How Sweden gave up the world’s most generous pension scheme to become a nation of unwilling fund brokers

“I’m sure that our actions will not be popular in 20 years’ time when retirees realise what we have done.”

Göran Persson, leader of the Social Democrats and Prime Minister of Sweden was speaking with his characteristic candour during a visit to Australia in 2005.

It was only six years after the launch of the new national Swedish pension system. And the leader of the biggest party behind the reform was already certain that the outcome would be widespread misery for all those who had been counting, as they had been told they could, on being provided for after a long life of labour.

The previous system, known as the “allmän tilläggspension” or more commonly ATP, was in many ways the crowning achievement of the long era of social democratic rule in Sweden. Perhaps they hadn’t done all they had promised, but they had at least done this: nobody had to suffer poverty in their old age.

But now, that is no longer the case.

Let’s recapitulate.

The first truly universal Swedish pension was put into place in 1948. A previous system had been implemented as early as 1903, but it was flawed and did not really provide pensions for all citizens the way it was supposed to.

The 1948 system however, extended to all citizens and paid out a flat rate to each and every one. Beggars and kings, it was said, received the same pension. This system effectively tripled the average rate of the benefits. This was then expanded with the so-called ATP system in which the state guaranteed that old age benefits for all citizens would meet a certain percentage - 65% - of that person’s wage.

Though perhaps less egalitarian than the 1948 pension system, the ATP was pushed through the Riksdag by the left-wing and social democratic parties in a close struggle with the right-wing parties, in the end coming down to a single vote.

The right-wing parties, which wanted a wholly private system where employers and employees agreed on pensions without the involvement of the state, would go on to claim that the ATP was the very symbol of all that was wrong with the Swedish welfare state. Much in the same way, the social democrats held it up as the prime example of the achievements of their long rule.

The system was fairly simple: work for 30 years and you receive at least 65 percent of your highest average annual salary each year starting at the age of 65. It was considered one of the most generous pension schemes in history. The system, however, was put in place during a time of unprecedented economic growth. And as the economy slowed down, even those political parties which had once been its proudest defenders would begin to fidget and look longingly at other, less expensive schemes.

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The current system was implemented in 1999, after a harsh economic crisis and during an international rollout of neoliberal reforms among countries in the global north. Only the left-wing party decided against signing off on the reform.

The system is largely unchanged to this day and consists of three parts. The income pension, the premium pension and the guaranteed pension.

The income pension is based, like in the old system, on the income of the beneficiary during his or her working years. The premium pension is a set amount of that sum that each individual has to place into at least one of over 500 funds. The combined pay-out of these two systems are growing more slowly than the average wage, meaning even the better-off retired are becoming relatively poorer.

The last part is the guaranteed pension, financed directly by the state budget. This part comes into effect only when the other two are too low. The guaranteed pension has a ceiling of about 800 euros per month, barely a quarter of the average working wage. Though many of the elderly forced to survive on this third leg of the pension alone also receive housing subsidies, this level places retired workers firmly at the bottom of society income-wise. Compared to the ATP system, the guaranteed pension pays only about a quarter of the average wage, going up to just above a third if you count the housing benefits available to the poorest pensioners. This means they currently receive about half of the lowest amount obtained with the previous pension scheme. And this time, there are no safeguards.

What the new system guarantees is in fact not a certain benefit for the retired, but a certain cost for the people still working. This cost is 17.5 percent for most people. Those with high enough salaries only pay for this percentage on the first 4500 euros they earn each month, meaning that wealthier citizens contribute a smaller part of their earnings.

From this money, the public pensions are paid through an automated mathematical system tied to the general economy. Whenever the market takes a downward turn, the automatic brake might activate - as it has several times since the system’s implementation - and in an instant lower the pay-out for everyone. The system is constructed in such a way that no more money can ever go out than is currently coming in, and also takes account of any fluctuations in average life expectancy.

Many Swedes also have a private pension negotiated through their labour union. For most people, this is the only way to get a somewhat liveable standard after retirement, barring personal savings.

This highlights the great inequality of the system. Those workers forced to make their living in professions where unions are weak or non-existent can miss out on this vital part of the pension. As ever, this means that marginalised people are hit the hardest.

More precarious jobs also mean less stable income - meaning lower pensions from the state. Women, who earn less and stay at home with children much more often than men, will naturally be worse off. Data from Sweden’s national bureau of statistics show that women do indeed receive lower pensions than men, perpetuating the gender pay gap throughout retirement and until death.

People from outside the EU are arguably hit the hardest. With the pensions being based on the wages earned in Sweden, many are liable to lose large chunks of their income pensions and premium pensions compared to workers born in the country. This loss of retirement income can often not be replaced by benefits from a previous country of living - most refugees are not arriving from generous welfare states.

