Thursday, March 13, 2008

If the Swedes can do it, why can't we?

Everyone but us seems to be addressing their entitlement problems.

For decades, Sweden maintained a conventional, pay-as-you-go, defined-benefit public pension, not unlike Social Security. By the late 1980s, it was apparent that rapid population aging would force tax hikes to an extent that even Swedish voters would find unacceptable. Pushed to act by a faltering economy, Sweden's leading political parties joined together in the 1990s to pass and implement a sweeping overhaul. Benefit payments under the new system began in 2001.

The Swedish reform introduced a new concept--"notional defined contribution" accounts, assigned to every worker participating in the public pension system. These notional accounts look like 401(k)s. They track worker "contributions," assign "investment earnings," and report "account balances"--except there are no financial resources in them. They're tracking devices. Pensions are still financed on a pay-as-you-go basis, with payroll taxes collected today to cover monthly benefits for current retirees.

What's different is the pension calculation at retirement. New Swedish retirees get a pension based on the balance in their own notional account, which is converted into a monthly benefit much as the balance in a 401(k) could be used to purchase an annuity. The retirement benefit is set at the amount that would, when drawn monthly, deplete the worker's "account" over his or her expected remaining life span.

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