduced a new system for public old age pensions in January 2011. The new system leads to lower pension expenditures than the old system, because annual pension benefits under the new system are inversely proportional to the remaining life expectancy of those who retire. We can expect public pension expenditures equal to 170 billion Norwegian crowns (NOK) in 2030 and 286 billion NOK in 2050. But expenditures will be larger if retirees live longer than expected. It is uncertain how fast mortality will fall in the future. Therefore we have computed a probabilistic population forecast for Norway to 2050 and analysed the consequences of population growth for public old age pension expenditures. A new insight is that the new system is much less robust against unexpected longevity shocks than what was assumed earlier, in spite of the longevity adjustment. The reason is that annual pension benefits are determined when new cohorts retire. After retirement, a retiree’s benefits remain unchanged.