Adding insult to injury, the guaranteed pension requires you to have lived in the country for 40 years to be eligible for the full amount. Each year before that deducts 1/40 of the total pay-out. This means that any refugee arriving in Sweden after the age of 25 will receive even less than the aforementioned 800 euros.

This in itself is of course a driver of further segregation. It’s hard to imagine a more obvious image of a second-class citizen than a man or woman receiving only half of the pension of his or her neighbour for twenty years for no other reason than that he or she was born in another country.

And though any responsible politician will nod gravely when these complaints are brought up (the retired are a significant voter group after all) the pension scheme is not likely to change.

In fact, it was designed not to.

Many analysts, researchers and journalists have described the Swedish pension system as a “black box”, a pension machine the inner workings of which are incomprehensible or invisible.

As the architects behind it have many times gladly pointed out, the genius of the system, no matter if you consider this genius evil or not, is that it is self-contained. The level of the pay-outs are the result of mathematical calculations and the movements of the market, not political decisions or notions of justice. One relevant factor is that the system was voted through between elections, meaning no political party had to “face the voters” until the deed was done. According to several interviews conducted with the politicians responsible, none of the parties involved wanted the issue of pensions to become a political one. One must presume this means they all knew, like Göran Persson did, that their solution would not be well received once its full scope became clear.

When faced with questions regarding the low pay-out of pensions today, politicians generally reply that it’s out of their hands. And in a way, it really is.

When the five parties reformed the pension system in the 1990s, they acted to move the responsibility, along with any economic risk, from the state to the individual citizen. Not only is the working wage the basis of the pension, but for part of the savings, you need to become a player in the financial sphere, choosing which funds to place your money in. If you don’t get a high enough pay-out, you arguably have yourself to blame.

Whether or not correct placement choice is likely, or even possible, is of course debatable. Is it feasible that not just one but every single citizen can make an informed decision about which funds to place their money in? The workings of the stock market are partly beyond the scope of this article, but it could well be argued that even the most competent professional brokers are but gamblers, playing a high-stakes game with money that’s not really theirs.

Statistics seem to imply that the average Swede agrees with at least the first part of this assessment. Fewer and fewer people make an active choice about which funds to save their pension in every year. For 2019, only 1 percent of the people reaching retirement age had made such a decision.

Luckily, AP7, the state-run fund that acts as the default choice, has provided higher returns than the average saver who made an active choice. This, of course, is far from certain in the future.

The funded part of the pension system has also opened up a market for a wide variety of grifters. The government is currently slashing the number of available funds by half, citing a problem with some funds being “not serious”. These funds have so far been handling the retirement money of everyday Swedish citizens for almost 20 years. In addition, the heads of pension fund management firm Allra were sentenced to long prison sentences after having been found to have defrauded their clients out of millions of euros in savings. Despite authorities seizing the culprits’ sports cars and luxury villas, there is scant chance of the people affected ever getting their money back.

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The retirement plans of the entire country are now tied explicitly to the market. Not only has this created a nation of unwilling fund brokers and shifted responsibility for the pensions, it has also ensured that the growth of the economy has become a personal economic interest for all citizens - otherwise they might lose parts of their social security. Any policy that might disrupt the market now also runs the risk of disrupting the pension system. A party that wants, for example, to step up the efforts to save the climate, take back control of the schools and the healthcare system from private companies, or even impose a lockdown during a pandemic, would have to add the risk of ruining the retirement of thousands in addition to the already significant challenges faced by policies like these.

Annette Nygren, a social anthropologist who studied the reform of the pension system for her 2008 dissertation, put it very succinctly:

“It is not loyalty to an emperor or employer that the pension scheme is to ensure, but a quest for economic growth, both public and private, that is to be accomplished, all political differences set aside.”

During the past year, the situation for the retired was revised in two ways. A tax cut on pensions as well as a slight but needed increase in the benefits for the poorest pensioners were both implemented. The latter was possible only with the left-wing party leveraging its position in a hung parliament to strong-arm the Social Democrats into acceptance.

These two reforms might seem to counteract the previous point, but it is important to note that neither of them was a change to the actual pension scheme. The tax cut was a different thing entirely, and the increased benefits were added as a direct pay-out on top of the existing system. Even when actually making changes to the pensions, politicians are forced to work around, and not within, the pension machine.

So in conclusion, twenty years after the introduction of the new pension scheme, it has proved not only to pay less than the previous one and be remarkably hard to alter, but also to actually exert a sort of political force of its own by reducing the window of possibility, narrowing the amount of choices and seemingly helping to chain the country to a path of neoliberalism.

In other words: it works just as intended.

This article was first published in German in: https://www.rosalux.de/news/id/45727