EUROPEAN PAPERS ON THE NEW WELFARE

Work and Pension in Sweden

7. Intended Effects of the New Pension System

According to the ideas behind it, the pension system is intended to achieve several goals.

7.1 Flexibility and Stability

In the long-term the new system should be better adjusted to changes in the economy, to demographic changes and to changes in the labour market. Pensions are determined by the size of the contributions together with these factors, which means that the benefit levels will not be known in advance. The payroll fee is fixed at 18.5%. The costs for the new system in its mature state will be lower than in the earlier system if the growth rate is 1.5%, but higher than the earlier system if the growth rate is 2.5%.
The rather low level of pension fee depends partly on the fact that some forms of compensation are financed from the state budget. These include the guarantee pensions and pension credits granted on grounds other than earnings (military service, studies, child care). Pension credits earned by way of transfer payments are financed by the transfer payment schemes. The growing costs for the government will be partially financed by the proceeds and the depletion of the AP-funds. The disability pension scheme was part of the old age pension system before, but is now a part of the sickness benefit insurance system.

7.2 Maintaining the Savings Ratio

The reduction in the size of the AP funds will in itself entail a drop in the total savings rate of the economy, but this decline will be counteracted by the growth of the funds in the premium reserve scheme.

7.3 Increase in the Supply of Labour

One intended effect of the change in the system is to increase the supply of labour. The work incentives are higher in the new scheme since it is based on earnings over all the years worked, not just the best 15 (as in the earlier system). The idea is that this should mean more years worked (earlier entry, fewer interruptions and later exit on average), and less part-time work. The actual effects, naturally, are uncertain. In Table 2 and 3 we see that labour force participation has increased considerably among older workers since the mid 1990s. The new pension scheme may be one of the factors behind that development.

Table 2: Labour force participation among men aged 55-64 in 1990-2006 (%) in Sweden
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Source: Statistics Sweden, Labour Force Surveys.

Table 3. Labour force participation among women aged 55-64 in 1990-2006 (per cent) in Sweden
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Source: Statistics Sweden, Labour Force Surveys.

7.4 A Fair System

The earlier arrangement, with its combination of the national basic and national supplementary systems, has been criticised for redistributing incomes in a way that does not always lead to greater equality. The earnings-related part of the new scheme will not generally be redistributive, but there are some redistributive elements. For earnings above the ceiling, the employer fee is paid but is not used as a basis when calculating pensions. Another redistributive element in the system is the guarantee pension, which is only paid to those who have low or zero earnings-related pensions. A third redistributive element is that unisex life tables are used.
The committee that prepared the proposal made various estimates of the distributional effects of the new scheme compared to the earlier one. For example, calculations were made for those born between 1954 and 1985 according to the old and the new schemes. The average pension in the new scheme will be 92% of the level in the earlier system for both sexes (the change in the system is neutral in that respect). Those who work for a few years (only 19 or less) will gain from the change in the system (due to the guarantee pension). The rest will lose, in particular those who work for 30-39 years.

8. Strong and Weak Points of the Swedish System for Older Workers

The Swedish system has some strong points but also some weak points regarding the employment of older workers. One of the strong points is the low unemployment rate among both older people and those of other age groups for most of the post-war period. The major exception is the recession of the early 1990s. Low unemployment has made it easier for older workers to stay in the labour market. Another strong point is the work principle and the fact that it as also been applied to older workers. Older unemployed workers have for example been placed in active labour market programs. A third strong point is the new pension scheme which encourages people to continue to work and to avoid early exit.
But there are also weak points in the Swedish policy regarding older workers. One weak point is that there are several early exit ways in Sweden even if they are less frequently used than those in many other countries. Another weak point is that many who are employed are on leave for health reasons.


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