A proposal from Sweden’s Productivity Commission to consider hiking tax on pension capital has drawn warnings of serious consequences from the country’s Pensions Agency (Pensionsmyndigheten) and the main industry association representing pension providers.
The commission published a 660-page report in October on boosting productivity in the Swedish economy, which included a wide-ranging set of proposals, including one to consider increasing the tax on returns on pension capital.
In its rationale for the idea, the commission said the tax on pension capital returns was currently low relative to the taxation of other assets, which it said “favours passive ownership via pension funds”.
“It also makes it more profitable to exchange salary benefits for pension benefits and can thus negatively affect the supply of labour later in life,” the commission said.
Responding to the consultation on the commission’s report, Insurance Sweden (Svensk Försäkring) said: “The Productivity Commission’s proposal for changes to the taxation of pension capital and savings risks having the opposite effect than intended.
Eva Erlandsson, senior economist at Insurance Sweden, said: “Pension savings are deferred wages and constitute a central part of the financing of investments that contribute to economic growth.
“An increased tax on returns risks leading to reduced scope for investments, lowering future pensions and, in the long run, increasing pressure on the public pension system,” she said.
In its consultation response, the Swedish Pensions Agency said it agreed there were reasons to consider an increased tax on pension capital, but said: “However, such a change in the rules could have a significant impact on pension levels.”
Tax on pension capital affected occupational pensions and private pensions, it said.
“A higher tax on pension capital means a lower net return on savings over time. Since pension savings are long-term, the compound interest effect is significant. Even a small increase in taxation, therefore, has noticeable effects on the final amount,” it said.
As for the commission’s argument that higher tax on returns would reduce pension capital, thus increasing the incentives to continue working for longer, the agency said it was uncertain whether such a tax change really would affect the retirement age and the effect would probably be small.
“There are many factors, such as the individual’s health and level of education, that affect the choice of retirement age and thus not only the level of the pension,” it said, along with other comments on the proposal.
