Pension System
The Icelandic pension system consists of three pillars: a tax-financed public pension, a compulsory second pillar and voluntary private pensions.
Public Pensions
The Icelandic state pension system is a tax-financed, means-tested scheme that provides a basic provision accounting for 15% of average earnings. For people without appropriate additional old-age income, a supplementary pension is paid. Basic and supplementary pension benefits can rise to 70% of average earnings.
The legal retirement age for private sector employees is 67 and for public sector employees 65. The average male Icelander retires at the age of 68.5. Strong disincentives for early retirement and, in return, incentives for retiring later encourage a longer working life.
State pension system benefits are adjusted according to the development in wages. This takes into account the current state budget, but must at least be indexed to the cost-of-living.
Occupational Pensions
Occupational pensions are the cornerstone of the Icelandic pension system and must have at least 800 members. The compulsory employer and employee-financed pension system provides benefits amounting to 50-60% of full time earnings during employment. The contribution rate must be at least 11% with the employer paying 7% and the employee 4%. Premiums are fully deductible for tax purposes.
Within private sector schemes, a form of intergenerational risk transfer and co-insurance takes place. These schemes could be defined as hybrid schemes as they combine elements from defined benefit (DB) and defined contribution (DC) schemes, but are neither pure DB nor pure DC schemes.
Pure DC schemes provide benefits that are actuarially fair as they depend on the contributions paid and the actual investment returns. In Iceland, contributions to most occupational pension funds do not earn rights according to the time horizon and therefore do not reflect the time value of money. In this "equal-earning system," pension rights are earned independent of age. This means that a 25-year-old member earns the same defined benefit for a given premium as a 55-year-old member.
Public sector pension funds provide DB benefits.
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