Work and Pension in Sweden

1. An ageing Population — A Challenge for the Employment Policy

For several decades the share of older people in the population has gradually increased in the industrialised countries. This development started early in the Scandinavian countries, especially Sweden, but is now prevalent in all industrialised countries and also in many others. Table 1 shows the development between 1975 and 2000 in a number of countries and a forecast for development up to year 2030 made by the U.S. Department of Commerce and U.S. Census Bureau.
Table 1: Share of the population 65 years and older and 80 years and older in some countries (%)
Source: U.S. Department of Commerce, Economics and Statistics Administration and U.S. Census Bureau, An Aging World 2001, Washington, D.C.

There are two main factors behind this development. The first one is the fertility rate that is low and declining — the average number of children a woman gives birth to has declined and therefore the number of children born each year declines. The new cohorts are smaller than the older ones at birth. In some countries the baby boom cohorts born in the 1940s or the 1950s are still the largest. For some countries this development has been very rapid. Such is the case for China with its one-child-policy but also for European countries like Germany, Italy and Spain. During the first decades of the post-war period, Southern European countries had higher fertility rates than Northern European countries. Now the pattern is reversed. Of the countries shown in the table, Italy will have the largest share of older people if the present tendencies continue. Sweden does not have an especially low fertility rate in a European perspective but, as in most other countries, it is below the level which leads to a stable or expanding population (not taking into account net immigration).
The other factor behind the age explosion is that life expectancy is increasing. During the 19th century and the early 20th century life expectancy increased, mainly through decreasing child mortality rates and partly through the decline in mortality rates among people of active age. Vaccination campaigns and new medicines are some of the factors behind that development. In recent decades the main factor behind increased life expectancy is that people live longer beyond the age of retirement compared to earlier. This tendency towards increasing life expectancy is strong in many countries. Sweden is among the countries that have the highest life expectancies.
An ageing population has consequences for the labour market and the economy of a country. The number of people to be supported by each person of active age increases. If the standard of those of active age is not reduced, but rather increases in the same way as that for other groups, the tax rates have to be increased. Increased tax rates have consequences for labour supply and demand.
The problem is exacerbated by a tendency towards increased early exit, i.e. people leave the labour market before they reach the ordinary retirement age. In some countries this tendency has become especially pronounced as a result of special programs which facilitate early exit having been introduced.
The tendencies I have described here are counteracted by an increase in female labour force participation. This tendency is to be found in all countries but varies considerably in the speed of development. In Denmark and Sweden the labour force participation is more or less the same for men and women, but women still work fewer hours.

2. Policies to Counteract the Economic Consequences of an Ageing Population

An ageing population means (if everything else is kept constant) that the number of older people per employed individual is increasing. It leads to a demand for increases in fees and taxes and cuts in public expenditures. There are several methods that can be utilized to reduce this problem. One such policy is to attempt to retain older workers in the labour force. Before concentrating on policies for retaining older workers in the labour force I will say something about other types of measures available to increase labour force participation.
A higher productivity level will lead to a lesser burden for those of active age if pensions and old age care are not increased as a response to the productivity growth. Other policies are such that may increase labour force participation. One way to do so is by increasing the formal retirement age. Other measures aim at increasing the actual retirement age by counteracting early exit, for example by changes in compensation rates and the possibilities of access to different social security schemes. Special labour market programs for older workers may also be a possibility. In the same way there may be methods of facilitating entry into the labour market for young people, especially to shorten the search period after completion of education. Measures for increasing female labour force participation and working hours may also be an option. Measures for better integration of immigrants and disabled people may also contribute to higher labour force participation.

3. What is the Swedish Model?

There is not one unified Swedish model. What is labelled the Swedish model varies depending on the focus of interest. I will mention here some of the aspects that are included in most versions of the Swedish model.
Sweden is a country with large public expenditures. The large expenditures and high taxes to finance them are the basis of the Swedish welfare state. The welfare state consists of both extensive social services programs and income transfer programs.
The work principle and not the cash support principle is the main one concerning employment policy. The work principle was established as the preferred policy during WW1 and since then it has guided the design of employment policy. An active labour market policy is preferred to a passive one. The work principle has been extended in different ways. One example is policies to increase employment among women, another example is policies to increase employment among older workers.
High employment among women means that child care and also the care of old people that in many countries takes place in the household by women, is instead organized by the public sector. Extensive social services characterize the Swedish welfare state.
The social security system is a central part of the Swedish welfare state. Together with the active labour market policy and the large public service sector it constitutes what has often been called ‘the Swedish model’. Coverage has been high with residence in Sweden as the main criterion, and could be classified as a universal system. Besides a basic compensation, for the compensation has also been based on the earning replacement principle, and the replacement rate has generally been high. There have been ceilings in the schemes, but for those with earnings higher than the ceiling, occupational insurance schemes have complemented it. In this presentation the emphasis is on the design and especially the changes in the social security programs.

