Projections of population, education, labour supply and public pension benefits

Norway, like most developed countries, is facing an ageing population from the beginning of the 21st century, and this may have large impacts on public pension expenditures. These relations are analysed with a dynamic cross-sectional microsimulation model called MOSART. The model simulates the life course of a representative sample of the Norwegian population with respect to demographic events, education, labour supply and public pension benefits. Changes in these subjects since 1960 are also reported, and the MOSART model is tested by its ability to reproduce the actual development in this period.

The base line alternative of the analyses is a situation where “everything continues as in 1993”. Consequences for the tax level are analysed by calculating a contribution rate given by dividing public pension expenditures by the sum of wages and half the public pension expenditures(pensioners pay less taxes than wage earners). This contribution rate was 15.6 per cent in 1993, and increases to 25 per cent by year 2040 with the base line alternative. The size of the population has stabilized by this time, and the projected contribution rate is the result of structural aspects of the individual life courses. These aspects include the average number of years each respectively participates in the labour force or is a pensioner, and the ratio between average pension benefits and wages. Improved benefits and longer life expectancy explain most of the growth in the contribution rate.

Systematic, but still moderate changes in the underlying assumptions on life expectancy, disability pension and labour force participation rates may change the conclusion of a growing contribution rate. Political decisions which may reduce and finally eliminate public supplementary pension schemes can also change the conclusion.
If the underlying assumptions turn out to be correct, simulation of historical data shows that the MOSART model is able to predict the actual development from 1960 and onwards reasonably well. A projection where all underlying assumptions are assigned the level in 1967 gives a surprisingly good prediction of the contribution rate in 1993. However, large changes in several components working in opposite direction are hidden behind this picture. The projections with the perspectives from respectively 1967 and 1993 are very different by the middle of the 21st century. Important changes in the underlying assumptions from 1967 to 1993 are lower fertility, larger propensities to enter disability pension, lower retirement age and a higher expected increase in life expectancy.

Keywords: Education, Labour supply, Microsimulation, Population projections, Public pension benefits.