Why having so much retirement money has become a puzzle for Iceland

It’s one of those first global problems that we would like to have in Latin American countries: “I don’t know what to do with so much money.

Although this is a caricature, the truth is that Iceland’s pension system, which has been ranked among the best performing in the world, has such enormous resources that there is now a debate in the country on what is the best way to invest these funds.

With assets nearly double the size of the island’s North Atlantic economy, the government led by conservationist Katrín Jakobsdóttir is exploring the idea of ​​allowing companies that manage Icelanders’ funds to invest more. abroad.

Currently, the rules limit these investments of funds abroad to 50%.

“The system has grown too big”Finance Minister Bjarni Benediktsson said in an interview with local press in December.

“It goes without saying that we cannot limit all investment opportunities to the internal market,” he said.

“The consequences of your own success”

With a quantity of resources close to 200% of gross domestic product (GDP), around $ 50,000 million, “the system is now facing the consequences of its own success,” says Hans van Meerten, professor of European pension law at Utrecht University, in a dialogue with BBC Mundo .

Iceland has a system of compulsory participation in a pension fund, explains the researcher, as in many economies in Europe.

Why having so much retirement money has become a puzzle for Iceland

But unlike the Netherlands, for example, Iceland has a lot more freedom in choosing a pension fund.

Another difference is that participation It is also compulsory for the self-employed, notes van Meerten, while this is not the case in most European countries.

These kinds of characteristics set it apart from the rest.

Iceland became in October “The best retirement system in the world”, according to the Global Pension Index prepared by the Mercer-CFA Institute, a recognized measure that annually compares pension systems in 43 countries, which represent about 65% of the world’s population.

This ranking assigns different score values ​​which are separated into three main categories: system sufficiency (which weighs 40% in the assessment), sustainability (35%) and regulatory framework (25%).

Why having so much retirement money has become a puzzle for Iceland

In 2021, Iceland obtained the highest score with 84.2 points, showing strengths such as a “relatively generous” public pension, a private pension system well regulated and managed, and high contributions.

The Netherlands and Denmark were second and third on the list.

Iceland is “very well preparethe for the time bomb you see it everywhere: getting old, ”explains van Meerten.

“It has a unique combination of private and public pensions that largely prevents senior poverty for working and non-working people.”

But… how does the system work?

In short, it is based on three pillars: a public pension paid by the state, a compulsory pension to which workers and employers contribute, and a voluntary private pension.

Why having so much retirement money has become a puzzle for Iceland


Pension system in Iceland

It is based on 3 pillars: a public system, a compulsory labor system and a voluntary system.

  • 11.5% employer contribution

  • 4%the worker’s contribution

Source: OECD

  • the public pension, financed by taxes, has two modalities.

A base that covers the entire population, with the exception of people with higher incomes, and a complementary one, which also has limits in relation to personal income.

  • The second pillar is the compulsory work pension. The law establishes a minimum contribution of 12% of the salary, where the employee pays 4% and the employer 8%.

However, the most common contribution scheme in the country is 15.5%, where the employer pays 11.5% and the worker 4%, thanks to union negotiations.

The law establishes that for people who have accumulated savings during 40 years of work, the amount of the pension must be at least 56% of the average income obtained during their years of work and paid for life, according to the data of the Organization for Economic Cooperation. and development (OECD).

Why having so much retirement money has become a puzzle for Iceland


Pensions in Iceland

In the compulsory labor savings system.

Source: OECD

The final amount of the pension depends on the financial situation of the accumulated funds, but should, at a minimum, be linked to the consumer price index.

  • And the third pillar is a voluntary savings.

Workers in the private sector can retire at 67 and those in the public sector at 65. However, most people continue to work for better benefits.

Protect yourself from big risks

This country, of only 370,000 inhabitants and whose economy depends largely tourism, has not been spared by international economic cycles of boom and bust.

This is how the crisis triggered by the bankruptcy of the American investment bank Lehman Brothers in 2008 and the Great Depression triggered by “toxic mortgages” paralyzed its huge banking sector, almost wiped out the national stock exchange and made the system lose. pension more than 20% of its resources.

Why having so much retirement money has become a puzzle for Iceland

Faced with this crisis, the country has decided to be much more careful in how to protect itself against a wave of international financial risks.

But now that some of its funds are approaching the limit on overseas asset investments, calls for an increase. they started to proliferate.

The debate is hard because the more money you invest abroad, the more likely you are to be seriously affected in the event of a new crisis.

In any case, the authorities have warned that any increase in the internationalization of pension funds should be gradual and in line with developments in the national economy.

Opponents of the proposal argue that a major change can destabilize the local currency as the country faces a contraction in the tourism sector due to the covid-19 pandemic.

Why having so much retirement money has become a puzzle for Iceland

In fact, at the height of the covid-19 pandemic in 2020, the central bank of Iceland made a pact with pension funds to stop overseas investments for six months, in order to protect the exchange rate, the crown.

The Icelandic Pension Fund Association proposes a total elimination of the investment limit or, failing that, a range of 60% to 65%.

So far, the government is evaluating the different scenarios before making a proposal to generate consensus.

Why having so much retirement money has become a puzzle for Iceland

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