Issue 1
a) What difficulties confronted Swedish
reformers who advocated for abolishing the flat
basic pension and re-establishing the wageearnings proportional pension benefits together
with the newly introduced minimum guaranteed
pension?
b) Without means test, how can be minimum
pension benefits correctly assessed?
Tokyo 15 December 2005 / Ole Settergren
Reform Objectives
A
Financial & political stability
B
Transparency
C
Maximize inter-generational fairness
D
Basic income security
Tokyo 15 December 2005 / Ole Settergren
(= Credibility?)
Four basic design options
Tie between
contribution
and
accrued
pension
credit
Defined Contribution
100 %
I
II
PayasFunded
youDefined Benefit
go
III
IV
0 %
0 %
Degree of funding
Tokyo 15 December 2005 / Ole Settergren
100%
100 % insured
Theoretical
or formal
risk
distribution
100 % insurer
(= taxpayers)
Reform Strategy
Contribution
16 16
% % Contribution 2.5 %
Contribution
Inkomstpension
“NDC”
Defined
Contribution
Defined
Benefit
I
Tokyo 15 December 2005 / Ole Settergren
100 % insured
II
Theoretical
or formal
risk
distribution
D
S
G
D = Disability pension
S = Survivors pension
G= Guarantee pension
Premiepension
Funded
Old pension
scheme
III
PAYGO
IV
100 % insurer
(= taxpayers)
Funded
What Is a
Notional Defined Contribution
(NDC)
Pension System?
Tokyo 15 December 2005 / Ole Settergren
Each crown paid during life result in the same
amount of pension credit
Pensionable income of insured
SEK
16 %
2,5 %
Funded
Pay-as-you-go
0
25
30
35
40
45
Age
Tokyo 15 December 2005 / Ole Settergren
50
55
60
65
Development of notional account and
conversion to an annuity
Life
expectancy (65
=18,5)
The amount on the
notional account, SEK
-
Administration
Survivors
bonus
Interest rate
1,6%
Net
indexation
Annuity
divisor
15,7
Interest
with change in
average income
Credited
contributions
=
Pension
0
25
30
Tokyo 15 December 2005 / Ole Settergren
35
40
45
50
55
Age
60
65
70
75
80
Birth
Effect on
Projected
cohort
annuity pension from
...turns divisor
increased
65
life-span
1940
2005
15.7
–
1950
2015
16.4
1960
2025
1970
Pension age to
neutralize lifespan effect on
pension
Gender
neutral
lifeexpectancy
at age 65
65 years
18 y. 6 m.
–4%
+ 7 months
+ 11 months
17.0
–7%
+ 13 m.
+ 20 m.
2035
17.5
– 10 %
+ 18 m.
+ 28 m.
1980
2045
17.9
– 12 %
+ 23 m.
+ 35 m.
1990
2055
18.2
– 13 %
+ 26 m.
+ 41 m.
Tokyo 15 December 2005 / Ole Settergren
Projected Compensation Rate at age 65, Cohorts 1938-1990
Average pension at 65 relative to average wage for those working at that time
Procent
70
Guaranteed pension
60
50
Premium pension
40
30
Inkomstpension
20
10
Life-span effect
Old Scheme
0
Birth Cohort
Tokyo 15 December 2005 / Ole Settergren
Swedish pension market, payments
“Market share”
Private 10%
Occupa15%
tional
Percent of GDP
1.0
Local & regional govern. empl.
Civil servants
Private blue color
Private white color
1.5
10.3
9.3
7.8
ATP
Public
75%
“old” old-age
pensionplan
6.2
Inkomstpension (new)
Premium pension (new)
Survivors pen.
Guaranteed pen.
Tokyo 15 December 2005 / Ole Settergren
0.6
1.0
1.6
1.0
0.0
Issue 1
a) What difficulties confronted Swedish
reformers who advocated for abolishing the flat
basic pension and re-establishing the wageearnings proportional pension benefits together
with the newly introduced minimum guaranteed
pension?
b) Without means test, how can be minimum
pension benefits correctly assessed?
