Dan Josefsson artiklar & blogg

An article on Bush, social security and the Swedish pension system

By Dan Josefsson
Translation by Andreas Bryhn

Note: This article is also available in Swedish

There's an important political struggle going on in the U.S. right now. President George W Bush wants to privatize the U.S. public pension system, the Social Security. That was one of the main points in his State of the Union speech to Congress. But the resistance is fierce. Not only from the Democrats but also from forces within his own party.

Privatization of the pension system is a neoliberal dream. Those 96 percent of American employees who make payments to the system are going to be equipped with private accounts. Some of the payments are going to be transferred there for further investment in pension funds. That would mean that the collective responsibility for pensions would decrease. Thus, wage-earners would no longer risk higher taxation to provide for the retired, at the same time as fund companies would be able to count on substantial income increases.

The proposal is considered to be so hostile to the country's citizens that the Democrats made it an election issue during the last elections. However, the point is rarely made that Bush's idea has in fact already been carried out in Sweden.

Our new premium pension system, that is, that part of the new pension system where we're being told to choose between 600 funds in a thick catalogue, is exactly the system that George W Bush is trying to push through in the U.S.

Opponents to privatization don't lack arguments. In the New York Times, economist Paul Krugman notes the fact that today's Social Security supplies 99 percent of its revenue to its beneficiaries and that less than one percent disappears as overhead costs. With Chile's pension system, privatized in 1981 by the dictator Augusto Pinochet with support from his economic advisor Milton Friedman, 20 percent goes to overhead.

In Sweden it is just as bad. Those who are 20 years old today might lose more than one-fifth, 22 percent, of their premium pension deposits in management fees, according to Thomas Franzén, ex-president of the Swedish National Debt Office. That could mean 1 350 crowns ($195) less in monthly pensions - year after year, during your whole retirement period. All those who have seen which modest budgets future retirees are supposed to survive on realize that this will be the worst deal we'll ever cut.

But not for the banks. According to Franzén, management costs might in 20 years time sum up to 5 billion crowns ($715 million) a year, money that according to a reversed Robin Hood philosophy is taken from the retirees and given to the fund companies and the banks.

Being a Swede you could ask yourself how privatization of a collective security system that meets strong resistance in the U.S. in 2005 could take place in Sweden already in 1998 - at that time with a Social-Democratic government in office. The reason is that from the very beginning, the pension reform was characterized by a lack of democracy, a lack of transparency, and - as it would turn out later - a lack of common sense.

When the work started in 1991, Sweden was enduring its first proper depression since the 1930s. Many politicians were probably struck by panic when massive unemployment exploded and government revenues dropped. Add to that a biased campaign that the banks had been running since the 1980s about the imminent collapse of the pension system and we have a perfect opportunity for politically ill-founded solutions.

The working group behind the reform was striving towards a complete internal consensus and a minimal public debate. Organizations were kept outside, the representative from the Left Party was kicked out, and the strong opposition that despite circumstances arose among social-democratic grassroots was brutally run over. The reform proposal was finally forced through the Parliament a few months before the elections in 1998, and the Swedes found themselves stuck with a pension system that most of them didn't understand and that few probably had approved of if they had been asked.

Gone was the promise about a certain pension level. Instead, wage-earners were promised that they would never have to pay higher taxes because of the retirees. If the money runs out, the so-called “brake” kicks in and pensions decrease automatically.

Additional news was that the [government-owned] AP funds were to be invested in stocks. The result was that 100 billion crowns ($ 14 billion) were gambled and lost - almost one fourth of the buffer that guarantees that there is enough money for pensions.

And finally we got our premium pension system. Just like in Chile and the U.K., part of our pensions would go to private accounts for investment in funds. Politicians were inspired by the soaring stock market during the IT bubble in the end of the 1990s and thought that a large part of future pensions would be financed by fast-growing fund values.

Actually, the Social Democrats didn't want the premium pension system, but while compromising with the conservative parties they agreed that as much as 14 percent of our total pension fees would go to these private accounts.

Today we know that a lot of Swedes will have a hard time economically when they retire. K G Scherman, the ex-president of the Social Insurance Board, showed in his book "The AP fund, the 'brake' and your pension" (Jure Publishing Co 2004) that a lot of young people today will have to keep working until they are close to 70 years old if they want to get the pension that the government is predicting but no longer promising.

When the IT bubble burst, the premium pension system soon became an embarrassment that is rarely discussed nowadays. A lot of money disappeared and to most people it became clear that profits from speculation will rarely secure the olden years for the whole population.

There is a sense that some politicians are starting to sober up. Thomas Franzén has been appointed Chairman of the Board for the Premium Pensions Authority. He is an outspoken critic to all claims of guaranteed dividends. He says that he wants to decrease the number of funds to ten and thinks it’s enough if people choose funds once in their lifetime.

In the meantime, a government commission has been assigned to investigate the high fees that fund companies and banks charge.

Those very grave objections against our new premium pension system that should have been pondered seriously before the reform was passed in 1998 will only now have an impact.

In the U.S., however, they take things in the right order. Discussions first, decisions later. That might very well help the Americans saving their pension deposits from greedy fund companies and banks.

A chance that the Swedes never got.

Dan Josefsson
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