Something Is Wonderful in the State of Denmark

When the Danish government recently announced that they will raise the retirement age from 67 to 70 for Danes born in 1971 or later, they came in for high praise from none other than the Wall Street Journal editors. The editors praised Danish politicians for being “honest about a fiscally responsible retirement age in an era of modern medicine,” and having “the courage to do something about it.”
You would have thought that the editors had discovered the key to restoring the financial rectitude of Social Security by the time their readers folded up their morning paper and pushed themselves away from their breakfast table. But even with this change, Denmark’s retirement age won’t hit 70 until 2040. Twenty years ago, the Danish parliament passed a welfare reform act that tied the retirement age to a life expectancy of age 60. The current Danish retirement age of 67 was already slated to increase to 68 in 2030, and 69 in 2035, and now to 70 in 2040, when Danes born in 1971 or later hit retirement age.

But a 15-year delay wasn’t about to stand in the way of the editors needling misguided supporters of the welfare state. “Liberals have long argued the U.S. should be more like Europe,” they wrote. “If they mean Denmark, then yes.”

More like Denmark? Count me in. I would trade the remnants of the U.S. welfare state for the Danish welfare state with its scheduled retirement age of 70 in a heartbeat. There are countless reasons why. But Denmark’s retirement policies alone would be reason enough. Compared to Social Security, Denmark’s retirement program is more financially stable, raises revenues more equitably, provides stronger support for low-income retirees, and includes a mandatory occupational-based private pension program.

What’s So WonderfulAbout Denmark’s Pension Plan?

Denmark’s retirement system, with its public pension called the Folkepension, outperforms the U.S. Social Security system by almost every measure. For instance, the 2024 Mercer CFA Institute Global Pension Index, which evaluates the retirement systems of 48 countries, ranks Denmark’s retirement system third and gives it an A grade overall, as well as A grades in the three subcategories of adequacy, sustainability, and integrity. Social Security, the U.S. retirement system, gets an overall grade of C+, gets C grades for the three sub-categories, and ranks just 29th in Mercer’s pension index.

How did the Danish retirement system rack up such high marks? It is not just having its retirement age indexed to life expectancy, as the Wall Street Journal editors seem to surmise. It has to do with more fundamental differences between the Danish and U.S. retirement systems, and with the fact that Denmark’s retirement system is embedded in its welfare state, which does far more to reduce inequality and to support its citizens with universal programs than the U.S. public sector. Let me explain the key differences between the two systems.

General government revenues vs. a trust fund.

U.S. Social Security and Denmark’s public pension are both “pay-as-you-go” systems. This means that tax revenues collected from today’s taxpayers pay for the benefits received by today’s retirees. But the countries’ pay-as-you-go systems differ in important ways. To begin with, the taxes earmarked to pay U.S. Social Security go into a trust fund. And the trust fund finances Social Security payments. As the Wall Street Journal editors like to remind readers, the trust fund as currently operating will no longer have enough money to pay all of its scheduled benefits by 2033, according to the most recent Social Security Administration projections.

Unlike Social Security, Denmark’s public pension is funded from general government revenues. And the Danish government is obligated to pay scheduled public pension benefits. While indexing its retirement age to life expectancy has reduced the financial strain on its system, the solvency of the Danish government makes the prospect of defaulting on its pension obligations remote. Denmark’s gross public debt relative to the size of its economy stood at 39% of Gross Domestic Product (GDP) in 2022, far lower than the 121% ratio of the United States.

Progressive vs. regressive public pension taxes.

Social Security taxes, called Old Age, Survivors, and Disability Insurance (OASDI), fall far more heavily on poor and middle-income wage workers than on the well-to-do. These payroll taxes are a fixed rate of 12.4% (6.2% on wages received by employees and 6.2% on wages paid out by employers). Also, there are no OASDI taxes on high-income wages. (The wage cap for 2025 is $176,100.) In addition to not taxing wages above that amount, payroll taxes don’t tax property income (this includes rents, interest, and profits). For those reasons, payroll taxes are distinctly regressive (which means that the poor pay out a far higher share of their income in payroll taxes than the rich do). In 2024, taxpayers with income in the 20% to 30% range paid an average of 9.1% of their income in payroll taxes, taxpayers in the 90% to 100% income range paid 5.5%, and those in the top 1% paid just 1.4%, according to the Treasury Department.

