New research from Sweden’s Umeå University has concluded that if a country’s pension system is not generally understood by individuals, then the economic effects it is designed – and reformed – to produce, may simply not happen.
Johan Gustafsson, the economist behind the study at Umeå University, said: “The economic mechanisms that are built into the system risk becoming ineffective if people do not understand them.”
As evidence of such a lack of understanding, he said in his paper, entitled “Implications of Pension Illiteracy for Labor Supply and Redistribution”, that the Swedish Pensions Agency claimed a common misconception among individuals was that their actions had no effect on their future retirement benefits.
“This is remarkable since the Swedish pension system is largely earnings-based, with a highly predictable link between individual contributions and entitled pension income following the introduction of notional pension accounts in the 1990s,” he said.
He said a previous study, from Sweden’s Institute for Labour Market and Education Policy Evaluation, had already found that two in three Swedes said they lacked sufficient knowledge to understand how their own choices affected their future pension.
“In my research, I want to understand more about the consequences of this ignorance,” Gustafsson said.
During the 1990s, he said, the Swedish pension system had been reformed with the aim of increasing the correlation between pension contributions and realised pension income, warning, in other words, ‘the longer you work, the higher your pension’.
“If people miss that connection, the reform risks failing to increase labour market participation,” the academic said.
The university said in its release about the new research that ignorance about the pension system was also detrimental to individual employees’ long-term finances.
“We can see that people underestimate the effect that continued work will have on the future pension, and that because of this, they retire earlier than they would have done if they had been aware of how the pension system works,” said Gustafsson.
In turn, this could lead to individual workers receiving a lower pension and thus a lower material standard of living, he said.
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