SUPERANNUATION INSWEDEN

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1 SUPERANNUATION INSWEDEN.. 0 by ORJAN HULTAKER Uppsala University, Sweden This Occasional Paper was prepared by Professor Hultaker while he was a Visiting Fellow with the Australian Institute of Family Studies in He is Professor of Sociology at Uppsala University, Sweden, and is currently Secretary of the Committee on Family Research of the International Sociological Association. Institute of Family Studies, Australia 766 Elizabeth Street Melbourne 3000 Australia A\FS ace If

2 Institute of Family Studies - Commonwealth of Australia 1985 Institute of Family Studies 766 Elizabeth Street Melbourne 3000 Australia Telephone (03)

3 Superannuation in Sweden A national superannuation scheme was introduced in Sweden before World War 11, granting a small income to all senior citizens. The pension was universal and provided the same amount of money to everyone regardless of their pre-retirement earnings. There were no income or assets tests, but the pensions allowed to a married couple were smaller than those received by two single persons. In order not to stigmatise the recipients of welfare, universal nonmeans-tested transfer payments have been a common characteristic of many of the Swedish welfare programs, but their universal character has also made them very expensive and has increased the level of taxation needed to pay for pensions. A Hot Political Issue Many groups of employees, including civil servants and many white collar private employees, had superannuation by agreement with their -employers before the late 1950s, when national earnings-related pensions became a hot political issue. It was controversial not so much because of resistance to guaranteed earnings-related superannuation, but because the main political parties had different opinions about the financing of the scheme. The Social Democrats wanted to combine the superannuation scheme with a public fund to which all employers - public and private - should every year contribute an extra payroll tax. They wanted to increase public savings in order to compensate for the drop in private savings it was anticipated would follow the introduction of national earnings-related superannuation. 1

4 Moreover, it was said that the pension fund would make the functioning of this scheme easier in years when the productive birth cohorts are relatively smaller than the cohorts of retired people. The major non-socialist parties opposed the proposal by the Social Democrats, saying they would cause the nationalisation of the capital market. They advocated a different method to raise the revenue needed. This political controversy led to the resignation of a coalition government formed by the Social Democrats and the Agrarian party. The Government called for an early election and a referendum was held. In the end the Social Democrats succeeded in getting a majority of Parliament to support their Bill for the introduction of national earningsrelated superannuation and a pension fund, but this was possible only because one liberal MP abstained from voting. A Four Component System The Swedish pensions scheme is primarily a means for providing income for citizens over 65 years of age, but there are additional beneficiaries, among whom are non-retired widows, children of deceased citizens, and handicapped and chronically ill people. The present system of pensions has four different components, which can be added to one another, as shown in Figure 1: national universal pensions, in existence since before World War II, provide the same income to all senior citizens regardless of their pre-retirement earnings; national earnings-related superannuation, started in 1960, pays to all retired employees a pension that is 60 per cent of their preretirement earnings below a ceiling; earnings-related superannuation by agreement between employers and employees; and individual pension rights that citizens can buy from private insurance compames. Basic Equivalences National pensions are indexed to compensate for the increase in consumer prices. This is done by means of a 'basic equivalence' of Swedish crowns (SEK). Each December the basic equivalence is augmented to 2

5 Figure 1: Senior citizens' pensions in Sweden Pension Individual private Earnings-related by agreement between employers and employees National earnings-related National universal Before retirement earnings compensate for the last year's inflation, and it increased from SEK 19,400 in 1983 to SEK 20,300 in 1984 or by a little less than 5 per cent. The amount of all pensions and benefits can be expressed as a number and fractions of basic equivalences, which remain the same from one year to the next. However, the value of the basic equivalence ~hanges with inflation and so do the pensions and benefits. A pension of 2 basic equivalences thus increased from SEK 38,800 in 1983 to SEK 40,600 in National Universal Pensions A single person receives a pension of 96 per cent of 1 basic equivalence SEK 19,488 in A married couple is supposed to exercise economies of scale and to live more cheaply than two single persons; thus they receive 157 per cent of the basic equivalence (SEK 31,871 in 1984). Senior citizens without or with a low earnings-related superannuation are paid an extra per capita universal pension of 48 per cent of the basic equivalence (SEK 9744 in 1984). A married couple receive 3