4. Changes in the Swedish Model since the 1990s

Up to the early 1990s social security schemes had changed in almost only one direction; they had become gradually more generous. However, in the late 1980s, already before the economic crisis of the 1990s, the policy changed. Intended reforms leading to even more generous systems were cancelled and a discussion started concerning the costs of the social security system. In the early 1990s several problems in the social security system worried the political players. The high and increasing take-up of sickness cash benefits, occupational injury benefits and disability pensions led to a discussion on compensation rates and eligibility rules. The slow growth rate of the economy, combined with a growing number of older people, led to worries regarding the future financing of the system and thereby its viability.
The unemployment insurance schemes gave no cause for worry in the late 1980s. Unemployment was very low, 1.5% of the labour force in 1989, and therefore the costs for the unemployment insurance scheme were also low. However, the situation totally changed during a few years in the early 1990s. A recession caused by combined international and domestic factors led to a drastic increase in unemployment levels previously unsurpassed in the post-war period. More important is that labour force participation declined for the first time since the labour force surveys started in 1963 and the employment rate declined even more.
The costs for unemployment insurances skyrocketed just as the costs for the active labour market policy did in the early 1990s. And as a result of the crisis, governmental income via taxes diminished as employment declined. A small governmental budget surplus turned into a large deficit and the public debt soared. The major political parties all came to favour changes to decrease the expenses for the social security programmes.
Changes were easiest to make in the schemes that paid people who were out of work for short periods due to unemployment, sickness or occupational injury. Unemployment compensation was lowered from 90 to 75% (it was increased to 80% in October 1997), a waiting period was introduced and the eligibility conditions were made slightly more demanding in steps. Similar changes were made for sickness cash benefits. The replacement rate was lowered from 90 to 75% (to determine the total compensation, compensation from occupational insurances should be added) and a waiting period was introduced here also. Compensation was also lowered for occupational injuries (but here the occupational insurances compensate for that change) and the burden of proof was moved from the employer to the employee in 1993.
The most difficult system to change was the old age pension scheme. There are several reasons for that. People’s working lives are influenced by the pension system. Those working would have chosen to go with another pension system. Changes in the pension system therefore had to be made in a way which would not alienate large groups of those who were already in the labour market (large groups of voters). Another factor was that the existing pension system was decided on in 1959 after an intense political conflict including a referendum and an extra general election. The major political parties tried to avoid a political conflict of that type this time, but that also meant that the political process had to take longer.

5. The Former Pension System

I will start by presenting the earlier ATP pension system, which is still totally dominant as regards the distribution of social security pensions, and is still more important than the new pension system for those who retire now. Since 1960 up to the introduction of the new pension system, the social security pension system in Sweden consisted of two parts: a basic pension (folkpension) and a supplementary earnings-related pension (ATP-pension). These two together replace roughly 65% of an individual’s earnings (more in the case of low earners), up to a ceiling. The pensions are indexed according to a base amount that follows the consumer price index. A base amount in 2008 is SEK 41 000.
The basic pension has been the same for everyone except in the case of married couples where both parties receive old age pensions. The sum of their two pensions is less than twice that of a person who is not married to another person receiving an old-age pension. From 1993 a new requirement was introduced: to be eligible for a full basic pension, 40 years of residence in Sweden between the ages of 16 and 64, or 30 years of earnings, are required (only the years with earnings that amount to at least a full base amount are included). If these requirements are not fulfilled, the pension is reduced proportionally.
To be eligible for a supplementary pension — the ATP-pension — three years’ earnings at least one base amount per year are required, while 30 years earnings at the same level are required for a full pension. The pension is based on the average of the 15 years with the highest (real) earnings. If a person has less than 30 years’ with earnings, the pension is reduced proportionally. There is a ceiling of 7.5 base amounts. Earnings above 7.5 base amounts do not affect the size of the pension. Additional pension supplements and housing supplements are granted to those who have low, or no, supplementary pensions.
Between 1913 and 1 July 1976 the retirement age was 67. Since then it has been 65. Since 1960, a reduced early old age pension and an enhanced late old age pension have been available options. It used to be possible to draw an early old age pension from the age of 63. This age was reduced to 60 in 1976 when the general retirement age was lowered, but raised to 61 in 1998. The pension continues to be reduced after 65 too, if it is taken up before that age. Since 1960 it has been possible to delay drawing the pension until the age of 70. In 1960 it became possible to draw half an old age pension (with the reduction or enhancement calculated according to the same principles as for a full pension). The age interval has been the same as for a full pension. The option of a quarter and a three-quarters old age pension has been available since July 1993.
The ATP pension system was a pay-as-you-go system, but combined with partial funding. A pay-roll fee and revenues from the funds have mainly financed the supplementary pensions. At the end of 1995 the AP-funds (the funds for the ATP-pensions) amounted to SEK 564 billion, which was roughly five times the total sum distributed in ATP-pensions in a year. The basic pension (folkpension) has been financed from the state budget, although there has been a special payroll fee for the basic pension.

Eskil Wadensjö: Swedish Institute for Social Research, Stockholm University.

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