Proceedings No.3 Konberg Hitotsubashi Winter Workshop on Pensions INSTITUTE OF ECONOMIC RESEARCH HITOTSUBASHI UNIVERSITY
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Hitotsubashi Winter Workshop on Pensions 29 Some Lessons from the Swedish Pension Reform by Bo KÖnberg, MP Tokyo, 10-11 January 2002 Swedish Pension Reform
30 Short History Working Group on Pensions Dec - 91 Draft Aug - 92 Five-party Agreement Jan - 94 Parliament Decision June - 94 Tokyo, 10-11 January 2002 Swedish Pension Reform
31 Some Lessons from the Working Group a very clear direction high-level participants great intellectual openness a limited number of people in the room no one in the room just watching the negotiators Tokyo, 10-11 January 2002 Swedish Pension Reform
Contribution Years per Retirement Year 32 Tokyo, 10-11 January 2002 Swedish Pension Reform
Social Insurance Expenditure GDP 33 Payments as a percentage of GDP (incl. prognosis 2001-2002) December 2001/RL/IW/LL Tokyo, 10-11 January 2002 Swedish Pension Reform
Contribution Rates : Swedish Mandatory Public and Contractual Benefits 34 3.5%- Contractual Benefit 2.5% - Funded 22 % 16% - NDC PAYG-component Social Insurance 18.5 % ( ) Tokyo, 10-11 January 2002 Swedish Pension Reform
35 Directions of the Reform Contribution 16 % Contribution 2.5 % (of pensionable income) Link between contributions and benefit 100 % 100 % 0 % New PAYG system I Old PAYG system III Financial accounts system II IV 0 % 100% Degree of funding Tokyo, 10-11 January 2002 Swedish Pension Reform
Every contribution during the whole life career gives 36 corresponding account value SEK Pensionable income 16 % Pay-as-you-go Funded 2,5 % 0 25 30 35 40 45 50 55 60 65 Tokyo, 10-11 January 2002 Age Swedish Pension Reform
Sickness unemployment parental benefits, etc. Types of Pensionable Income 11% Disability benefits 4% 2% Child years 37 83% Wages & income of self-employed Tokyo, 10-11 January 2002 Swedish Pension Reform
16000 SEK Accrual of (notional) account & pension Life expectancy 38 Value of indexation Real rate 1,6% Value of contributions divisor 0 25 30 35 40 45 50 55 60 65 70 75 80 Age Tokyo, 10-11 January 2002 Swedish Pension Reform
( ) 100 75 Pension as an Annuity 1 1.6% The imputed rate =1.6% 39 50 ( ) 25 0 65 70 75 80 Age Tokyo, 10-11 January 2002 Swedish Pension Reform
Contributions and Benefits in the New and the Old Systems ( ) 40 Contributions Benefits National basic Reformed rules pension and ATP 1 550 000 SEK 107 000 SEK 148 000 SEK 155 38% 10.7 53% of final salary of final salary 1 550 000 SEK 107 000 SEK 105 000 SEK 14.8 155 59% 10.7 58% 10.5 of final wage of final wage Tokyo, 10-11 January 2002 Swedish Pension Reform
Guarantee pensions 41 Basic security for those with low or no income-related pension 140 000 Income related + guarantee 120 000 100 000 80 000 60 000 40 000 20 000 0 0 Guarantee Income-related pension 42 000 100 000 Income-related pension Tokyo, 10-11 January 2002 Swedish Pension Reform
Guarantee pensions 42 Basic security for those with low or no income-related pension lowest guarantee level 2.13 base amounts for single people 1.90 base amounts for married people made up to the income-related pension from the age of 65 for full guarantee pension a person must have lived Sweden for 40 years same taxation rules as for the gainfullemployed Tokyo, 10-11 January 2002 Swedish Pension Reform
The Swedish pension reform defines a financially stable pension system 43 Contribution = Entitlement Average wage indexation Annuity = Capital / (Life expectancy & Real rate 1.6%) Balance mechanism Tokyo, 10-11 January 2002 Swedish Pension Reform
