The Demographic Transition in Denmark: Declining Population Growth, an Ageing Society, and the Challenges for the Public Pension System

Abstract

This thesis investigates how demographic ageing, characterized by decreasing population growth and increased longevity, threatens the fiscal and structural sustainability of the Danish public pension system. Using an extended overlapping generations (OLG) model with 70 overlapping cohorts, calibrated empirically to fit the Danish economy, the analysis examines the long-run macroeconomic impact in both a baseline transition scenario and under a series of targeted policy measures. Based on methods of dynamic equilibrium modeling, the simulations quantify the economic effects of reduced population growth and higher longevity, clearly showing how the economy is affected negatively. Specifically, the baseline results confirm that the demographic shift leads to a rising old-age dependency, lower labor force participation, and declining welfare as the fiscal strain increases taxation and lowers disposable income, lifetime consumption, and overall utility.To address these challenges, the thesis evaluates three policy approaches, including a fiscal reform reducing pension benefits, an improved long-term population growth achieved through immigration and fertility policies, and a structural improvement of educational standards increasing labor efficiency. Based on the economic simulation results, a multi-pillared reform approach is developed to counteract the negative implications of demographic ageing. Specifically, the proposal consists of five pragmatic and balanced recommendations spanning direct fiscal measures as well as more structural and societal policies. In combination, these policies can improve not only the fiscal sustainability of the Danish pension system but also increase overall economic welfare and ensure greater intergenerational equality in the Danish welfare state.