EFTERLØN

Efterløn (literally "after wage") is the third rail of Danish politics; conventional wisdom is that if you touch it, you die. It is also a salutary tale both of how difficult it is to dismantle entitlements once they have taken hold, and of how politicians can be hoist with their own petard, if they try to finesse issues by being economical with the truth.

Efterløn was originally proposed by the unions during the mid-1970's, when the state pension age in Denmark was 67. Some workers doing hard manual work got "worn out" well before then, and should be allowed to retire early at 60 on efterløn. It was, therefore, a specific proposal to deal with a small-ish problem. However, that decade was also a time of widespread unemployment, particularly amongst young people. The cross-party Government of the day saw efterløn as a way of getting older people out of the labour market and replacing them with younger people, and thereby massaging the official unemployment figures downwards. The 1979 reform which introduced efterløn for those aged 60-67 made no mention of having to be physically worn out in order to be entitled to it. It was, in effect, officially sanctioned early retirement.

Not surprisingly, it quickly became clear that efterløn was hugely expensive. It was originally expected that some 17,000 people would take advantage of it (today, the figure is around 130,000, compared with a total workforce of around 2.6-2.7 million). Yes, some worn-out manual workers were rewarded for their lifetime of physical effort. But Denmark has never really had lots of heavy industry (there are no coal fields or mines, very few steelworks etc). It turned out that many ordinary workers, particularly those who had paid off their 30-year mortgages by the time they were 60, were opting for early retirement and a life of bridge and golf and other pleasures. In 1999, the then Social Democratic Government introduced a reform, which reduced the state pension age to 65, but required people wishing to take advantage of efterløn to pay a monthly premium in the preceding years. This reduced the cost of the entitlement, but also gave it its third rail reputation. It was widely held that a key factor in the subsequent defeat of the Social Democrats in 2001 was the fact that they had won the previous election on a platform which categorically promised - inter alia - no changes whatsoever to the efterløn regime.

Since then, demographics have reared their ugly head. Denmark is already in a situation where for every five who retire from the labour market, only four enter it; having lots of otherwise able 60-year olds retiring just makes things worse. A tinkering in 2006 accepted that the state pension age is now too low and will have to rise, first back up to 67 and then in line with life expectancy; efterløn will follow suit. However, that reform is not scheduled to kick in before 2019, and people are retiring now. My bridge partner, for example, who has just turned 62. When I asked him how much the premium had been, in order to qualify, I was astounded by how low it is. It costs roughly 3-4 months' worth of efterløn, spread over many years, to get the full whack for 36 months (from the age of 62 to 65). As a financial investment, it must be one of the best in the world. No wonder it costs the state some kr.18 billion a year.

Something had to give. In his New Year's Day address to the nation, Prime Minister Lars Løkke Rasmussen called for the total abolition of efterløn for anyone currently under 45. But now politics enters the picture. It might be expected that the left of centre opposition would be against the proposal, and put itself forward as the champion of all those worn-out workers (mental wear and tear has now been added to the mix, even though, as I say, many of those efterlønners are not worn out at all, in any sense). The big problem for the minority Government is the opposition of the very right-wing Danish People's Party. They were the big beneficiary in 2001 of the shift in the working class away from the perfidious Social Democrats, and they have particularly appealed to older people worried about the supposed drowning of Danish culture by all of those dastardly immigrants. They have vowed to retain efterløn, come what may. Without the necessary 90 votes in Parliament, the Prime Minister's proposal is dead in the water.

But the Government is not giving up, not least because it needs to find kr.47 billion a year if it is to balance the public finances by 2020. Roughly half of that will come from a measure already passed, which cuts the right to unemployment benefit from 4 years to 2. In presenting its proposals this morning for filling up the rest of the hole, the Government again called for the abolition of efterløn and a bringing forward from 2019 of the start of the increased retirement age for the state pension.

With a new election due within the next six months, that puts everyone on the spot. All parties agree that the hole will have to be filled (in contrast to - say - America, no political party wants to be held up as economically irresponsible by running a budget deficit). And there are basically only three ways to do that. Higher taxes are ruled out, since Denmark already has the world's highest taxes. Freezing public spending is pretty well ruled out, since that will have to rise in real terms (because of all those elderly retirees requiring more healthcare and old people's homes). Which leaves entitlements. Against that background, you can keep efterløn if you raise the state pension age earlier and more sharply; however, that will then irritate almost half a million people in their 50's instead of the much lower number affected by changes to efterløn.

Damned if you do, damned if you don't. The political horsetrading of the next few months will make for interesting viewing.

Walter Blotscher