Swedish pillar integration: A mix or mess of different principles?

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1 Swedish pillar integration: A mix or mess of different principles? Rotman ICPM Discussion Form June 2, 2014 Paris Presentation by Ole Settergren 1

2 Swedish pensions provision Pillar 0 basic income protection by Guaranteed pension, Housing allowance (and tax deductions and various forms of assistance in kind or reduced prices) Pillar 1 an earnings related public pension DC style: one scheme pay-as-you-go (with buffer fund), one fully funded Pillar 2 quasi mandatory occupational pension plans (4 large private blue collar, private white collar, government, municipalities & regions Premium in % of wage Tax financed 17,21 % to ceiling Ap. 4,5 % to ceiling Ap. 30 % from ceiling Pillar 3 private pensions (tax favored until 2014, abolished from 2015.) 2

3 Pillar flows and stocks in % of total Swedish wage sum* Premiums Funded assets Pensions paid Public (0-pillar) Public earnings-related (1 pillar) Occupational (2 pillar) Private (3 pillar) Total *In 2012 wage sum was 1467 billions SEK 3

4 Relative importance of pillars in Swedish pension provision, % of total Premiums Funded assets Pensions paid Public (0-pillar) Public earnings-related (1 pillar) Occupational (2 pillar) Private (3 pillar) Total

5 Individual average income by age and type of income, % of average work income* Net income 102 Capital gains (net) Private pension Work income Public pension Social Net income insurance/assis. Other income Occupational pension 0 Tax 34 * Average income SEK / month (Average production worker (APW) ap SEK / month) Average income 3666 USD / month (Average production worker (APW) ap SEK / month) Average income 2690 EUR / month (Average production worker (APW) ap EUR / month) 5

6 Some arguments for life long forced savings for retirement income People in general are irrational, or myopic, or have an inexplicable high discount rate for future income relative to income now It reduce free riding by those who would not save if they are free to decide (given that there exists social ambitions for minimum standard ) Large compulsory plans reduces administrative costs Political economy democracies tend to introduce earningsrelated pay-as-you-go financed pension plans To free work places from unproductive older workers in a socially acceptable way 6

7 7 Total pension for increasing public earningsrelated pension (excluding Housing allowance) Total pension, % of average income Guaranteed pension Net pension % 8 % 16 % 25 % 33 % 41 % 49 % 57 % 66 % 74 % Inkomstgrundad allmän pension Occupational pension Earnings-related public pension Earnings-related public pension, in % of average income inkomstgrundad alllmän pension garantipension tjänstepension nettopension

8 Total pension for increasing public earningsrelated pension (including Housing allowance) Total pension, % of average income Housing allowance Guaranteed pension Earnings-related public pension Earnings-related public pension, in % of average income Occupational pension 0 % 8 % 16 % 25 % 33 % 41 % 49 % 57 % 66 % 74 % SEK / month 8

9 Marginal effects How much of an increase in pillar 1&2 pension is lost by reduced 0 pillar pension and tax 100% 90% Including housing allowance 80% 70% 60% 50% 40% 30% Guaranteed pension and tax only (No housing allowance) 20% 10% 0% % 8 % 16 % 25 % 33 % 41 % 49 % 57 % 66 % 74 % Earningsrelatet public pension, in & of average income Earnings-related public pension, in % of average income Marginaleffekt utan BTP Marginaleffekt med BTP 9

10 OECD standard is to define persons with less than 60 % of median income as poor 372% of median Woman Men Total 270% 186% 93% 60%

11 Different incomes importance in reducing poverty among retirees, share with income less than 60 % of median income, % Singles Couples Total Above age Income from work Public earnings related pension (1 pillar) Occupational pension (2 pillar) Privat pensions (3 pillar) Other private income (capital gains etc) Guaranteed pension (0 pillar) Housing allowance etc (0 pillar) Adjusted for household income

12 Pensions as basic income protection and/or income standard protection? Pillar 0 is basic income protection Pillar 1 when designed as an earnings-related public pension is formally standard protection but in practice it essentially replaces pillar 0 Pillar 2 occupational pensions provides together with pillar 1 standard protection for large groups 1 out of 3 will not reach standard protection level by means of pillar 1, 2 & 3. 12

13 Conclusions 1 Pensions from pillars 1, 2 & 3 reduces relative poverty from almost 100 % of retirees (+65) to 39 % of retirees Acknowledging households reduce the number of relative poor retirees to ap. 20 percent of retirees. Pillar 0 reduce the number of relative poor to ap. 10 percent, roughly the same share as in the population younger than 65. (The remaining 10 % poor are in general close to the threshold level of not being poor) Partly due to forced savings poverty reduction is relative cheap 3 % of wage sum 13

14 Conclusions 2 Very high marginal effects, % for low to normal income earners. The high marginal effects are not a large economic problem disincentives to work are in the future pension income and for most workers that is highly discounted. The high marginal effects are possibly more a political, moral problem than a work disincentive and economic problem. 14

15 Why this complexity? 1. A result of different semi-independent actors with different objectives 2. A result of the political desirability to fix sell both the (contradictory) messages: - all your income will contribute to your future pension - there is a basic income protection for all Indeed voters want both these contradictory properties of a the pension systems 15

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