Sweden - Current pension system: first assessment of reform outcomes and output

This led to one of the most radical pension overhauls in OECD countries. The new system is multipillar, whose first pillar combines a minimum flatrate guarantee pension (garantipension), a Notional Defined Contribution earnings-related pension, the income pension (inkomstpension) and a private fully-funded premium pension (premiereservsystem). Quasi-mandatory occupational pensions top up the schemes above. The reform was only possible due to the existence of National Pension Funds (AP-Fonden), so-called ‘buffer funds’, which invested the ATP surpluses during the years, thereby reaching the effective capacity to cover 5 consecutive years worth of benefits.

The reform achieved three important goals: i) it stabilized the long-term financial prospects of the Swedish public pension system; ii) it introduced wage-related indexation, thereby stopping the erosion of the ATP benefit ceilings; iii) by calculating the assessment base over an individual’s life-time, it eliminated the perverse redistribution of the best-year formula. The first (state and mandatory) pillar includes three tiers. The zero tier, the guarantee pension supplanted in 2003 the old basic pension and related supplements. It is universal, taxfinanced, flat rate and indexed to prices.

Eligibility is based on residence (40 years) and age (for people over 65). It is either meant as a source of income for people who do not qualify for public pension or as a supplement for low income pensioners. Means-testing applies for income earned through the income pension, premium pension, supplementary pension (tilläggspension), widow’s pension (änkepension); but not through by income form capital, occupational pensions (tjänstepension) or private pension insurance. In 2009, the full guarantee pension amounted to SEK 6,777 per month for a married persona and SEK 7,597 for a single one.

The income ceilings were SEK 10,959 per month for a single person (around a quarter of gross average earnings) and SEK 9,713 per month for a married one. For those who do not meet this requirement (usually immigrants), there is a special maintenance allowance; low-income pensioners are also eligible for the pensioners housing supplement (BTP) that covers 93% of housing costs up to SEK 5,000 per month for a single pensioner.

The first tier is the income pension (ATP), a very sophisticated Notional Defined Contribution system introduced in 1998 for the cohorts born after 1954 (a mixed system applies for those born between 1938 and 1953) and which implies taking into account lifetime income. It is financed through a total contribution rate of 18.5% of the pensionable pay, i.e. the gross wage minus the 7% employee contribution for pension insurance. Of these, 16% flow into ATP and 2.5% to the funded premium pension. Hence the actual contribution rate on gross wages is 17.21% in total, 14.88% to ATP and 2.33% to the premium pension. Contributions are paid up to a ceiling (111% of the gross wage in 2006), employers pay a tax equal to their contributions above that ceiling and this flows into the general budget. The state (sometimes together with the claimant) covers the contributions for inactive periods during childrearing, military service, higher education, sickness and unemployment.