pension reform in the nordic countries a model for the other eu member states? arne paulsson sia...
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Pension Reform in the Nordic Countries
A Model for the Other EU Member States?
Arne Paulsson SIA Sweden
CICERO FOUNDATION SEMINARPARIS - 11 MAY 2007
What´s common for Nordic Pension Systems
• Basic Security – guaranteed by the State
• Earningsrelated supplements
• Means-tested support for the poor
• Universal benefits
• Individual rights
Different Designs
Sweden Basic security and mandatory
Norway earningsrelated supplement by
Finland public law
Denmark Basic security by public law and
Iceland earningsrelated supplement by
occupational systems
Recent Pension Reformsin
Sweden Finland Norway
• Finacially stable Pension System to meet the future demographic and economic conditions
• Politically stable Pension System by a broad political support in the Parliament
Swedish Reform – time schedule
• 1984-1990 Pension Comission• 1991-1994 Working Group on Pensions• 1994 New System approved in Parliament• 1998 Final Legislation approved• 1999 New System comes into force• 2003 New System fully implemented
• Defined Contributions– NDC 16% (Pay-as-you-go) – FDC 2,5% (Funded)
• Lifetime earnings
• Rate of return
– NDC: wage index
– FDC: financial market
Main Features of the Swedish Pension System
• Benefits based on life expectancy at
retirement
• NDC – automatic balancing
• Transitional rules
• Guarantee pension
– basic protection (general tax financed)
Main Features of the Swedish Pension System
0
25 30 35 40 45 50 55 60 65
Age
Every contribution give corresponding pension credit, the whole life
16 %Pay-as-you-go
Funded2,5 %
Pensionable incomeSEK
Pension rights• Pensionable earnings
– wages
– social insurance benefits
• Pensionable amounts– children under 4 years
– disability pension
– higher studies
– military service
NDC Account
YearAccount
Value 1/1PensionRights
SurvivorsBonus
Index-ation
Adm.Costs
AccountValue 31/12
1999 851 832 35 100 1629 15 372 -143 903 790
2000 903 790 35 712 1969 13 605 -436 954 640
2001 954 640 35 808 2074 28 468 -367 1020 623
Annuity =
Annuity calculation NDC
Account value at retirement
Annuitization divisor
Annuitization divisor is calculated from
unisex life expectancy at retirement age and
an interest rate of 1,6 %
Retirement
• From the age of 61
• NDC-pension, FDC-pension or both
• 25%, 50%, 75% or 100% of benefit
40
45
50
55
60
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85
..interest 1,6 %Growth 1,6 %
Imputed interest 0,0 %Growth 1,6 %
PE
NS
ION
FIX
ED
PR
ICE
S
AGE
Pension as an annuity
Norway
• Pension rights accrued by 1,35 % of earnings annually
• Lifetime earnings count
• Pension rights indexed by wages
• Retirement age 62 –
• Life expectancy affects pensions
• Pensions indexed 50/50 by prices/wages
Finland
• Pension rights accrued by 1,5 %(age 18-52), 1,9 %(age 53-62) and 4,5 %(age 63-68)
• Pension rights indexed 20/80 by prices/wages• Retirement age 63 – 68• Life expectancy affects pensions• Pensions indexed 80/20 by prices/wages
Effect from forecasted increase in life expectancy
Cohort born
.. turns 65 year
Forecasted divisor (at 65)
Effect on pension, relative to cohort
born 1940
Required delay of retirement age to offset
effect of increase in divisor
1940 2005 15.6 - -
1945 2010 16.0 -2% + 5 months
1950 2015 16.3 -4% + 9 months
1955 2020 16.6 -6% + 13 months
1960 2025 16.9 -8% + 16 months
1965 2030 17.2 -9% + 20 months
1970 2035 17.4 -10% + 23 months
1975 2040 17.6 -11% + 26 months
1980 2045 17.8 -12% + 28 months
1985 2050 18.0 -13% + 29 months
1990 2055 18.1 -14% + 30 months
For those born
1938-1953
Försäkringskassan och Riksförsäkringsverket 1999 5
Guarantee pensionsBasic security for those with low or no income-related pension
0
20 000
40 000
60 000
80 000
100 000
120 000
140 000
0
Income-related pension
Inco
me
rela
ted
+ g
uar
ante
e
42 000 100 000
Income-related pensionGuarantee
0
20 000
40 000
60 000
80 000
100 000
120 000
140 000
0
Income-related pension
Inco
me
rela
ted
+ g
uar
ante
e
42 000 100 000
Income-related pensionGuarantee
Balance ratio
Pension Liabilities
Contributions AssetFund +
=
Time is money...
15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Payments
In average year 2000: 43 years age 76 years age
age
Contributions
15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Wait…
33 years Contributions Payments
age
Exp. turnover duration contributions
The present value of contribution flow,i.e. the contribution asset,is calculated as:
Fund550 mdr. SEK
The Balance Sheet in 2003
Pension Liabilities
5 984 mdr. SEK
ContributionAsset
5 465 mdr. SEK
Fund577 mdr. SEK
Balance Ratio = 1.0097
100
105
110
115
120
125
130
135
140
145
150
1 2 3 4 5 6 7 8 9 1011 12 13 14 15 16 17 18 19 20
Income index
Balance index
slower indexation
faster indexation
Year
Income and balance index
Key FiguresBillions of SEK
2006 2005 2004 2003 2002
Buffer Fund 858 769 646 577 488
Contribution Assets 5 945 5 721 5 607 5 465 5 301
Total Assets 6 803 6 490 6 253 6 042 5 789
Pension Liabilities 6 703 6 461 6 244 5 984 5 729
Surplus 100 28 9 58 60
Balance Ratio 1,0149 1,0044 1,0014 1,0097 1,0105
To learn from the Nordic Countries
• Broad political support
• Tight connection between earnings and benefits
• Lifetime earnings
• Pensions affected by life expectancy
• Flexible retirement
Thank you for your attention
For more information
• www.forsakringskassan.se