Pension principles in the Swedish pension system

ABSTRACT

This article analyses the role of pension principles of funding and benefit provision for the development of the Swedish pension system. Focusing on four major public pension reforms in the twentieth century, it discusses why certain pension principles were used and under what circumstances they were more or less likely to change. The analysis shows that change was implemented to a large extent as a response to the previous pension system failing to fulfil its intended purpose in terms of financial stability, work incentives and redistribution.

KEYWORDS:

• Pension principles
• funding
• benefit provision
• retirement
• welfare state
• institutions
• economic history

JEL CLASSIFICATION:

• H55
• H75
• N33
• N34
• P35

Acknowledgements

The author gratefully acknowledges Sören Blomquist, Håkan Selin and Bo Könberg for interesting discussions and useful suggestions. I also thank Daniel Waldenström, Monika Bütler, Karl Birkholz, Inger Johannisson, Ann-Charlotte Ståhlberg, Per-Gunnar Edebalk, Margit Gennser, Anna Norén and Oskar Tysklind for helpful comments and reading tips. Special thanks to two anonymous referees whose comments and suggestions helped improve and clarify this manuscript.

Disclosure statement

No potential conflict of interest was reported by the author.

ORCID

Johannes Hagen http://orcid.org/0000-0003-3093-726X

Notes

1 Table A1 provides an overview of major public pension reforms.

2 Ancient Roman writings by Cicero and Horatius, among others, reveal to us that people possessing an exalted societal position or significant financial means chose to ‘retire with dignity’ rather than work throughout life.

3 However, because life expectancy at the time was around 50 years, not many people could expect to live long enough to claim a pension. The retirement age was subsequently lowered to 67 for men and 60 for women in 1907.

4 See Elmér (1960) for a detailed account of the outcome of the referenda.

5 See for example Kruse and Ståhlberg (1977), Ackerby (1992), Persson (1991) and Riksförsäkringsverket (1987).

6 The authors of the report were inspired by Bröms (1990) and Ackerby (1992).

7 An alternative indexing strategy is to use the change in the contribution wage sum as the measure of the rate of return. Indexing to average wage growth might be more comprehensible from an individual’'s perspective, but the growth rate of the contribution wage sum provides a more relevant measure of the system's financial capacity because it takes the growth rate of the workforce into account.

8 See Pensionsmyndigheten (2014) for the mathematical representation of the annuity divisor.

9 For information on investment behaviour in the premium pension, see Dahlquist, Martinez and Söderlind (in press), Säve-Söderbergh (2012), Palme, Sundén, and Söderlind (2007), Engström and Westerberg (2003) and Cronqvist and Thaler (2004).

10 For example, the lowest age for early withdrawal was raised from 60 to 61. The lowest age for withdrawal of the minimum guarantee was raised from 60 to 65. Since 2001, employees have the right to remain employed until the age of 67 (prop. 2000/01:78).

11 In a recent paper, Hagen (2015) studies the payout choices of 183,000 white-collar workers who retired under the ITP plan between 2008 and 2013. He finds that the popularity of the fixed-term payouts has risen over time with 20% opting for any of these payout options in 2008 compared to 31% in 2013.

12 Pensionsmyndigheten (2014) shows that the benefit reductions caused by increasing life expectancy are substantial. Thus, the fact that the average claiming age in the public pension system has been relatively stable during the last decade (64.8 in 2014) raises concern about the level of future pensions. However, even if people do not seem to delay claiming, they do work longer. Conditional on being in the labour force at age 50, the average exit age rose from 63.1 to 63.8 between 2005 and 2014 (Pensionsmyndigheten, 2015).

Additional information

Funding

Financial support from the Jan Wallanders och Tom Hedelius Stiftelse samt Tore Browaldhs Stiftelse [grant number 2013-0025:1] is gratefully acknowledged.