6 the same amount of the extra universal pension as two single persons. The basic equivalences and the 1984 universal pensions are shown in Table 1. Table 1: The national pension received by single persons and married couples in 1984 Senior citizens with an additional earningsrelated pension Senior citizens without any additional earningsrelated pension Single persons Married couples Single persons Married couples Basic equivalences 1984 SEK (a) ,488 31, ,232 51,359 Note: (a) 7.3 Swedish Crowns (SEK) = A$1 in April National Earnings-related Superannuation In addition to the universal pensions, all employees receive a national earnings-related superannuation. Full pension is given to people who have earned more than 1 basic equivalence during at least 30 years, and it is reduced in proportion to the number of lacking years - 1/30 per year less than 30. Each year's earnings are translated into the basic equivalences of that year, and a retired person's pension depends on the average number of basic equivalences during his 15 best-paid years. His superannuation is equal to 60 per cent of the average minus 1 basic equivalence. A ceiling maximises the pension to 60 per cent of 7.5 basic equivalences. An employee thus receives an earnings-related superannuation that is 60 per cent of his past average earnings between 1 and 7.5 basic equivalences. In 1984 this meant 60 per cent of his earnings between SEK 20,300 and SEK 152,250, which would result in a superannuation ranging from zero to SEK 91,350. The earnings-related superannuation is added to the universal pension of 96 per cent of 1 basic equivalence for single people and 157 per cent for married couples. The earnings-related superannuation is the same for married and single people, and both spouses can both receive superannuation, given that they have both had earnings greater than 1 basic equivalence. 4

7 In 1984 a single senior citizen thus received a total national pension in the range from SEK 29,232 to SEK 110,838, while a married couple received from SEK 51,359 to SEK 214,571. Additional Earnings-related Superannuation Most white collar employees and civil servants receive an earningsrelated superannuation in addition to the national scheme. An example is the supplementary pension paid to people employed by companies affiliated to the Swedish Federation of Employers. The supplement amounts to circa 12.5 per cent of the pre-retirement earnings below 7.5 basic equivalences, to circa 67.5 per cent. of the earnings between 7.5 and 20 basic equivalences and to circa 35 per cent of the earnings between 20 and 30 basic equivalences. White collar employees thus get a small supplement to the national pension for earnings that entitle them also to national pensions. More important, however, is the fact that the supplementary superannuation extends in the latitudes of pre-retirement earnings for which there is no national pension paid. The supplementary scheme allows well-paid people to keep their life style after retirement. The supplementary pension is important to those relatively few employees who earn more than 7.5 basic equivalences (SEK 152,250 in 1984), but the national pensions are much more important to most employees. There is no guarantee that the supplementary pensions will increase at a sufficient rate to compensate for inflation, but the profit of the insurance company is used to increase the money value of the pensions. A senior citizen who received his first superannuation payment from the supplementary scheme in 1980 will receive per cent of that amount in 1984; his supplementary superannuation has increased enough to compensate him exactly for inflation. Private Insurance All Swedes can buy pension policies in. private insurance companies, and the 'cost is deductible from taxable income to the extent that it does not exceed 1 basic equivalence. People with high salaries can always deduct a maximum of 10 per cent of their earnings, and self-employed people can deduct 30 per cent of theirs. 5

8 Thus, in 1984, all Swedes were allowed to deduct at least SEK 20,300 if they used this amount to buy insurance for old age. Table 2 and Figure 2 present 1984 pensions; and Figures 3 and 4 show the difference between pre-retirement earnings and post retirement pensions. Table 2: Pre-retirement earnings and superannuation payments made to former salaried employees of private companies, 1984 (SEK 1000 per year (a)) Pre-retirement earnings Superannuation The National Scheme In basic Private equival- In 1984 Earnings- Total earnings- Total ences earnings Universal (b) related national related (c) pension Notes: (a) 7.3 Swedish Crowns (SEK) = A$1 in April (b) A married couple would receive SEK 31,900 under the universal scheme and additional SEK 19,500 (total = 51,400) if they have no earnings-related pension. (c) Approximate amounts. Widows' Pensions A woman who is widowed before she reaches the age of 65 can receive the same national universal pension as a single senior citizen; that is, 98 per cent of 1 basic equivalence (SEK 19,488 in 1984). She may also receive the extra universal pension given to pensioners without any other pension; that is, 48 per cent of 1 basic equivalence (SEK 9744 in 1984). 6

9 Figure 2: Superannuation in Sweden as a function of pre-retirement earnings Pension Earnings-related by agreement between private employers and their salaried employees National earnings-related Before retirement earnings Figure 3: Difference between pre-retirement earnings and post-retirement income from national superannuation Pension 18.3 Full retainmeni-line " Before retirement earnings 7

10 Figure 4: Difference between pre-retirement earnings and post-retirement total superannuation income for private salaried employees Pension ~ Full retainment-iine Before retirement earnings Figure 5: Widows' superannuation in Sweden as a function of their late husband's earnings Widow's pension Earnings-related by agreement between private employers and their salaried employees National earnings-related National universal Spouse's earnings 8