Tokyo 15 December 2005 / Ole Settergren
The main difficulties were to:
secure an agreement between normally conflicting groups of political parities,
not to break up the political agreement during the long reform process
overcome, or survive, wide spread political resistance against the change
agree with the ministry finance the financing of the reform
develop, negotiate, the precise legislation and secure its implementation by the
administrative body of the government
Tokyo 15 December 2005 / Ole Settergren
Swedish Pension reform - a long process
1991
Commission
set up
1990
1991
Social
democratic
government
1994
Parliament
adopts
principles
of the
new
pension
plan
1992
Draft
of a
new
pension
plan
1994
Center-right
government
1998
Main
legislation
of the
new
pension plan
1998
Social
democratic
government
2001
Legislation
on the
automatic
balance
mechanism
2001
2003
2003 first payments
according to new system
But transition rather quick i international comparison
Tokyo 15 December 2005 / Ole Settergren
Possible lessons from the Swedish
pension reform…
A
…very radical changes of mature public pension systems
are sometimes possible in even in “stable” democracies/economies
B
…there may exist an alternative to “continues pension reform”
- a big bang reform and then silence… (Realistic? Good?)
C
…it is, at least has been, technically and politically possible
to establish an automatically financially stable pension system
D
Tokyo 15 December 2005 / Ole Settergren
…some methods that are semi or entirely new, such as the:
- annuity divisors
- balance mechanism
- accounting standard?
Possible lessons from the German
pension reforms…
“You can only sell reform to politicians when
you can guarantee results within their term.
Holding onto and extending power takes
priority over problem solving”
Bert Rürup recently told the German weekly Stern.
Tokyo 15 December 2005 / Ole Settergren
Possible lessons from the German
pension reforms…
That's why - instead of proposing revolutionary
change all at once – Rürup says he prefers
incremental steps, hoping each will take hold
and pave the way for further reforms:
“I would rather put through powerful
reforms in small steps than propose a
‘brilliant concept’ likely to end up in the history
(but not the law) books.”
Tokyo 15 December 2005 / Ole Settergren
The German lessons are probably more
universal than the Swedish…
I agree with Rürup, but the Swedish reform
does not!
The Swedish reform is a result of an
atypical, perhaps unique, political process.
Will it prove “successful” or not? We don’t know,
and in a scientific sense we will never know.
… however the reform is an undisputable success
in at least one sense!
…answer on the penultimate slide
Tokyo 15 December 2005 / Ole Settergren
…redistribution of incomes
Types of Pensionable Income
Sickness
unemployment
11%
parental
benefits, etc.
Disability benefits
4% 2% Child years
83%
Wages &
incomes of self employed
Tokyo 15 December 2005 / Ole Settergren
The Swedish Shift of Pension Structure
– from a restricted perspective
Pre-reform
structure
Earnings
-related
Earnings
public pension
pension
Universal
Universal
flat
flat
rate
ratebenefit
benefit
folkpension
”folkpension”
Tokyo 15 December 2005 / Ole Settergren
Post-reform
structure
Guaranteed
pension
Earnings-related
Earnings
pension
pension
”Inkomst- && premium
premium
pension)
pension”
The guarantee is a basic security financed
with general tax revenue
It changes the distribution of risks between insured and taxpayers (contributors)
for those with low or no income-related pension
Earnings-related 4
pension
+
Guaranteed 3.07
pension
2.72
(33 years, 42%) 2.13
(29 years, 37%) 1.90
1
Unmarried
Married
Guaranteed
pension
Earnings-related pension
(as if inkomstpension contribution was
18.5 percent and as if withdrawn at age 65)
0
Brackets in price indexed base amounts
1.14 1.26
2.72
3.07
Average pensionable income
22% 25%
54%
60%
Years with average pensionable
income to pass bracket
18
19
42
47
Years with income equal to
ceiling to pass bracket
11
12
26
30
Tokyo 15 December 2005 / Ole Settergren
The Importance of the
Guaranteed Pension
Individuals born 1939
In the 100 % bracket
Share of
insured
persons
Share of
guaranteed
pension
Inkomst &
old scheme
pension
Total
public
pension
4%
46%
1%
3%
In the 48 % bracket
28%
54%
18%
20%
Guaranteed completely reduced
67%
0%
81%
77%
100%
100%
100%
100%
Total
People
4%
28 %
67 %
Money
46 %
54 %
0%
Money
1%
18 %
81 %
Tokyo 15 December 2005 / Ole Settergren
Issue 2
Does the collection of pension contributions
from the self-employed come across with
serious problems of assessing and capturing
their incomes?
