Swedish Lessons for Social Security Reform
February 5, 2004
President Bush has proposed allowing younger workers "the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account." In 2000, Sweden instituted a system of personal accounts that holds many lessons for U.S. reforms.
Sweden's reform process began in 1991, when its generous retirement system was expected to exhaust its "buffer" funds in about 20 years. It now has a blended system:
- Beginning in 1995 the government began tucking away 2.5 percent of payroll for employees to invest once the system was set up.
- Personal investment accounts were not established until 2000, with some 456 funds initially -- now around 600.
- Anyone who did not choose a fund was automatically assigned to a default fund that must invest 80 to 90 percent of its assets in stocks.
- Employers and employees now contribute a combined 16 percent of
Payroll toward a "pay as you go'' retirement system like U.S. Social Security, and an additional 2.5 percent toward individual retirement accounts.
Workers with little or no pension income are guaranteed a minimum pension amount to keep them above the poverty line. Those born after 1954 are fully in the new system, while older workers are phased in.
However, Henrik Cronqvist and Richard Thaler of the University of Chicago have found that a third of Swedish workers did not choose a fund when the system started and, since 2000, 92 percent of new enrollees have been added to the default fund.
Apparently, many individuals were paralyzed by the large number of fund choices. This has happened in many 401(k) plans in the United States. Swedish workers also have tended to pick funds composed of Swedish companies. The diversified default fund, by contrast, has only 17 percent in Swedish stocks.
Source: Alan B. Krueger (Princeton University), "Retirement Lessons From Sweden," Economic Scene, New York Times, February 5, 2004.
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