[Sweden] How the partial privatization of Social Security has worked out

Sweden - During dramatic pension reforms in the 1990s Sweden privatized part of its Social Security system, MarketWatch looks at how that decision is affecting the country in 2019.

A contribution of 18.5 per cent of workers’ salaries is made by employers and employees into the country’s pension system. Around 2.5 per cent of the contribution goes into a privatized investment account which is earmarked solely for an individual. This investment account is called a “premium pension.” 

Employees may choose how this money is invested. They are offered a list of funds to select from. Hervé Boulhol - senior economist of pensions and population ageing at the Organisation for Economic Cooperation and Development - says, “It could potentially lead to an increased future pension because of financial returns, and also to diversify the source of funding.”

The separation of pensions into individual accounts was reportedly intended to increase interest and commitment to the system. Swedish workers receive a bright orange envelope in the post with their account statements and according to a report in The Wall Street Journal, the psychological effects have encouraged some people to work longer (link via MarketWatch).

Brookings notes that under the Swedish system workers are encouraged to carefully research the various funds and choose one most appropriate for their portfolios (link via original reporting). Not all workers will choose well.

Another wave of pension reform is underway in the country. At present retiring workers may choose to withdraw from their pensions any time between 61 and 67. Under the new rules, retirees will have to be a specific age. In 2023 they will need to be 62 years old and by 2026 the age will be 64. Thereafter the age will be tied to life expectancy rates, Annika Strandhall - Sweden’s Minister for Social Security - said. 

Additionally, Sweden is extending the right for workers to stay in the labour market, rather than continue the present system where a company may force an employee out at 67.

Ms Strandhall points out that there is still more work to be done, particularly to ensure women and new parents are properly covered. “These groups feel they are not getting out from the system what they should get,” she said. “They also feel like they have lost when they changed the pension system in the ‘90s.”

The privatization of part of the pension system was only a fraction of the previous reform but it is something the US could not achieve. According to Vox, president George W. Bush had proposed privatizing Social Security in the early 2000s (link via MarketWatch). He said the system had funding issues and needed to be changed. Critics raised concerns that private accounts could hinder Americans’ future retirement security since a large proportion of their money would be affected under a market downturn.

By their nature investments are risky but a privatized account could safeguard individuals from political risk. Defined contribution and - more rarely - defined-benefit plans are also on offer.

The system is working so far. Hervé Boulhol said the Swedish pension has survived periods of market volatility, including the Great Recession, “The system proved to be resilient.”