Work and Pension in Sweden

6. The New Swedish Pension System

The main idea behind the new pension system is to increase work incentives by making the pension system actuarially fair and, consequently, viable. The system was to be more of an insurance system and less a system for the redistribution of income. A second aim of the reform has been to see that the pension system guarantees a basic income for everyone in their old age. This means that there should be some redistribution, but it should be more visible than in the earlier system. The major change has been to shift away from a defined benefit to a defined contribution system. This new defined contribution pension system consists of two parts — a pay-as-you-go system and a premium reserve system — with the pay-as-you-go system having notional accounts as its main part. The construction of the defined contribution pay-as-you-go system is an interesting innovation. The transition from the earlier ATP to the new system is gradual. The first group to get part of their pension from the new scheme were those who were born in 1938. The pensions of those who were born in 1954 or later will be based entirely on the new system.

6.1 A Defined Contribution System

The pensions are based on a person’s earnings every year for those aged 16 or over, and include earnings after the age of 65. An amount corresponding to 18.5% of the earnings will constitute the pension credits accrued over a year (the same as the fee, see below); 16% will go into a pay-as-you-go scheme (inkomstpension) and 2.5% to a premium reserve scheme (premiepension). Not only earnings (including transfer payments during unemployment, sickness, etc.) are taken into account when calculating the pensions, but military service, care of one’s own children up to the age of four, years of study to some extent, and years with disability pensions are all considered. In general, hypothetical earnings are calculated and pension credits corresponding to 18.5% of the hypothetical earnings are added to the account of the person concerned. There is a ceiling for income included in the calculation of pension credits. This ceiling was 7.5 base amounts in the year 2000, and since 2001 it is linked to an earnings-based index. The pension credits are linked to an index for the development of the total earnings in the economy.
Each year the accumulated pension credits of those who have reached 65 years of age during the year are transformed into a pension. This is done by way of a “partition rate”, that is decided anew for every cohort upon reaching 65. The size of the partition rate, and thus the pension, depends on the expected period during which those reaching 65 will receive a pension. As remaining life expectancy increases with each cohort, the partition rate will gradually rise, and pensions will therefore be lower for each cohort, unless counteracted by economic growth.
Secondly, there will also be a ‘guarantee pension’ (garantipension) for those with low or no earnings. For a full guarantee pension the applicant must have resided in Sweden for at least 40 years between the ages of 16 and 65. A full guarantee pension is 2.1 base amounts for an unmarried pensioner and 1.87 base amounts for a married pensioner. The guarantee pension is reduced if the pensioner receives an earnings-related old-age pension. If the total pension is 3.0 or more base amounts for an unmarried pensioner, or 2.655 base amounts or more for a married pensioner, the pension will consist of the earnings-related pension only. This means that the guarantee pension is ‘taxed’ at 70% of what is received in the earnings-related pension (but not taxed against other pensions and incomes).
After a person has retired, the earnings-related pensions will be linked to a price and growth-related index. If the funds amount to less than is necessary to cover the pensions, the index is recalculated. Guarantee pensions are linked to a price index.

6.2 Financed by Employer and Employee Fees

The new pensions are financed by fees, which amount to 18.5% of earnings. The funds of the ATP-scheme, the AP-funds, will also be used to finance the pensions. As noted above, military service, childcare, etc. also yield pension credits alongside earnings. The state will pay fees covering the pension credits acquired in this way. The fees are calculated and paid in the same way as the other fees. The only difference is that the state pays the fees, not the individual. The costs of the guarantee pensions will also be paid out of the state budget.
The system is run mainly on pay-as-you-go lines, but part of it is a premium reserve system. 16 percentage units of the fees are paid into the pay-as-you-go system, and 2.5 percentage units into the premium reserve. Payments into the premium reserve system started already from the fiscal year 1995 with 1 percentage unit from the employee. Both parts of the new pension system are defined contribution schemes, not defined benefit schemes.
Half the fee is paid by the employer, half by the employee. An employer fee of 9.25% is paid on the part of the earnings that exceeds 7.5 base amounts although this payment will not be a basis for calculating the pension.

6.3 A Premium Reserve Part

A much-discussed feature of the new pension scheme is the premium reserve part of it. The fee, as mentioned earlier, is 2.5%.
The premium reserve part is regulated as follows:
1. The individual decides which funds should administer his savings in the premium reserve part. Insurance companies, banks and newly started institutions are among the alternatives available. An individual may choose up to five funds and may change funds without notice. There are more than 600 funds.
2. The companies administering the savings must be approved and supervised by Finansinspektionen (the Financial Inspection Authority).
3. It is possible to begin claiming the pension from the age of 61. When the pension starts, the money is transferred to a government pension company, which will administer the premium reserve pension.
The pension funds of the premium reserve scheme will gradually increase. When the system reaches maturity, its size will correspond to 25-30% of GDP. There are also funds in the pay-as-you-go systems. The AP funds constituted these funds at the start. In the first twenty to thirty years of the new system the funds will diminish as they are used to pay for those to whom the rules of the earlier system apply. However, they will not be totally depleted, and will start to rise later when the payments under the earlier system dwindle.

6.4 An Opportunity for Dividing Pension Credits in the Premium Reserve Part between Spouses

Married couples, where both spouses were born in 1954 or later, are offered the opportunity of dividing their pension rights in the premium reserve part of the new system. No such possibility existed in the ATP-scheme. One requisite is that both spouses apply, and that the application is made before 31 January in the year when both spouses want to divide the pension credits. Other requisites for a division of pension credits are that both spouses reside in Sweden and that neither of them receives an old age pension. Once the application has been made, the division of the pension credits continues until an application is made for its discontinuance, or until the couple divorce. If the couple apply together for discontinuance, this becomes valid from the year of the application. If only one of the spouses applies it becomes valid from the year after application was made. Discontinuance does not influence the pension credits that are already divided.

6.5 The Intention: More Flexible and Higher Retirement Age

The change to actuarial pensions is intended to increase labour supply and delay retirement. Other steps have also been taken with the same intention. Earlier, a reduced old age pension could be drawn from the age of 60, but in the new pension system 61 is the lowest age (this change has applied since 1998). At the time of early retirement the pensioner will receive the earnings-related pension only. A guarantee pension can only be granted from the age of 65, and is then calculated in the same way as if the person had retired at the age of 65. Other changes are that earnings after 65 also give pension credits, thus increasing the pension, and that it is possible to delay the take-up of the pension until after the age of 70, thus increasing the annual pension. Another part of the reform is that mandatory retirement agreements with a stipulated age lower than 67 have been forbidden since 1 January 2003.

6.6 An Opportunity for Part-Time Retirement

One way of combining work and retirement is to take up a partial old age pension from the age of 61 or over (the earnings-related part). It is possible to draw a quarter, a half or a three-quarter old age pension.

6.7 The Main Features of the New Pension Scheme

To summarize: the main features of the new pension scheme are 1) that it is a defined contribution system with notional accounts, 2) that it is financed by employer and employee fees, 3) that it has a premium reserve part, 4) that it allows the option of dividing the pension credits in the premium reserve part between spouses, 5) that it offers the chance of part-time retirement, and 6) it is intended to raise the age at retirement.

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