Denmark is the only OECD country to rely exclusively on income taxes to finance its public pension system. (“OECD” stands for the Organisation for Economic Co-operation and Development and consists of 38 middle- and high-income countries, including the United States.) The top tax bracket for Denmark’s income tax is 55.9%, the highest top-income tax rate in Europe, and considerably higher than the 43.7% top tax rate in the United States (which combines the top federal income tax rate with the top state income tax rates). In addition, Denmark’s top rate kicks in on incomes greater than 1.3 times the average income, while the U.S.’ top rate doesn’t take effect until incomes are 8.5 times greater than the average income. Finally, Denmark’s income tax is levied on capital income (including interest payments, dividends, and rental income) as well as labor income (including wages, salaries, and other types of remuneration, such as receiving stock shares). For those reasons, the rich pay out a much higher share of their income through Denmark’s progressive income taxes than the poor do.

On top of its publicly financed pension system, Denmark has a mandatory occupation-based pension system, which covers 90% of employees. The occupation-based pension plans must be agreed upon as part of a collective bargaining process between unions and employers. The contributions, which range between 12% and 18% of wages, typically come one-third from workers and two-thirds from employers. Occupational pensions include company-specific pensions and agreement-based pensions, which typically cover a particular industry.

Impressive outcomes vs. even better ones.

While the shortcomings of the U.S. retirement system are thrown into sharp relief when compared with Denmark’s retirement programs, Social Security has genuine strengths as well. Unlike the payroll taxes that finance Social Security, the retirement benefits themselves are quite progressive. In 2020, Social Security benefits going to low-income retirees (with earnings at half the national average) replaced nearly half of their earnings (49.6%). But for high-income earners (with earnings at twice the national average), the replacement rate was much lower, 27.8% of their income.

Social Security has also lifted seniors out of poverty. The poverty rate for seniors (aged 65 and over) fell from 35.2% in 1959 to a low of 8.7% in 2011 and was 9.7% in 2023. That was lower than the poverty rates of other adults (between ages 18 and 64) and for children (under age 18). The Center on Budget and Policy Priorities estimates that in 2023, Social Security benefits lifted 16.3 million older adults above the poverty line. And without Social Security benefits, 37.3% of older adults would have been poverty-stricken.

Unlike in Denmark, U.S. private pensions are not mandatory. The Bureau of Labor Statistics estimates that about three-quarters (73%) of civilian workers have the opportunity to participate in a retirement plan offered by their employer, but just 49% of the lowest-paid quarter of wage workers have the same opportunity. Adding voluntary private pension benefits to Social Security’s mandatory benefits boosts the replacement rate to 83.5% of the earnings of low-income retirees (with earnings one-half the national average) and 61.9% of the earnings of higher-income retirees (whose earnings were twice the national average).

In 2020, the average income of U.S. seniors (people 65 or older) was an impressive 93.2% of the average of the total population. That income, however, was distributed quite unequally. The disposable income of a senior (66 or older) at the 90th income percentile was 6.7 times that of a senior at the 10th percentile. And 22.8% of seniors lived in relative poverty, making do with an average income of less than one-half of that of the total population.

Denmark’s public pension replaces more of the earnings of low-income retirees but fewer of the earnings of high-income retirees than Social Security: 73.6% for retirees with less than one-half of the national average income, and just 10.1% for retirees with earnings twice the national average income. With Denmark’s mandatory occupational pensions, those replacement rates reach 116.8% of the earnings of low-income retirees and 53.8% of the earnings of high-income retirees. For middle-income earners (those with earnings equal to the national average), the replacement rate was 73.1%, nearly identical to the United States’ 73.2% rate.

In 2020, the average income of Denmark’s seniors was 82.0% of the average income of the total population. That was lower than the U.S. average, but the income of Denmark’s seniors was distributed far more equally. The disposable income of a senior at the 90th income percentile in Denmark was 2.3 times that of a senior at the 10th percentile. The U.S. figure was nearly three times as high. Finally, the relative poverty rate for seniors in Denmark was also far lower than that in the United States. In 2020, just 4.3% of seniors older than 65 in Denmark had an income of less than 50% of the average disposable household income. The U.S. relative poverty rate was more than five times that high.

A Fully Grown Welfare State

Welfare states protect their citizens from the market risks associated with old age, unemployment, accidents, and sickness, as defined by the International Encyclopedia of the Social & Behavioral Sciences. A welfare state typically begins with providing public pensions and public education and then expands to providing other universal programs such as health insurance, support for children, and other equality-promoting measures. The modern U.S. welfare state began with the Social Security Act of 1935 and was expanded to include the provision of health insurance for the elderly (Medicare) and low-income households (Medicaid) with the Social Security Act of 1965. But the expansion of the U.S. welfare state stalled after that, while Denmark’s welfare state went much further.

