An Extra 71 Thousand Per Month for Pensioners

Recently, the Welfare Committee of the Althingi received a legal opinion from the office of the Althingi regarding deductions from state pensions due to pension payments. In short, the conclusion was that current legislation is unclear about deducting payments from pension funds as general income instead of employment income.

What does this mean? The law specifies two types of tax-free income thresholds. One general tax-free threshold of 25 thousand kroner per month and a special employment income threshold of 200 thousand kroner per month. This means that deductions under the Social Security laws do not start until after 225 thousand kroner per month, depending on the type of income people have. If we take a simple example of a single individual with 225 thousand from pension fund payments on top of a full pension, then the individual is getting 422,698 kr. per month. However, if the same amount is received as employment income, it means 493,630 kr. per month in pocket according to the TR calculator. There is a difference of about 71 thousand kroner per month if pension fund payments were classified as employment income and fell under the special tax-free threshold.

But that’s what the issue is about. I have been chasing this issue since just before the 2021 elections, but nowhere has an acknowledgment been obtained about this flaw in the implementation of the social security laws, and finally now a legal opinion comes out clearly stating: “It is pertinent to draw the conclusion based on the interpretation of the words that payments which are based on the individual’s contributions to a pension fund should be considered as employment income.”

The consequences of this could be that ever since the laws enacted at the end of the 2016 term took effect, substantial amounts of money which people were entitled to according to the letter of the law have been taken from pensioners. The problem is that the intention was to set the laws so that pension fund payments would not count as employment income against the special tax-free threshold, but as has been pointed out, this implementation of the laws does not adhere to the letter of the law. It is pertinent to point out another similar example where the state was found guilty of violating the same laws due to a similar flaw. In that case, the state was ordered to pay 5 billion due to illegal deductions from pensions due to errors in legislation.

What is ironic is that this flaw comes from the same legislation, and despite repeated indications, the system has stubbornly refused to recognize the flaw, until now.

What happens next? The Welfare Committee will likely propose some kind of amendments, but the damage is done. It will probably require another court case to assess people’s rights due to the illegal deductions now in effect. This could mean an additional 71 thousand kroner per month, several years back in time.