11 A widow is eligible for a full widow's pension if: she has been married (including de facto relationships) at least 5 years to her late husband; and is 50 years or older; or has dependent children under the age of 16. A widow will lose her pension if she remarries or starts to cohabit without a marriage. A woman over 65 does not receive a universal widow's pension, but she is allowed a pension in her own right regardless of whether she has been employed or not. A widow is also paid part of the national earnings-related superannuation of her late husband. She receives 40 per cent of the pension her husband would have received if he had lived till the age of 65; that is, 24 per cent of his earnings between 1 and 7.5 basic equivalences (SEK 20,300 to 152,250 in 1984). Both the universal pension and the earnings-related national superannuation is sexist, because it allows a widow's pension to a woman, but denies it to a widower. There have been plans to remove the widow's pension from the national superannuation scheme, but the proposals have been withdrawn due to popular opposition. A widow and a widower can receive additional superannuation supplemented by the employer of their late spouses. The widows' pensions are shown in Figure 5. Children's Pensions Children are eligible for children's pensions from the national superannuation scheme when one or both of their parents are dead. Children under the age of 19 are paid part of the earnings-related superannuation that their parents would have received at the age of 65, but orphans receive only such a pension from one of their deceased parents - the one with a right to the higher pension. The eldest orphan receives 40 per cent of his or her parents' earnings-related superannuation, and each of his or her younger siblings receives an additional 10 per cent. The earnings-related superannuation is reduced, however, when the eldest child's mother has a widow's pension from the national earnings- 9

12 related superannuation scheme. The widow and her eldest child together receive 50 per cent of the late husband's earnings-related pension. Thus, a childless widow receives 24 per cent of her late husband's earnings below the ceiling of 7.5 basic equivalences minus 1 basic equivalence. An extra 6 per cent of his earnings is paid to each of his children. In families where no widow's pension is paid, the eldest child receives 24 per cent of her or his late father's earnings, and each sibling receives an additional 6 per cent. The national universal pension scheme pays a pension of 26 per cent of 1 basic equivalence (SEK 5278 in 1984) to each child under the age of 18 when one of his parents is dead. Orphans receive 52 per cent of one basic equivalence (SEK 10,556 in 1984). An extra children's pension is paid to children not eligible for an earnings-related superannuation, and they receive a total universal national children's pension of 41 per cent of one basic equivalence (SEK 8323 in 1984) when one of their parents is dead. Orphans receive a total pension of 62 per cent of one basic equivalence (SEK 12,586 in 1984). Children's pensions are also paid by superannuation schemes agreed upon by a private employer and her or his salaried employees. Taxes All pensions are taxable income, and they are taxed at the same rate as income from other sources. The tax scales are progressive, and the marginal tax increases from 33 per cent for a total income of SEK 7500 to 82 per cent for total incomes above SEK 570,000. Costs The national pensions are financed by a flat payroll tax of about 20 per cent (19.55 per cent in 1983). The payroll tax has in recent years changed from a social insurance fee paid by employers to finance the pensions and superannuation of his or her employees to a general payroll tax unrelated to the cost of his or her employees' superannuation. In 1984 employers had to pay the payroll tax also for earnings that did not give their employees any right to a pension. The cost structure is more complex for the supplementary super- 10

13 annuation agreed upon by private employers and their salaried employees. The cost varies from one company to another, depending on the income structure among salaried employees, but the average cost is close to 10 per cent. Thus all employers (public and private) have to pay about 20 per cent of the total payroll to cover the costs for the national universal and earnings-related superannuation. Private employers also have to pay an additional 10 per. cent for the agreed-upon superannuation of their salaried employees. Indexation Private superannuation can never guarantee any compensation for inflation, but the value of the pensions depends on the profit of the insurance company. The Parliament has promised, however, that the pensioners will be compensated for inflation under the national superannuation scheme. The money value of the basic equivalence is indexed according to a consumer price index. The scheme worked well in the 1960s and early 1970s, when the inflation rate was lower than the yearly increase in the gross national income. The pensioners got their increase in their pensions, but they increased at a slower rate than did the incomes of the active workers. In the late 1970s the growth in the economy slowed down. Many employees received large increases in their salaries and wages, but they could not keep up with the rate of inflation, and their real incomes decreased. Pensioners, however, were compensated for the high inflation, and their standards of living increased relative to that of other people. No politician dared to change the principle that pensioners should be compensated for inflation, but they tried to change the structure of the consumer price index. A non-socialist Government excluded the impact of oil prices, a change that was opposed by the Social Democrats, then in opposition. The latter, however, returned to government office in 1982 and immediately decided to exclude from the price index the effects of the 1982 devaluation of the Swedish currency. Almost all Swedes seem to approve of the indexation of the national pensions, but the present scheme is not good economic policy. The income of senior citizens will lag behind those of people in the work force in years when the rate of growth is high in the economy, and they 11

14 will increase their incomes relative to that of other people in difficult times when there is no growth. Thus, the proportion of the national income needed for public transfer will increase when the GNP does not increase, and the proportion will decrease when the GNP increases. A better indexation would be to allow the senior citizens to keep pace with the increase in average earnings. Their pensions would increase more in good than in bad times, and the pensioners would share with the other citizens both the burdens of difficult times and the prosperity of good years. The pensions would increase less than at present during periods of low growth in the economy, but the beneficiaries would be better off in the long run. They would receive a share of the growth of the economy and not only be compensated for inflation. Moreover, the increases in the pensions would occur in years when society can better afford them. 12

15

16 Institute of family Studies, Australia 766 Elizabeth Street Melbourne 30,~~ ra~ii;;~~~ I [elephone (03 Superannuat i on in Sweden

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