When it comes to early retirement, Icelanders would seem to be a pension minister’s dream. Within the OECD countries, early retirement contributed to a 7.1 per cent loss of gross domestic product, according to latest figures. That cost was borne unequally, with Hungary losing 16.5 per cent of potential output. Swedes ditched a more modest 5.2 per cent, and fewer Icelanders retired early than anywhere else, losing just 1.6 per cent of potential GDP. The projections to 2010 make even more depressing reading, with Hungary and Sweden slated to lose 19.4 and 7.5 per cent of GDP respectively over the next five years – Iceland risks a modest increase to just 2.2 per cent.

A strong disincentive against early retirement in Iceland is the absence of a formal early retirement vehicle. The official retirement age is 67, although retirement is possible at 65, with a corresponding reduction in benefits. In recognition of their cultural status, seamen can retire from age 60. Oddly enough, so too can public sector workers in Department B of the LSR once the sum of their age and years of service totals 95. Fortunately for Iceland’s tax payers – the scheme is a partly funded defined-benefit scheme – the division has been closed to new members since 1996. Department B members face further disincentives to opt for early retirement because final benefits are calculated on base rather than final salaries, meaning a sharp drop in income.

Iceland’s relatively stable dependency ratio between the 1960s and the 1980s, certainly in comparison with Sweden, also helps to explain why Icelanders eschew early retirement. Over the same period, Sweden headed across-the-board increases in the dependency ratio in the Nordic region, posting a 13 per cent increase against Iceland’s more modest 4 per cent. But projections from roughly 2010 onwards – if not sooner – indicate that the ratio of retirees to active workers will increase steadily until some point between 2040 and 2050, although Iceland will still lag behind its Nordic neighbours in the dependency stakes.

So, while by the late-1990s over 95 per cent of Icelandic males aged 55–64 were active in the labour market, just over 70 per cent of their Nordic counterparts in Finland could boast similar levels of economic participation. Such stark withdrawals from the labour market serves to illustrate why the archetypal 1960s Nordic model of old-age provision is now unsustainable, just as less generous provision in the UK has forced politicians to examine the issue.

So while the total sum of Nordic citizens entering early retirement grew by 2–3 per cent during the 1950s and the 1960s, within Iceland the number grew by a mere 0.5 per cent. It is equally possible that the rising count of older workers in Nordic countries other than Iceland has encouraged the development of early retirement vehicles – Iceland is expected to converge in this respect with the other Nordics at some point between 2040 and 2050.

To an extent, Iceland continues to benefit from its legacy as one of the poorest countries in Europe, where any move towards early retirement had been checked by the prospect of poverty. Until the British and later American occupations post-1939, Icelanders had by and large engaged in subsistence-level economic activity in agriculture and fisheries, working until their health gave way. With the wartime occupation came a drift to the capital, a flood of foreign money and increased expectations, although retirement provision remained rudimentary until the availability of pension schemes in the private sector during the 1970s. So not until roughly 2010 will Icelandic workers with full ‘modern’ pension rights retire.

And for older workers – at least male workers – Iceland offers no vehicle for reducing economic participation by working fewer hours. Few enterprises offer formal arrangements to reduce working hours, and although it is possible to make workers redundant at 70, between ages 53 and 60, the amount of redundancy notice that an employer must give rises from three months to six months. There is, however, evidence of more women moving to part-time work after 55.

But Tryggvi Thor Herbertsson, an academic at the University of Iceland and author of the leading study “Why Icelanders Do Not Retire Early” believes that Icelanders’ traditional aversion to early retirement might be about to change. Since January 1999, Icelanders have been able to put 2 per cent of their gross salary into a voluntary private pension, with a matched contribution from the employer that has climbed from 0.2 per cent at the scheme’s inception to a like-for-like 2 per cent today. Perversely for a mechanism intended to promote additional provision in retirement, Iceland’s pensions industry might have encountered the law of unintended consequences: “The system of individual accounts,” says Mr Herbertsson, “might promote early retirement, while changing demographics will put pressure on people to retire early.”

“It is possible that increased productivity within the wider economy will put pressure on workers with lower rates of productivity to be pushed out of the labour force,” he continues. “There will also be greater pressure on the unions to create early retirement vehicles.”

There is, he says, “a growing awareness of the dangers of ending up where the island’s Nordic neighbours have found themselves and of the need to tackle the problems now.”

Tryggvi Thor Herbertsson’s report, can be found online at: http://www.ll.is/files/baddeaficb/why_icelanders.pdf

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