Retirement Saving
Sweden’s Move to Defined Contribution Pensions
Research Report
Edward Palmer, Swedish Social Insurance Agency and Uppsala University
October 2007
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In 1994 Sweden converted its defined benefit public pension scheme into a combination of a notional defined contribution (NDC) pay-as-you-go scheme and a financial defined contribution (FDC) scheme. At the time, there were only a few examples of national mandatory financial schemes in the world. This AARP Public Policy Institute Issue Paper by Edward Palmer of the Swedish Social Insurance Agency and Uppsala University discusses the motives for and the design and implementation of the reformed Swedish pension system.
The pension system’s financial stability was the main reason for pension reform; however, inter-generational fairness was another concern. Without change, pension costs would continue to rise for future workers. In addition, the old system was viewed as intra-generationally unfair, in part because benefit calculations led to a redistribution of benefits from low to high earners. The new system is financially stable and more inter- and intra-generationally fair. Retirement age has become flexible from age 61, and there is an actuarially fair return for each additional year of work. Workers can also collect one-fourth, one-half, or three-fourths of their pensions while continuing to work, which facilitates phased retirement. Benefits are indexed to life expectancy, a change that will require working longer or saving more for the same benefit as life expectancy rises. (28 pages)
Pub ID: 2007-16