Sweden's Pension Reform

By Jeremy Hildreth
[Investor's Business Daily, September 9, 2001]

STOCKHOLM, Sweden -- These days, every Swede has one. Even King Carl Gustav and his wife Queen Silvia have one. A cell phone? An e-mail address? No -- an individual social security account. As difficult as it is to believe, when it comes to public pension reform socialist Sweden has beaten capitalist America to the punch.

Since Jan. 1, all Swedes who earn wages have been able to put two and a half percentage points worth of their 18.5% payroll tax contribution in an individual account. More than 600 privately run mutual funds are available, from which a person may select up to five.

The new program, known as the premium pension system, or PPM, passed the Swedish parliament with 85% approval. But getting to that point wasn't easy.

The old Swedish pay-as-you-go system was the pride and joy of the nation. "(It was) the crown jewel of the Swedish welfare state," says Hans G. Svensson, former vice minister of health and
social affairs and a prominent member of the leftist Social Democratic party. "It allowed even the poorest workers to have a decent life after retirement."

Svensson, now a consultant for Skandia A, was one of the first in his party to speak out in favor of accounts-based reform. As chairman of the working group of legislators that hammered out the plan's details, he had a difficult task. "Many people said, "Don't think about pension reform. It will never succeed.' "

Journalists, especially, were skeptical. "They loved to speculate, because by speculating they try to affect what's going on. When we were in final negotiations, (reporters would) call me and say, "So and so said he won't agree to this unless you agree to that, so isn't reform dead now?"'.

Moreover, Svensson explained, "They were comparing (the benefits under) the old system with (those under) the new system when the old defined benefit system was going to become bankrupt." Sound familiar?

Bo Konberg, who also took part in the six-member, five-party working group, is the parliamentary leader of the Liberal Party. He has regular contact with Democrats in the U.S., but when asked why his political counterparts across the ocean don't agree with him when it comes to pension reform, he replies: "I don't know. Our party leader was at the (Democratic) convention last year and listened to candidate (Al) Gore condemning the premium pension system!"

On the question of whether the PPM is a "risky scheme," Konberg is unequivocal: "In one sense, of course it is risky. But life is risky, too. If capital markets collapse, then that portion of your pension (that relied on them) would become quite small. But at the same time, if the stock exchange collapses then you would have some problems with the public economy, too. . . . It ought to be better not to put all your eggs in one basket."

In Sweden, as in the U.S., many citizens have at least some investment experience. While this eases the implementation of personal accounts, it is by no means essential. Peter Friberg, head of the private client group for Skandia AB, remarks: "If your argument is that people don't know anything about (investments), do you want to keep them in the dark? I mean, if all adult Americans knew something about equity investing and the bond markets and so forth, wouldn't that be a good thing?"

Public pension reform, in his view, provides the ideal chance for people without prior investment knowledge to become investors.

Svensson agrees. "The PPM system is a way of letting every normal Swede who doesn't own stocks get the good things out of the capital markets and become a part of the wealth creation in Sweden." He admits: "This year has not been so good. But we have hopes for the future."

This comes as no surprise to Hans Jacobson, director general of the PPM program. "We have not had an awful lot of protest or criticism. People understand this is a longtime affair, and they aren't looking at it each month or quarter."

"Given the demographics," Friberg says, "you must get out of the present system. You must shift to a funded, defined contribution program. Then you can choose who makes the investments, the government or the people. But why not let the people choose?"



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