By 2001 there is a good chance Sweden will have launched its new public pension system. The change follows years of intense debate.
The problems with the present PAYG system were first observed in the 1980s, but political disagreements have held back reform.
Most of the details of the new system were disclosed last month, and now there is hope that the long -postponed system will be in effect by 2001. The change, however, will be gradual, and it will be 20 years before all changes are fully implemented for all generations.
The new system is designed to take care of the present imbalance between trends in outlays and revenues. Pension payments today are financed out of contributions, based on wages. Payments are indexed according to the consumer price index. With the slow increase in real wages the burden on the active population to finance pensions has grown tremendously. This, in combination with longer life expectancy, has made the need for change obvious.
The following example highlights the problem. In 2000 there will be 30 old age pensioners for every 100 economically active Swedes. By 2025 this number will have increased to 41.
The key feature of the new system is that it is technically self-adjusting to changes in life expectancy and contributions. The pensioners will have a proportion out of the total amount contributed.
At retirement, accrued pension capital, ie, contributions indexed to the rate of growth of wages, will be divided by a figure based on average life expectancy at the time of retirement, and a norm" real rate of return. This means, according to the system designers, that as life expectancy increases there is a built-in incentive to work longer or to save more prior to retirement. The alternative facing those not able to go on working is to accept a lower yearly pension.
The new system will be a PAYG system to a large extent. 18.5% of the individual's wages are deducted and divided in two parts. 16.5% is distributed directly to pensioners in the non-funded system. Two percentage points are funnelled into a funded state-operated reserve system, with unit-linked features. Pensions from this system will be based on investments in mutual funds. All fund managers wishing to participate having necessary authorisation from the Finansinspektionen will be invited according to a committee proposal published in October. The PAYG system is a compulsory national scheme. In addition to an earnings-related part, there will be a price indexed guarantee level for those not having earned enough pension credits. The guaranteed amount will be approximately equal to the amount required for a minimum standard of living. Child care, military service and studies will count towards pension rights in a similar way as employment. These are deviations from the core principle of the system, which is to link benefits more closely to contributions and make the coverage related to lifetime earnings.
In the present system only 30 years of pensionable income are needed for the full pension and the level of the pension is calculated on the basis of the 15 years with the highest income.
The acquired pension credits will be indexed according to wages and the pension will be dependent upon the cohort's average life expectancy upon retirement after age 61.
The indexes were presented at the beginning of November and the picture of the once transparent and simplistic system was somewhat blurred by the new decisions of the parliamentary committee. The principles of indexation and calculation formulas for guaranteed level pensions are complicated.
"The system for guaranteed level pensions is complicated but that is a natural result when many different opinions are taken into account", says Bo Könberg, parliamentary member for the liberal party and one-time chairman for the committee that designed the new system. The index is designed to give a certain "interest rate" on the earned pension rights and is calculated on the average rise in real wages. This does not only affect the earned rights but also the outgoing pensions.
"The principle is quite simple. When there is a real growth in wages both workers and future pensioners will benefit. When the opposite occurs both group will face cutbacks", says Könberg.
A few arguments within the committee are still not settled and different options are being aired. The main disagreement is over the financing of the reform. Contrary to today's system, where employers pay the contributions, the original agreement states that half of that cost should be paid by the individuals. This has been rejected by the unions who claim members might lose out if the shift in contributions is not fully compensated by wage increases. "There are many different benefits besides wages that need to be taken into account in the wage negotiations. We fear that this kind of shift is impossible to carry out and will complicate the pay talks dramatically," says Gert-Ove Andréasson of PTK, a negotiation pact for various white-collar workers. Some time in June the Riksdag can vote on the new pension system bill.
Mikael Nyman is editor of 'Pensioner & Förmåner' newsletter in Stockholm."