Выпуск №1 2002
СОДЕРЖАНИЕ >> СЕССИЯ 3: "Пенсионная реформа в России"

The Swedish pension system - an area in need of reform

Петер Стейн (Mr. Peter Stein), директор Стейн Бразерз;

Introduction

In the summer of 1998 the main parties in the Swedish Parliament agreed to a proposal for pension reform. The new system replaced the old one that had existed since 1960. To some extent the new system builds on the old, albeit with major improvements. To another extent it has introduced a component based on a different principle. The old system was entirely pay-as-you-go. The new has introduced a component based on a funded system.

The old system

The old system was introduced 1960. It was compulsory, public and covered almost the entire working population. Compulsory means no one could opt-out of the system. Public in the sense it was financed via proportional payroll tax.

The system was pay-as-you-go meaning that current generations of working people paid via taxes pensions to the existing stock of retirees. The entitlement scheme was such that each retired was guaranteed an annual pension amounting to 60 % of the income during the 15 best years of the persons working career. To obtain full pension one needed 30 years of full-time work.

In this context such a timeframe is a relatively short period. There were built in a regressive distribution component in the system. Those who worked many years and experienced moderate improvements in their incomes were given lower pensions than someone who studied many years and then made a rapid professional carrier.

There was an additional distribution effect built into the system. In order to gain political support for the scheme the government of the time had to promise voters of the time good pensions. People born before 1944 received 6 times more in pensions than they paid in as taxes.

Pay-as-you-go systems tend to be unsustainable in the long run. So was also the Swedish, partly due to general flaws inherent in such systems, partly due to specific Swedish flaws. 

Firstly because of improvements in health care people live longer. There are thus more pensioners. Secondly people study more meaning that they enter the labor force later. Thirdly the Swedish system encouraged people to retire earlier. Frothily people don’t give birth to as many children as before and most EU-nations apply strict rules towards immigration. All this meant that over time more and more pensioners had to be supported by fewer and fewer adult workers.

Those about to retire after 1994 received 80 % in pensions of what they had paid in as taxes. So from the 1990s payments to the system started to exceed receipts. Since there were no buffers the system became unsustainable. Such flaws are inherent in most pay-as-you-go-schemes.

There were also specific Swedish flaws. The pension entitlements were protected from rises in inflation. Wages were not. So when inflation rose pensioners were compensated but workers not. This distribution-effect added to tensions between generations.

The system could only have been saved with massive rise in payroll-taxes. Such rises would however have increased the cost of Swedish products making Swedish exports less competitive abroad. This would have been detrimental to economic growth and real wages. Furthermore higher payroll taxes would have lowered companies margins to increase real wages. This would thus have added further burden on working generations. So the system became economically as well as politically unsustainable.

The New System

Borrowing from the old

The new system started to operate from 1999. It was also compulsory, public and financed by a proportional payroll tax of 18,5%.

The transition scheme was designed so that anyone born before 1938 would receive all his pensions from the old system. Anyone born after 1954 would get everything from the new. For the rest the system is such that the nearer to being born 1954 the more from the new system. The closer born after 1938 the more from the old. It was also agreed that anyone would be entitled at least to the pension points one was entitled to in 1994.

In the new system the entire working carrier counts. The more years one works the higher will be the pension. Furthermore in this system those retired are not compensated for inflation. The pensions are calculated based on the wage levels. When average real wages go up retired also get more. When they go down they also experience a drop. This way it is hoped the system will reduce distributions tensions between generations. By encouraging people to work more years it is hoped growth will increase and more receipts flow to the system. It thus is more financially robust than the old.

A new component

This system also has new component. 2,5 of the 18,5% are paid in individual accounts that each retired own. He or she can decide on her own which foreign or domestic fund manager should be responsible to manage the savings. Provided they are authorized by the Swedish Finansinspektionen, which handles such authorization. The sum of this scheme will depend on how well the savings are invested.

In my mind a funded system has many advantages. This is money that is owned by the individual. It increases freedom of the individual, private property and freedom of choice. Such freedom of choice bolsters competition among fund managers. Such a system is less susceptible to political manipulations. Politicians can’t alter the system the way they can in a pay-as-you-go scheme. Furthermore since the individual has a direct stake in this system it is likely that he or she will make the utmost to obtain the highest possible rate of return. This increases the likelihood that money saved will be productively invested at home or abroad.

Conclusions 

In the short-run the funded scheme is unlikely to exert a major influence. In the long run it will. Sine it stared 1999 already 6 billion SEK ($600 million) have been invested. For those born after 1954 it is likely that pension receipts from this system will amount to about 50% of total pensions receipts.

In such a society individuals have vested interest in a robust system for social security. This is likely to increase the attraction of funded systems.