Comparison of income growth and growth in pension payments


Written by: Ola Lotherington Vestad

How does the income growth towards the end of a person’s working life compare with the growth in pension? It is important to analyse this in order to determine how the pension system should be regulated in the future.

The report on income growth over the life cycle " Inntektsvekst over livsløpet ” by the researcher Ola Vestad is part of Statistics Norway's analysis of the Norwegian pension system. This report summarises the results of a descriptive study of income growth over the life cycle of various groups.

The analysis primarily examines the income development towards the end of a person’s working life, and the main purpose is to answer the following question: How does the income growth towards the end of a person’s working life compare to the regulation of pension payments?

Why is this important?

In the National Insurance Scheme, accrued pensions are regulated through changes in the basic amount, and thereby in accordance with the average wage growth for the working population, while retirement pensions paid are regulated in accordance with the general wage growth minus 0.75 percentage points.

When wage growth is expected to be lower at the end of a person’s working life than earlier in their career, it is unclear whether the rule for the regulation of pension payments means that the pension will increase more or less than the wages increased towards the end of a person’s working life.

Main findings of report

The report's main findings can be summarised in two points: (i) The average growth in nominal income is positive until retirement, and (ii) the average growth in deflated income, i.e. income measured in units of the basic amount, is slightly negative from the age of 55. During the last few years before retirement age, the median growth is approximately equal to the average increase in the basic amount, minus 0.75 percentage points.

This means that about half of the sample population will experience that growth in the pension is somewhat higher than the income growth they experienced towards the end of their working life, while for the other half the rise in pension will be slightly lower than the income growth immediately before retirement.

The results are broken down into different groups, including gender, education and sector they are employed in, and are irrespective of the income measurement used.

Using incomes as a basis

The report is based on income as opposed to wages, despite the fact that the regulation of pensions paid is linked to the average wage growth. This is because of the desire to follow the actual development of individuals over time, and because the data source for incomes is significantly more comprehensive than the data source for wages.

Two different income measurements are used:

  • Pensionable income, defined as the sum of earned income (including overtime) and self-employment, and social benefits that replace these.
  • Earned income, defined as the sum of all cash benefits paid to the employee during a calendar year.