Opinion urges Iceland to reset welfare system rules

An opinion article published by Morgunblaðið argues that Iceland needs to rethink how its welfare system is managed, as public spending on benefits has risen sharply. It attributes some of the pressure to a substantial increase in the number of residents of foreign origin.

The article says the 2008-2010 financial crisis forced the government to protect the incomes and basic services of those hit hardest while restoring balance to public finances. That period brought significant reviews, spending restraint and prioritisation within the welfare system, it says. Today, the article argues, the sustainability of public finances is threatened by rising spending in key areas, particularly welfare.

From 2010 to 2025, the share of first- and second-generation immigrants in Iceland’s population rose from 8.9% to 21.7%. A further 5.4% of the population has one foreign-born parent, meaning that more than 27% of residents have some foreign background, according to the article.

The article links the increase in migration to the economic expansion that followed the financial crisis, when labour-intensive industries including tourism, construction and care services needed more workers. It says many foreign workers chose to settle in Iceland, in part because of its extensive welfare system.

In 2025, state payments related to disability and old-age pensions totalled about ISK 235 billion, including more than ISK 22 billion paid to residents of foreign origin, the article says, citing a response from the social affairs and housing minister to a parliamentary inquiry. Nearly 1,700 people of foreign origin received monthly payments from the Social Insurance Administration of between ISK 400,000 and 600,000, while eight received more than ISK 1 million.

The state’s budget allocation for disability and old-age pensions is estimated at ISK 262 billion for 2026 and ISK 288 billion in the 2027 budget proposal. The article says that would amount to an increase of ISK 53 billion, or nearly 23%, over two years. If residents of foreign origin continue to account for about 10% of payments, their share would be around ISK 29 billion in 2027, it estimates.

The article argues that Iceland’s benefit rules have not kept pace with a changing society. It says the system is largely based on residence rather than work, income or contributions. Under the rules described, a person from outside the European Economic Area who is assessed as unable to work may qualify for sickness or rehabilitation pension payments for up to five years after one year of legal residence, with a possible two-year extension, even without having worked or paid contributions in Iceland. The article also says such a person may qualify for disability or old-age pension after three years of legal residence.

In 2025, nearly 4,600 people of foreign origin received disability-related benefits in Iceland, or 15% of all recipients, compared with 5% in 2010. More than 2,900 received old-age pensions, and an average of 4,630 received unemployment benefits each month, the article says. It notes that these figures do not include other support, such as municipal financial assistance, housing benefits and child benefits.