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President Bush has
proposed adding optional personal accounts as one of the central elements of a
major Social Security reform proposal. Although many details remain to be worked
out, the proposal would allow individuals who choose to do so to divert part of
the money they currently pay in Social Security taxes into individual investment
accounts. Individuals would have a choice of fund managers, and the return that
they earn from those accounts would then partially determine the Social Security
benefit they receive when they retire.
Individual accounts pose
a number of important and complex design and implementation issues, including
how to lower the cost of administering accounts so that they do not erode the
value of pensions that individuals receive when they retire, how many and what
kinds of fund choices should be offered, and how to engage workers in choosing
funds.
In the late 1990s, Sweden added a mandatory individual
accounts tier to its public pension system. This p01icy brief examines the
Swedish experience and lessons it suggests for the United States about the
design and implementation challenges of individual accounts.
Sweden has one of the oldest and most comprehensive public pension systems
in the world. But by the 1980s, several problems with the system were becoming
evident, including current funding deficits and a very large projected funding
shortfall as Sweden's population, which is among the oldest in the world,
continued to age.
Between 1991 and 1998, Sweden adopted a new
pension system built on three fundamental elements. A new "income pension" is
intended to tie pension benefits more closely to contributions made over the
entire course of an individual' s working life, while lowering the overall cost
of the system; it is financed entirely by a 16 percent payroll tax. A "guarantee
pension" provides minimum income support for workers with low lifetime earnings.
It is financed entirely by general government revenues and is income-tested
against other public pension income.
The third element is a
"premium pension" financed by a 2.5 percent payroll tax. These funds are placed
in an individual investment account. Individuals have a wide variety of fund
choices. To lower administrative costs; and the administrative burden on
employers, collection of premium pension contributions and fund choices are
centrally administered by a new government agency, the Premium Pension
Authority. Deposits into pension funds are made only once a year, after complete
wage records for a calendar year are available from the state tax authorities.
Employees choose up to five funds from a list of funds approved by the PPA.
Swedes can change their fund allocations as often as they want without charge,
but the system is not designed to facilitate "day trading"—switching funds often
takes several days.
The new pension system's planners recognized
that many workers might not make an active pension fund choice. They created a
Seventh Swedish National Pension Fund to offer a default fund, called the
Premium Savings Fund, for those who do not choose a fund or simply prefer to
have the government invest for them.