The Swedish Pension SystemAlbert MemetiEconomics of aging and pensions

25/03/2013

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Content

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

•January 16, 2008

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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

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Background: An ageing populationTable 1. Share of the population 65 years and older in some countries (per cent)

Country 1970 2000 2010 2030 2040 2050 Denmark 12.3 15.2 17.0 23.2 25.2 24.1 Norway 12.9 15.4 16.0 22.9 25.3 24.7 Sweden 13.7 17.4 19.5 25.5 27.2 26.7 France 12.9 15.9 16.7 23.2 25.3 25.5 Germany 13.7 16.4 19.8 26.2 28.8 28.4 Italy 10.9 18.2 20.8 29.1 34.5 34.9 United Kingdom

12.9 16.0 17.1 23.1 25.0 24.9

Japan 7.1 17.4 22.0 28.0 31.0 32.3 USA 9.8 12.5 13.2 20.7 21.5 21.7

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Data source: World bank

Declining fertility rates

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Data source: World bank

Increased life expectancy

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Data source: World bank

• 7 FORMER STRUCTURE

First Pillar Second Pillar Third Pillar

Occupational schemes (DB, 90% coverage)

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

AFP (flat rate pension)

ATP DB PAYG

(related to 15 best income years)

• 8 REFORMED NATIONAL PENSION SYSTEM

Premium pension (DC, funded) 2,5%

Income pension (NDC, PAYG) 16 %

Guaranteed pension (filling up)

THE SWEDISH PENSION SYSTEM

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First Pillar Second Pillar Third Pillar

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

Occupational schemes (90% coverage)

Income Pension (PAYG)

Premium Pension(DC, funded)

GuaranteedPension(filling up)

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

The PAYG

Contributions, 16 %, unchanged indefinitely Benefits based on all earnings (PB,UB) over an

individual’s 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;

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The PAYG pension benefits are indexed in relation to growth

in average wages minus 1.6 per cent;

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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

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0,6

0,8

1,0

1,2

1,4

2070206020502040203020202010

Balance Number( Assets/Liabilities )

The yearly revaluation of pension rights and pensions is reduced in

order to restore the financial equilibrium

Optimistic

Base

Pessimistic

Pessimistic without balancing

-10-8-6-4-202468

10

2070206020502040203020202010

År

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

The Balancing Mechanism is activated

2009

This difference is eliminated by the balancing mechanism

Optimistic

Base

Pessimistic

Pessimistic without balancing

Premium pensions

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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;

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

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Intended effects of the new pension system

Increased labour supply Keeping up the savings ratio Stability ? A fair system ?

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Stability and fairness • 18

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

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

Age 1990 1995 2000 2004 55-59 87.4 82.2 83.9 83.8 60 74.2 71.6 73.7 76.1 61 70.9 64.9 66.5 72.5 62 65.9 55.9 57.4 66.1 63 58.0 51.3 43.6 58.9 64 48.8 41.9 38.0 48.2 16-64 87.0 80.2 80.2 79.7 Source: Statistics Sweden, Labour Force Surveys.

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