The Swedish Old Age Security System in 2020

By Thomas Erhag, University of Gothenburg

Sweden introduced a universal invalidity and old age pension in 1913. This first system, later reformed in 1935, was a combination of a contribution-based pension and a universal supplement in the form of a nominal basic pension. In the 1950s and 1960s, the debate on the public (state) responsibility for ensuring a sufficient pension level laid ground for new reforms. The reformed public system combined a flat-rate universal benefit (folkpension) with an earnings-related defined benefit supplement (ATP). In the 1990s, concerns about the financial sustainability of the pension system led to major reforms and a new system was phased in from 2001. The current public old age pension system is a defined contribution system. The calculation of income-related old age pension shall be based on the so-called life income principle. Pensions will largely come from a distribution system and to a lesser extent from a premium pension system. In the premium pension system, paid-in funds must be funded, and the balance is reported on individual premium pension accounts. The individual decides with which trustee the funds are to be placed. In addition to the universal old age pension scheme, a ‘standard’ level of protection is to be ensured through supplementary benefits provided by mandatory insurance in occupational pension schemes based on collective agreement. Those not covered by collective agreement can be voluntarily insured in occupational schemes or opt for private pension schemes, for which tax benefits are available. Generally, options for private pension savings are available to all persons who want to ‘top up’ their public and occupational pension benefits, but tax benefits are no longer provided. A tax-financed ‘minimum’ level of protection for persons with low or no income-based pension is provided by the guarantee pension and other public support measures.

Standard Protection in Old Age

The basis for belonging to the statutory old age pension scheme (allmän pension) is that persons are covered by Swedish social insurance. Persons are insured either through working or residing in Sweden. Everyone in gainful employment in Sweden earns pension entitlements for two types of income-related pensions (inkomstrelaterad pension): the income pension (inkomstpension) and the premium pension (premiepension). The income pension is pay-as-you-go (PAYG)-financed based on pension benefits being earned in relation to the contributions paid (notional defined contribution). This part of the public pension scheme is kept apart from the rest of the state budget. The contributions to the premium pension are deposited in individual pension accounts and invested in the private funds of choice of the insured person; a passive fund solution is also provided. Pension rights are awarded for each year of work and payment of contributions. These rights are based on an individual’s specific pensionable income; 16% of this income is allocated to the income pension and 2.5% to the premium pension. Retirement age is flexible from the age of 62, however pension rights increase if the person stays in employment. A tax-financed guarantee pension (garantipension) based on residence criteria is provided for those over 65 years with an insufficient income-related pension.

Occupational pension schemes are mandatory in both the public and the private sector and are based on collective agreements. Collective agreements are divided into four sectors, and as a result thereof four different occupational pension schemes exist: the scheme for private sector manual workers (SAF-LO), the scheme for industry and trade (ITP), the scheme for government employees (PA 16), and the scheme for persons employed by municipalities or regions (KAP-KL and IKAP-KL). All sector agreements are defined contribution schemes offering either investment in a premium reserve account or a defined contribution scheme with a guaranteed benefit level. However, there are varieties both with respect to contribution levels and the extent to which premium reserve investments are offered. There are, for example, no upper limits on the earning of pension rights. State employees, depending on age, can also have the right to pension from a defined benefit scheme.

The self-employed and employees without an occupational pension based on collective agreement can participate in occupational schemes on a voluntary basis. They can choose voluntarily to pay contributions into private schemes; they can also opt for so-called individual pension savings (individuellt pensionssparande, IPS), which are incentivised by tax deductions on premiums.

Top-Ups

Individual pension savings (individuellt pensionssparande, IPS)  serve as a ‘top up’ to public and occupational pension benefits for persons who are covered by other forms of ‘standard protection’ in old age. However, incentives for joining private pension schemes changed in 2016, when the right to tax deductions on premiums of the IPS were abolished. Therefore, individuals commonly opt for voluntary extra payments to the available occupational pension schemes to top up public and occupational pension benefits. For tax reasons, this option is particularly beneficial for persons with incomes above the income assessment ceiling. Another alternative for private savings, also for old age, is the investment savings account (investeringssparkonto, ISK) that functions as a deposit for different kinds of financial instruments. This type of saving is not limited to old age protection and not tied to a specific retirement age.¹ Persons can exchange savings forms, capitalise and make withdrawals without this triggering a tax. However, the savings are subject to a yearly standard tax.

Minimum  

The guarantee pension (garantipension) is a tax-financed pension, intended to secure a minimum pension level for persons over the age of 65 who have no or an insufficient income and premium pension. It is a pension-tested and inflation-indexed supplement or top up to the total benefit provided by the income-related public pensions. Persons must have lived in Sweden for a minimum of three years with 40 years of residence being required for a full guarantee pension. The pension is reduced proportionally for those with shorter residence periods. As a consequence, some persons, having lived in other countries for several years and with no other income, have difficulties to support themselves. Under normal circumstances, these persons would need to apply for municipal social assistance to reach a minimum subsistence level. In order to not put pressure on the municipalities, two state-financed support measures are targeted on low-income pensioners: the housing supplement (bostadstillägg) and the maintenance support for the elderly (äldreförsörjningsstöd). The income-tested housing supplement is also a part of the public pension system. Together with the residence-based and pension-tested guarantee pension, it is supposed to be sufficient to meet at least the minimum subsistence norm as expressed in social assistance legislation. The income-tested maintenance support for the elderly, being a part of the social security and pension system, guarantees a decent standard of living for persons who receive little or no pension or other means of income. All other benefits to which the person is entitled must be claimed before qualifying for maintenance support; such benefits include income pension, premium pension and guarantee pension, as well as the housing supplement for pensioners.

¹ As the investment savings account (investeringssparkonto, ISK) does not solely target financial protection in old age, the scheme is not pictured in the Pension Map for Sweden.