Pension policy was a hot political topic in Sweden in the 1990s – a debate that heralded a landmark policy to invest a small portion of workers’ contributions in capital markets. Some 30 years later, the same ideas are capturing the imaginations of European policymakers and think tanks.
Most of the 2.5% that Swedes pay into the premium pension system flows to the default fund AP7, but workers can decide to choose their own fund managers from a pre-screened pool.
The Swedish model has captured the imagination of policymakers elsewhere. Brussels think tank Bruegel has recently proposed the idea.
France’s asset management association AFG is proposing the same model, and an expansion of workplace pensions, although its white paper is a flag-flying exercise aimed at influencing the policy debate ahead of next May’s presidential election.
Germany’s pension commission is also now recommending the Swedish model. Citizens would pay 2% on top of the current 18.6% contribution to the state system, and the ideas have political backing.
While Sweden got on with reforms in the 1990s, France is stuck in a familiar groove. Like other western European countries, it faces dire demographics and widening pension deficits. This is leading to broader acceptance that an expansion of funded pensions is unavoidable, even if there is nothing remotely like a political consensus about how to fix the problem.
If AFG’s proposals evoke a familiar refrain, that is because they probably do. A white paper from 1991 (Livre blanc sur les retraites) was published by the then Socialist premier Michel Rocard. It recommended many of the things that the AFG is proposing now.
A couple of years after the Rocard white paper, Germany’s then labour minister Norbert Blüm told voters that “pensions are secure”, which effectively put a moat around the pensions debate.
Germany has at least tried reforms, mostly rather lacklustre ones, but without compulsion or auto-enrolment, most individuals don’t make use of savings allowances. Social partners have mostly been too suspicious, or too unambitious, to launch their own workplace schemes. This intransigence of social partners is one reason why Sweden’s model is attractive to policymakers. Simplicity is another.
Yes, there will be an additional contribution to the pension system, but within a well-designed system there will also be clear ownership. In Germany, the gambit is that the additional 2% contribution will be viewed more favourably because voters will grasp that they have ownership rights. Pension contributions above 20% are widely seen as politically unacceptable.
Unlike in the Netherlands, where collective-minded social partners recoil in horror at the thought of individuals getting hold of even a small part of their pension cash on retirement, German and French policymakers should let people do what they please with their cash.
And they should press on with this policy – bearing in mind that the youngest cohort enrolled in Sweden’s premium pension in the early 2000s are now well into their 40s. Clear, motivated self-interest within a paternalistic system is probably the best European model to boost retirement incomes and underpin the financing of state pensions.
Liam Kennedy, Editorial Director
