NCPA - National Center for Policy Analysis


March 7, 2007

Like the Social Security system in the United States, the Swedish pension plan uses current workers' contributions to fund current retirees' benefits.  Beyond that, however, the differences are vast, says the Wall Street Journal.

For instance, under the Swedish program:

  • Payouts are calculated according to salaries and aging projections, giving it the flexibility to accommodate revenue and population shifts.
  • If the economy does well, future pension payments will go up, and vice versa.
  • In addition, Sweden mandates that a slice (2.5 percent) of total pension contributions (18.5 percent) go into private accounts similar to a 401(k), where the money is invested in mutual funds.

The concept of individual accounts has been key to selling the plan to Swedes, says the Journal.  Advocates say seeing their retirement expressed as an individual account has the psychological effect of encouraging people to work longer to win bigger benefits.  And in fact, since the change took effect, the average age at which Swedes retire has risen to 63, up from the official retirement age of 61.

There have been detractors, however, mainly among organized labor that would prefer largely subsidized guaranteed plans, says the Journal.  But many others are catching on:

  • A World Bank book based on the Swedish model has been translated into Chinese; and next month, Egypt's government will review plans to replace the country's failing system with a Swedish version.
  • Poland, which transition to a Swedish-style system in 1999, has been deemed by the European Union as having the lowest long-term budgetary impact of aging in the EU; Poland also has larger personal accounts, which let them contribute up to 7.3 percent.
  • After studying the Swedish model, Brazil started using individual-contribution and life-expectancy rates to calculate private-sector pension payouts -- and they have seen costs fall since.

Source: Joellen Perry, "Sweden's Pension Antidote, Wall Street Journal, March 5, 2007.

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