Much like other Nordic welfare states, Denmark’s government spending accounts for nearly one-half of the spending in its economy, which came to 46.8% of the country’s GDP in 2023. U.S. government spending—which includes federal, state, and local spending combined—is considerably less, just 36.3% of GDP. The difference in government social spending (including old-age, health, family, and housing benefits as well as financial assistance for the poor and unemployed) between the two countries was especially large. Despite Denmark providing publicly funded health care services to all its citizens, U.S. and Danish government spending on their pension and health care systems was not so different. But the U.S. government spent just 2.8% of GDP on other social spending, while the Danish government spent nearly five times that amount, 13.8% of GDP. In Denmark, those public monies went to fund a wide range of social programs, including: paid parental leave and child benefits; guaranteed access to daycare; grants for higher education; large housing allowances; generous support payments for the unemployed, sick, and disabled; an array of programs targeted at seniors (including home health care services, preventive services, senior centers, and subsidized and adaptive transportation); and yet other social programs.

Those services, like most of Denmark’s welfare state, are funded by taxes. In 2022, Denmark collected tax revenues equal to 41.9% of GDP, the sixth highest level of the 38 OECD countries, and far higher than the tax revenues in the United States, which were just 27.7% of GDP that same year. In Denmark, the personal income tax, with its 55.9% top rate, raises the majority of tax revenue. It is followed by consumption taxes, most prominently a value-added tax that is levied multiple times on a commodity from its production to sale. The economic burden of those taxes is borne disproportionately by low- and middle-income households.

Nonetheless, Denmark’s overall tax code remains highly progressive. For instance, in 2019, the distribution of income in Denmark after taxes was 32.1% more equal than the distribution of income before taxes. (The reduction in inequality is calculated as the change in a country’s Gini index ratio—one of the most widely used measures of a nation’s inequality—before and after taxes.) In the United States, the after-tax income distribution was only 17.1% more equal than the before-tax distribution of income in 2019. And in a 2017 study, the Peterson Institute found that U.S. taxation and spending policies did the least to reduce income inequality of the 28 high-income countries in the OECD at the time. And that was before the Trump tax cuts for the rich.

Getting to Nordic Pension Nirvana

So yes, let’s take the Wall Street Journal editors’ advice and make Social Security more like Denmark’s retirement system. But the key to reaching Nordic pension nirvana is not to increase the retirement age to 70, as the editors argue.

A retirement age of 70 should be a nonstarter in the United States until we enact several key welfare state policies. First off, we need universal health care—Medicare for all, not just for retirees. We also need to dramatically increase our social spending so that we can lower the relative poverty levels in the United States from 15.2% in 2021 to below double-digit levels and closer to the 6.3% level in Denmark. In addition, like Denmark, the United States would need to make occupational retirement benefits mandatory and guarantee that workers have a voice in negotiating those pensions, whether through their unions or through public regulation.

While the Trump administration, along with Republicans in Congress, would surely agree with the Wall Street Journal editors that the way to fix Social Security’s finances is to reduce benefits by increasing the retirement age, there are better, more progressive ways to shore up Social Security’s finances. They begin with lifting the cap on wages that are subject to the payroll taxes that fund Social Security. Lifting the cap would make the payroll tax less regressive and would generate considerable revenue. Some 90% of wages fell below the cap in 1983, but with the increased concentration of income among the highest-paid, that number had decreased to 81.4% by 2021. In a 2018 paper, the Congressional Research Service estimated that eliminating the cap altogether could cover up to 83% of the projected shortfall in Social Security revenues. A similar cap that used to apply to funding for Medicare was removed by a 1993 tax bill, which the Congressional Budget Office estimated would increase Medicare tax revenues by $29 billion between 1994 and 1998.

Going yet further, Social Security should be funded by a progressive income tax, as it is in Denmark. That would require refusing to renew Trump’s 2017 tax cuts for the rich and making the rich pay their fair share of taxes. Increasing the top tax bracket to match Denmark’s 55.9% rate is one needed reform. Taxing capital gains, unrealized as well as realized, as they are accumulated, is another. So is taxing wealth directly.

John Miller is a professor emeritus of economics at Wheaton College and a member of the Dollars & Sense collective.

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