Reasons for balance mechanism 44 Transition period Transition period Decline in labour force Decline in labour force Annuity is is calculated on on life life expectancy at at the the time time of of retirement (people will will probably live live longer) Rate of return on the buffer fund Rate of return on the buffer fund Tokyo, 10-11 January 2002 Swedish Pension Reform
45 Fund + Contributions Asset Balance ratio = Pension Liabilities Tokyo, 10-11 January 2002 Swedish Pension Reform
Time and money... 46 Contributions Payments 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 age In average: 43 years age 76 years age ( ) ( ) Contributions Wait 33 years Payments 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 = () age () Tokyo, 10-11 January 2002 Swedish Pension Reform
The Balance Sheet in 2003 ( ) 47 5500 Fund 550 mdr. SEK 56000 Contributions Asset Fund 5550 600 mdr. SEK SEK Pension Liabilities 5 950 mdr. SEK 59500 Balance Ratio = 1.034 Tokyo, 10-11 January 2002 Swedish Pension Reform
Automatic balance mechanism, some properties ( ) 48 Secure financial stability regardless magnitude or type of financial strain Allow less stable ( more socially attractive ) systems deviation from desired indexation only if it is financially necessary No forecasts, nevertheless early reaction to protect liquidity bookkeeping based on well defined, observable historical facts, increases transparency Tokyo, 10-11 January 2002 Swedish Pension Reform
150 145 140 135 130 125 120 115 110 105 100 Income and balance index Income index Balance index faster indexation slower indexation 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 49 Tokyo, 10-11 January 2002 Year Swedish Pension Reform
1,50 Balance ratio, Demography = Baseline, growth = 2% ( ) 50 1,40 1,30 1,20 1,10 5.0% 3.25% Rate of return 5.0% 3.25% 2% 1,00 0,90 2.0% 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2.0%, with balancing Tokyo, 10-11 January 2002 Swedish Pension Reform
Buffer Fund Ratio Demography = Baseline, growth = 2% 51 ( ) 10,0 Buffer Fund Ratio [years] 5.0% 8,0 Rate of return 6,0 4,0 3.25% 5.0% 3.25% 2% 2,0 0,0 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090-2,0 2.0% 2.0%, with balancing -4,0 2.00% med 2.00% utan 3.25% med 5.00% med Tokyo, 10-11 January 2002 Swedish Pension Reform
Buffer Fund Ratio Nativity = Low, growth = 2 % 52 ( ) 10,0 Buffer Fund Ratio [years] 8,0 6,0 4,0 2,0 0,0 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090-2,0-4,0 5.0% 3.25% 2.0% Rate of return 5.0% 3.25% 2% 3.25%, with balancing 2.0%, with balancing 2.00% med 2.00% utan 3.25% med 3.25% utan 5.00% med Tokyo, 10-11 January 2002 Swedish Pension Reform
If a Pay-As-You-Go system is based on Then it is an life income adjusted for changes in contributions adjusted for changes in life expectancy Unfunded Defined Contribution system, which can be named a Notional Defined Contribution system (NDC) 53 Tokyo, 10-11 January 2002 Swedish Pension Reform
Civics 54
Bo Könberg (fp) Stockholms City Council, seat 10 Address: Riksdagen, S-100 12 Stockholm, Sweden Phone: +46 8 7864222 E-mail: bo.konberg@riksdagen.se Homepage Parliamentary missions: Deputy member of Committee on Finance Member of Committee on Social Insurance Deputy member of Advisory Committee on EU Affairs Member of the War Delegation Member of the Riksdag Board Deputy member of Advisory Council on Foreign Affairs Deputy member of Nominations Committee Title: Former County Council Commissioner Born: 1945 More information is available in Debatt & beslut/rixlex. 55