1. The Swedish Public-Private Mix in Pensions Eskil Wadensjö Swedish Institute for Social Research

2. January 16, 2008 2 Background: An ageing population

3. January 16, 2008 3 Factors behind the ageing of the population 1. Declining fertility rates The decline in the fertility rate leads to a change in the composition of the population. Earlier, the younger the cohort was the larger was the group. This is not so any longer. In many countries the fertility rate is so low that the population will decline. 2. Increased life expectancy Increased life expectancy – especially if it comes about by that people who have reached retirement live for more years – leads to that an increasing share of the population is composed of older people.

4. January 16, 2008 4 The Swedish pension reforms 1913 A funded system but with an income and wealth tested alternative 1936 Less of income testing 1948 Abolishment of income and wealth testing – the people’s pension 1960 ATP earning related supplements 1994, 1998 the new pension system (income pension with notional accounts; a premium reserve part; guarantee pension)

5. January 16, 2008 5 The former ATP system A basic pension (folkpension) And an earnings related ATP 30 years for a full pension (if fewer the pension is reduced proportionally) 15 years with highest earnings decide the pension (60 per cent of the average up to a ceilings) Fees paid by the employer (but in practice by the employee) Some funding (AP funds) but in principle a pay-as-you- go system

6. January 16, 2008 6 Elements of (most) pension reforms Lower pensions (higher fees) (Increased) Funding Higher (or more flexible) pension age From defined benefit to defined contribution schemes

7. January 16, 2008 7 Why a pension reform in Sweden? An ageing population Lower growth than expected at the introduction of the ATP system An expensive system in the long run The economic crisis of the early 1990s The political parties wanted to avoid political conflict regarding pensions A new an interesting proposal

8. January 16, 2008 8 The main characteristics of the new pension scheme in Sweden A defined contribution system Financed by employer and employee fees A premium reserve part A possibility to divide the pension credits in the premium reserve part between spouses An intended more flexible and higher age at retirement The right to stay to the age of 67 A possibility of part-time retirement

9. January 16, 2008 9 Intended effects of the new pension system Flexibility and stability Keeping up the savings ratio Increased labour supply A fair system

10. January 16, 2008 10 The Swedish occupational pension systems Four major systems -Government employees -Employees in municipalities and county councils -White-collar workers in the private sector -Blue-collar workers in the private sector

11. January 16, 2008 11 Central government employees PA03 (2003) Defined contribution -1) Individual old age pension -2) Supplementary old age pension – Kåpan Defined benefit for those with pension bases over 7.5 price base amounts (almost 75 % of all employees have wages above €2,700/month )

12. January 16, 2008 12 Central government employees, cont. 1) Individual old age pension -Earned from the age of 23 -2.3 % of pension bases (all wages paid and other cash benefits) -The employee chooses how the contributions are to be managed -Pension is paid lifelong from the age of 65

13. January 16, 2008 13 Central government employees, cont. 2) Supplementary pension – Kåpan -Earned from the age of 28 -2.0 % of the pension base up to 30 income base amounts (iba) (≈ €12,500/month) -The employee does not choose the management of Kåpan -Kåpan is usually paid for 5 years, but can also be drawn life long

14. January 16, 2008 14 Central government employees, cont. Defined benefit pension -Calculated on the average pensionable wage in the last 5 years prior to retirement -The pensionable wage is limited to 30 income base amounts -To obtain full pension 30 years of employment in the central government are required (otherwise decreased proportionally) -Earned from the age of 28

15. January 16, 2008 15 Central government employees, cont. The defined benefit pension amounts to -60 % of pension bases between 7.5 iba and 20 iba (€2,737/month and €8,313/month) -30 % of pension bases between 20 iba and 30 iba Since 1998: Financed by premiums paid by the employer decided according to the age, wage, wage increases and age of retirement of the individual. The average premium was 9.35 % in 2005. Pensions earned before 1998 are financed through the state budget

16. January 16, 2008 16 Municipalities and county councils KAP-KL (from 2007) Defined contribution -Earned from the age of 21 -4.0 % of wages (increases to 4.25 % 2008-2009 and to 4.5 % in 2010) -In the old pension plan, the contributions were between 3.5-4.5 % for wage parts up to 7.5 pba and 1.1-2.1 % for wage parts over 7.5 pba -The employee chooses how contributions are to be managed

