Coronavirus DK: Putting (their own) cash in consumers' hands

The government has announced that it will release wage-earners’ forced vacation savings (DK) to stimulate the economy. This measure is possible because of a change in the timing of vacation savings that is taking place this year. Some background: 12.5 percent of Danes’ earnings are deposited in a vacation account and released when the person holds vacation. Previously, you accumulated the savings in one calendar year and they were released after May 1 in the following year. Everyone has a right to five weeks’ vacation after one year’s employment. 

With the change, workers now earn their vacation days and accumulate vacation savings that they can withdraw in the same year. The transition to the new schedule ends in September 2020. The change means that the savings people accumulate in the transitional period will not be paid out for their vacation period in 2020 but rather are being placed in a collective fund, the Wage Earners’ Vacation Fund. The amount that workers are entitled to from this period will be paid out when the person reaches retirement age. It is intended to constitute a sort of forced savings that the Danish state has implemented previously.

Gauging the dosage

So now the government has reached an agreement to release some of these funds this year in order to stimulate the economy, which is undergoing a recession because of the lockdown. There is some DKK 100 billion ($15 billion) in the Fund. It will not release all the funds now, however, but rather three weeks’ worth, or 60 percent. The reasoning is that the recession will have long-term effects and the infusion of money into the economy will be more effective if it is spread out. The first instalment will be disbursed in October, and the parties will negotiate the timing of the release of the rest in the autumn.

The measure was raised during negotiations on the economic rescue plan with the other parliamentary parties. It was proposed by three right-wing parties and endorsed by both labor and industry associations. The latter estimate that the measure – the release of the entire Fund – will support 30,000 jobs. Finance Minister Nicolai Wammen presented the plan on Friday: “We will take it one step at a time,” he said when asked about when people will get the rest of their savings. “We want to release it in doses that have the most beneficial effect.”

The plan will mean that 3 million wage earners out of Denmark’s population of 5.8 million will receive a payment. For someone with an income of DKK 330,000 ($50,000), it will amount to DKK 14,700 ($2,200) in the first instalment and DKK 24,500 ($3,7500) in total.

Economists approve, others dissatisfied

Several economists support the measure (DK) and also the timing. They recall that in 2009, during the recession following the financial crisis, a fund for special retirement savings was released. Some 60 percent of the amount went to consumption and helped to keep the economy running. They suggest that the funds be released around the time that the temporary wage compensation program expires, on August 31. 

People on transfer payments (DK) have no wages and therefore no vacation savings. They include retirees, students, those on disability pensions, and welfare recipients. They will receive a one-off, tax-free payment of DKK 1,000 ($150). Three right-wing parties left the negotiations just before their conclusion, partly because of this feature. The Danish People's Party objected to the terms for retirees, as did the DaneAge Association (the counterpart to AARP), which argued that many of the elderly have a low income and would spend the money on consumption and thus support the economy. Other parties objected that people on transfer payments should not receive anything extra at all.