Tokyo 15 December 2005 / Ole Settergren
Tax evasion ?
People
Share of total work force
Money
Share of total contributions
Self employed
10 %
3%
Employees
90 %
97 %
Yes, most probably
Tokyo 15 December 2005 / Ole Settergren
Issue 3
What were major problems with the separation of
assistance of the disabled and the inherited from
the pension system?
Understood as;
What were major problems with the separation of
the disability pensions and the survivors pensions
from the old-age pension system?
Tokyo 15 December 2005 / Ole Settergren
Issue 4
a) How does the Swedish reform support
women regarding their pension benefits, in
particular, non-working household women?
b) Did the introduction of individual accounts
come across with any difficulties, including
administrative ones?
Tokyo 15 December 2005 / Ole Settergren
The reform has implied high administrative
and fund management cost
Millions of SEK
Percent
change
per year
1999
2000
2001
2002
2003
2004
Inkomstpension
administration
352
617
718
861
807
796
18 %
Buffer fund
management
359
586
946
1 030
1 234
1 497
33 %
Premium pension
administration
292
669
502
599
354
282
-1 %
0
0
231
234
302
486
28 %
242
237
263
321
340
344
7%
1 245
2 109
2 660
3 045
3 037
3 405
22 %
Premium pension
fund management*
Tax office
Total
Tokyo 15 December 2005 / Ole Settergren
The reform has implied high administrative
fund management cost
Buffer fund
management
4
3
Total
2
Inkomstpension
administration
Premium pension
fund management
1
Premium pension
administration
1999
Tokyo 15 December 2005 / Ole Settergren
2000
2001
2002
2003
2004
What are the major problems?
To name a few, favorite issues,
A
…is an automatically financially stable pension system
compatible with the political struggle for power?
B
…will the system cause volatile pension levels, and if so
how will policy makers react to such volatility?
C
D
Tokyo 15 December 2005 / Ole Settergren
…are the new systems claimed better work incentives real, and
if so will it make people work more and for a longer period?
…what will the reaction of the occupational pension schemes
and private market be? Will this reaction weaken or strengthen
the sought reform effects.
What are the major problems?
continued…
E
F
…the combination of compulsory insurance and individual
funding, i.e. the premium pension system, will it prove a
good idea?
…the partial scrapping of the notion of a legal retirement age as
an alternative to increased legal retirement age. Politically
brilliant, but is the signal to weak? It has also caused some
disturbing inconsistencies between systems.
G
Tokyo 15 December 2005 / Ole Settergren
…will insured and policymakers understand the system?
Will they like it?
The one undisputable success of the
Swedish pension reform
A parliamentary committee proposed in 1992
a very radical reformation of the old, largely
popular, public pension system, replacing it with
a new automatically financially balanced plan.
In spite of tremendous obstacles the political
system did exactly that.
If this was good or bad is not, and will not be,
undisputable, but I believe and hope that it was
good.
Tokyo 15 December 2005 / Ole Settergren
End
For more information, please read the
Swedish Pension System Annual Report 2004
You can reach me at
ole.settergren@forsakringskassan.se
Tokyo 15 December 2005 / Ole Settergren