The Swedish Pension Reform Model: Framework and Issues
Edward Palmer
Abstract
This paper describes the recent Swedish reform and available options on major issues within this reform
framework. In June 1994, Sweden’s Parliament passed legislation replacing the old defined benefit
system with a combination of a pay-as-you-go notional defined contribution (NDC) and a DC
privately managed financial account scheme, based on a total contribution rate of 18.5 percent on
earnings. The financial account scheme is run using a state-clearing house as a broker, and will have a
state monopoly supplier of annuities. During the accumulation period, participants can choose among all
registered funds, about 500 when they make their first choice in the autumn of 2000. Accounts were
created in 1999, and two annual statements have been sent out since then.
If the NDC and financial account schemes together do not reach a minimum level by age 65, and the
individual chooses to retire at this age, benefits from these systems will be supplemented up to the
guarantee level, determined by Parliament and financed with a state budget transfer. This reflects the fact
that the PAYG NDC and financial account schemes are designed to function autonomously from social
policy. Life expectancy is factored into the NDC annuity, and together with the financial account system,
this innovation helps to shift the risk of an aging society onto workers while they are still active. There is
no maximum retirement age, and the system offers a broad range of options for labor-force exit for
older workers. Full, partial or no earnings from work can be combined freely with full or partial annuities
from one or both of the public schemes from the minimum pension age of