The Swedish pension reform model: Framework and issues, The World Bank SP Discussion Paper No. 0012

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 61