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The Swedish Pension System

Albert Memeti
Economics of aging and pensions
25/03/2013

Content
Why pension reform in Sweden Former structure of the pension system Current pension system Intended effects Conclusions

January 16, 2008

Why a pension reform in Sweden?

An ageing population Lower growth than expected at the introduction of the ATP(General supplementary pension) system An expensive system in the long run

The economic crisis of the early 1990s

The political parties wanted to avoid political conflict regarding pensions A new an interesting proposal

January 16, 2008

Background: An ageing population

Table 1. Share of the population 65 years and older in some countries (per cent)

Country Denmark Norway Sweden France Germany Italy United Kingdom Japan USA

1970 12.3 12.9 13.7 12.9 13.7 10.9 12.9

2000 15.2 15.4 17.4 15.9 16.4 18.2 16.0

2010 17.0 16.0 19.5 16.7 19.8 20.8 17.1

2030 23.2 22.9 25.5 23.2 26.2 29.1 23.1

2040 25.2 25.3 27.2 25.3 28.8 34.5 25.0

2050 24.1 24.7 26.7 25.5 28.4 34.9 24.9

7.1 9.8

17.4 12.5

22.0 13.2

28.0 20.7

31.0 21.5

32.3 21.7

Data source: World bank

Declining fertility rates

Data source: World bank

January 16, 2008

Increased life expectancy

Data source: World bank

January 16, 2008

FORMER STRUCTURE
First Pillar Second Pillar Third Pillar

AFP (flat rate pension)

Occupational schemes (DB, 90% coverage)

Tax efficient individual pensions (incl. mutual funds, unit linked)

ATP DB PAYG
(related to 15 best income years)

REFORMED NATIONAL PENSION SYSTEM

Income pension (NDC, PAYG) 16 %

Premium pension (DC, funded) 2,5%

Guaranteed pension (filling up)

THE SWEDISH PENSION SYSTEM

First Pillar Income Pension
(PAYG)

Second Pillar Occupational schemes

Third Pillar
Tax efficient individual pensions (incl. mutual funds, unit linked)

(90% coverage)

Premium Pension
(DC, funded)

Guaranteed Pension
(filling up)

-Government employees -Employees in municipalities and county councils -White-collar workers in the private sector -Blue-collar workers in the private sector

January 16, 2008

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The PAYG
Contributions, 16 %, unchanged indefinitely Benefits based on all earnings (PB,UB) over an individuals full working career Pension rights are indexed according to average wages and accumulated during the entire career; the retirement age for an individual is flexible after age 61; the pension amount is dependent upon a cohort's average life expectancy and on the individual age of retirement; pension benefits are indexed in relation to growth in average wages minus 1.6 per cent;
January 16, 2008

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The PAYG
pension benefits are indexed in relation to growth in average wages minus 1.6 per cent;

January 16, 2008

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The PAYG Financial Sustainability

If people live longer than expected, annuity factor on notional accumulation rises so annual benefit falls for new retirees

Notional account is indexed to wage growth (g) so future benefits fall if g is low. If g < 1.6%, benefits fall for current retirees also.
ABM (automatic adjustment mechanism): if (notional assets + buffer fund)<pension liabilities, due to falling fertility or lf participation rates, notional accounts and current benefits fall

January 16, 2008

Balance Number ( Assets/Liabilities )

1,4

Optimistic

1,2
Pessimistic

Base

1,0
Pessimistic without balancing
The yearly revaluation of pension rights and pensions is reduced in order to restore the financial equilibrium

0,8

0,6
2010 2020 2030 2040 2050 2060 2070

The size of the Buffer fund= Fund/yearly pension payments

r

10 8 6 4 2 0
2010 2020 2030 -2 -4 The Balancing Mechanism is activated 2009 -6 -8 -10 2040

Optimistic Base

2050

2060

2070

Pessimistic Pessimistic without balancing

This difference is eliminated by the balancing mechanism

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Premium pensions
fully funded part; contributions 2.5% contributions are accumulated in one or several funds which the individual chooses; there are both private and State funds, today nearly 700 funds! the amount in the funds increases by the investment yield on the savings which are deposited;

January 16, 2008

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The main characteristics of the new pension scheme in Sweden

A defined contribution system Financed by employer and employee fees A premium reserve part A possibility to divide the pension credits in the premium reserve part between spouses An intended more flexible and higher age at retirement The right to stay to the age of 67

A possibility of part-time retirement

January 16, 2008

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Intended effects of the new pension system

Increased labour supply Keeping up the savings ratio Stability ?

A fair system ?

January 16, 2008

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Stability and fairness

Net contribution negative since 2009 High contribution from the national budget unpredictable for the period till 2025 The development of the financial markets influence the Buffer fund (rate of return) Successively lower the amount of min. pension in the face of economic growth

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Table 2. Labour force participation among men aged 55-64 in 1990-2004 in Sweden (per cent)

Age 1990 1995 2000 55-59 87.4 82.2 83.9 60 74.2 71.6 73.7 61 70.9 64.9 66.5 62 65.9 55.9 57.4 63 58.0 51.3 43.6 64 48.8 41.9 38.0 16-64 87.0 80.2 80.2 Source: Statistics Sweden, Labour Force Surveys.

2004

83.8 76.1 72.5 66.1 58.9 48.2 79.7

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