17. January 16, 2008 17 Municipalities and county councils, cont. Defined benefit -To obtain a full pension 30 years of employment are required (otherwise the pension is decreased proportionally) -Earned from the age of 28 -The pension can be drawn from the age of 61 at the earliest and from the age of 67 at the latest

18. January 16, 2008 18 Municipalities and county councils, cont. According to KAP-KL the defined benefit pension amounts to -55 % of pension bases between 7.5 iba and 20 iba -27.5 % of pension bases between 20 iba and 30 iba However, there are transition rules from PFA01 for individuals born before 1968 (62.5 – 55.5 % for wage parts between 7.5 and 20 iba)

19. January 16, 2008 19 Municipalities and county councils, cont. Financing the defined benefit pension Employers have costs for both those employed today and retired earlier employees. For pensions earned before 1998, no contribution was set aside. In 2005 municipalities paid 3 % and county councils 5 % of the wage sum for pensions earned before 1998. They also set aside 6.5 % and 9 % respectively for pensions earned in 2005 including the contribution based part.

20. January 16, 2008 20 White-collar workers in the private sector ITP (1960) Defined benefit -Earned from the age of 28 -For full pension 30 years of employment are required (8 hours/week) -The size of the pension is based on the wage at retirement and the average bonus payments during the last 3 years before retirement

21. January 16, 2008 21 White-collar workers in the private sector, cont. The pensionable age in ITP is 65, but the defined benefit pension can be drawn from the age of 55 with a deduction of ≈ 0.6 % for each early month taken or be postponed up to the age of 70 and then increased by 0.5 % per month postponed.

22. January 16, 2008 22 White-collar workers in the private sector, cont. The defined benefit pension amounts to -10 % of wage parts below 7.5 iba -65 % of wage parts between 7.5 and 20 iba -32.5 % of wage parts between 20 and 30 iba Financed by individually calculated premiums. Average premium was 5.88 % in 2005.

23. January 16, 2008 23 White-collar workers in the private sector, cont. ITPK - Defined contribution (1990) - Earned from the age of 28 -Paid for 5 years as standard -2 % of the wage up to 30 iba -The employee chooses how it is to be managed

24. January 16, 2008 24 White-collar workers in the private sector, cont. NEW PENSION PLAN from January 1, 2007. Applies to those born in 1979 or later. Also employers who become new members of the Confederation of Swedish Enterprise can choose the new ITP system for all employees

25. January 16, 2008 25 White-collar workers in the private sector, cont. The new ITP-pension: Only defined contribution -Earned from the age of 25 -4.5 % on wage parts up to 7.5 iba -30 % on wage parts above 7.5 iba -Retirement age is 65 but the pension can be drawn from 55. -The employee chooses how the contributions are managed but at least 50 % has to be placed in a ”safe” insurance plan

26. January 16, 2008 26 Blue-collar workers in the private sector Pension plan SAF - LO (1996) Only defined contribution -Earned from the age of 24 -3.5 % of wages and taxable benefits -The employee chooses how the contributions are to be managed -The pension can be drawn from the age of 55 -Paid lifelong or for a shorter period of at least 5 years

27. January 16, 2008 27 Summing up the costs Area Total premium set aside in 2005 Contribution based part in 2005 Central government 13.65 %4.3 % Municipalities9.5 %3.5-4.5 %<7.5 pba 1.1-2.1 %>7.5 pba County councils14.0 %3.5-4.5 %<7.5 pba 1.1-2.1 %>7.5 pba White-collar, private sector 7.88 %2.0 % Blue-collar, private sector 3.5 %

28. January 16, 2008 28 Supplementary benefits and economic policy The schemes are influencing each other by being complements and substitutes The state influence the schemes by the tax system The state regulate the complementing schemes to some extent Collective agreements may be extended (not in Sweden) Legislation regarding collective agreements (but not in Sweden)

29. January 16, 2008 29 Table 2. Labour force participation among men aged 55-64 in 1990-2004 in Sweden (per cent)

30. January 16, 2008 30 Table 3. Labour force participation among women aged 55-64 in 1990-2004 (per cent) in Sweden

31. January 16, 2008 31 Changes in the number with an early old age pension between 2003 and 2006 People aged 61-64 with some form of old age pension were 28,041 in 2003 and 66,846 in 2006 People aged 61-64 with a ¼-pension were 1,031 in 2003 and 14,719 in 2006 The population in this age group increased from 386,743 in 2003 to 475,436 in 2006 (it explains part, but only a part of the increase)

32. Swedish Institute for Social Research www.sofi.su.se