Heritage Study: Swedish Lessons On Social Security
July 31, 2000
Sweden, the first nation in the world with a mandatory government retirement system for all citizens and sometimes considered the ultimate welfare state, is now in the process of privatizing part of its pension program.
With a pay-as-you-go system similar to the United States' Social Security program, Sweden faced demographic and financial problems. The only solutions were to raise taxes and cut benefits to prolong solvency, or give workers private retirement accounts. Policymakers decided privatization was the best solution. The new system has four key features.
- Workers can invest 2.5 percentage points of the 18.5 percent of their income that they must set aside for retirement; they will soon be able to choose the pension fund into which the money goes.
- The remaining payroll tax funds a dramatically restructured pay-as-you-go government program that provides a pension based on the amount of taxes a worker has paid into the system rather than on years in the workforce and earnings history.
- The government will continue to guarantee a minimum pension funded by general tax revenues.
- Current retirees and old workers will continue to receive retirement income based on the new program; workers born from 1938 to 1953 will receive benefits form both the old and new systems as the new system is gradually introduced.
The combination of partial privatization and reform of the pay-as-you-go portion of the retirement system will result in a fiscally sustainable system without raising payroll taxes.
In addition, private investments over time will allow workers to benefit from compounding returns, which will increase retirement income. Further, the reform will increase national savings and provide capital for future growth.
Source: Goran Normann and Daniel J. Mitchell, "Pension Reform in Sweden: Lessons for American Policymakers," Backgrounder No. 1381, June 29, 2000, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.
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