Comments on Financial Stability of Swedish Pension system

1
Comments on Financial Stability of Swedish
Pension system

• for Urban Institute Conference
• by Estelle James
• February 2006

2
Main points

• Swedish system is very clever
• Gets close B-C link without transition costs
• Very generous
• high replacement rate and minimum pension
• Automatic stabilizers for system
• unexpected outcomes reduce benefits,
• increase outlays from general state budget
• Different starting points limit relevance to US
• our benefits start much lower
• using general budget as shock absorber likely
  means making large deficit still larger

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Very clever

• NDC gets labor market benefits of close
  benefit-contribution linkage without high
  transition costs of FDCNDC is PAYG
• NDC is PAYG, therefore has low implicit return,
  doesnt increase national saving, not
  automatically sustainable as population ages.
  Financial stability achieved in other ways.
• NDC is not redistributivethis is achieved by
  separate minimum pension guarantee (interferes
  with benefit-contribution linkage at bottom end)

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Very generous benefits

• Replacement rate now 65, expected to be 55 in
  future, of which 2/3 from NDC, 1/3 from FDC
• Minimum pension is 30-40 average wage. May fall
  due to price indexation, but authors expect wage
  linkage to continue many retirees receive it.
• Also, recipients of minimum pension get housing
  supplement (90 of rent paid by government)
• Generous minimum permits risk-taking, high
  expected return, in FDC
• Minimum benefit in Sweden is higher than our
  average benefit

5
Very generous generosity costs

• Contribution rate 16 for NDC 2.5 for FDC up
  to ceiling 8 paid without benefit for all
  wages above ceiling
• 3-4 quasi-universal occupational pension
• govt budget pays for guaranteed pension,
  housing allowance, disability and survivors
  insurance, pension credits for those on parental
  or sickness leave, childcare years and
  unemployedcosts equivalent to 12-14 wages??
  (unclear)
• Total cost35 of payroll??
• (medical insurance and long term care)

6
Built-in stabilizers mechanisms

• If people live longer than expected, annuity
  factor on notional accumulation rises so annual
  benefit falls for new retirees
• Notional account is indexed to wage growth (g) so
  future benefits fall if g is low. If g lt 1.6,
  benefits fall for current retirees also.
• ABM (automatic adjustment mechanism) if
  (notional assetsbuffer fund)ltpension
  liabilities, due to falling fertility or lf
  participation rates, notional accounts and
  current benefits fall
• Note no automatic adjustment for guaranteed
  minimum, housing supplements, disability
  insurance, and other expenditures from govt
  budget. In fact, these will probably increase.

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Built-in stabilizers where does risk go if not
borne by NDC?

• Brunt of unexpected outcomes is borne
• mainly by present and future benefit cuts, except
  that bottom is protected by minimum pension
• secondly by increases in general government
  spending
• No automatic increase in contributions
• starting point is high benefit contribution
  rate
• No rise in retirement age, fall in minimum
  pension
• Most uncertain items put into govt. budget but no
  calculations of costs under alternative scenarios
• Authors claim that some of government spending
  will increase national saving, but this wont
  happen if financed by larger budget deficit

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Relevance to U.S.in principle but limited in
practice

• In principle we could have automatic adjustment
  when life span increases, growth decreases or
  expected PDV of revenues lt PDV of liabilities
• But we are starting with much smaller benefits
  and no minimumnot clear we want benefits to bear
  most of brunt of unexpected events
• We could have a formula that splits adjustment
  between benefits, contributions, retirement
  age, and specifies distribution of cuts by income
  class
• but we would have a hard time agreeing on this
  (long term commitment on income distribution)
• We could shift uncertain spending items into
  govt. budgetbut this would be difficult given
  deficit