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The Swedish Pension SystemAlbert MemetiEconomics of aging and pensions
25/03/2013
• 1
Content
Why pension reform in Sweden Former structure of the pension system Current pension system Intended effects Conclusions
•January 16, 2008
• 2
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
• 3
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
• 4
Data source: World bank
Declining fertility rates
•January 16, 2008
• 5
Data source: World bank
Increased life expectancy
•January 16, 2008
• 6
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
•January 16, 2008
• 9
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;
•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
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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
•January 16, 2008
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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
•January 16, 2008
• 16
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 • 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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