Sweden's Take on Private Pensions (Add-on accts based on 2.5% "contrib")

http://www.nytimes.com/2005/02/12/business/worldbusiness/12pension.html
Sweden's Take on Private Pensions
by ALAN COWELL
The New York Times
February 12, 2005

STOCKHOLM - Every spring Marie-Louise Graveleij, a 62-year-old receptionist in a funeral home, receives a large orange envelope through the mail. Now, it is about to become her lifeline, offering her an alternative to a full-time job.

Soon, she said, she will end her current work contract and decide whether she can afford to retire. The orange envelope she expects to receive within the next few weeks will contain a statement of her rights under a five-year-old restructuring of this country's still-generous state pension program that - like the changes President Bush wants to introduce in Social Security - includes a personal investment account. <snip>

Her anxiety could eventually be shared by Americans who would lose some of the guaranteed benefits of Social Security if President Bush's plans to introduce privatized accounts became law. But Sweden's struggle with a new approach to pensions is by no means unique.

Its experience, along with those from other countries, highlights some of the benefits involved but also underscores the various risks when a government turns over an important investment decision to people not always comfortable with managing their retirement money.
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In Chile, the introduction of private investment accounts almost 25 years ago led to accusations that hidden fees reduced benefits by as much as a third.
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But in seeking a highly competitive program, Sweden threw open its private accounts system to a staggering 675 funds (compared with 6 in Chile and 21 in Poland), requiring savers to pick 5 of them or invest in the default fund.

Unlike Mr. Bush's Social Security overhaul proposal, which would carve voluntary private accounts out of existing taxes, the Swedish system imposes a mandatory 2.5 percent saving on top of its basic benefit. In Sweden, 16 percent of wages goes into an overhauled pay-as-you-go system that defines the contributions savers make but no longer guarantees the same benefits as in the past.
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Of five million current savers, only three million actively choose their investments - mostly people who chose their five funds when the system was introduced and the market looked more promising. After the initial enthusiasm, according to official figures, only 8 percent to 10 percent of new entrants into the system opt to make their own investments.
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The Premium Pensions Authority in Sweden aggregates trades between funds made by individual savers on a huge computer system and places them each day in bulk with the specific funds that savers have requested. That cuts out individual transaction costs but it also prevents fund managers from knowing their customers. Mr. Bush has proposed something similar for the United States.
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But there are similarities, too. The old pay-as-you-go system, like the one in the United States, was under strain as increasing numbers of pensioners relied on decreasing numbers of taxpayers for support. Under the previous system, pensioners were guaranteed 65 percent of the average salary of their 15 best-paid years up to salary levels of around $50,000 a year.

Beyond that, more than 90 percent of all Swedish employees belong to occupational pension plans worth 10 percent to 15 percent of their final salary up to $50,000 and a much higher proportion for higher salaries.

By contrast, the new pay-as-you-go component offers retirees even higher pensions if they postpone their retirement, and it includes a complex formula, known as the brake, that automatically reduces pensions if the system goes into deficit.

So while the level of contributions has remained the same, the overall value of benefits will fall as pensioners in coming decades move increasingly onto the new system. That is where the private accounts come in, forecast, ideally, to provide up to 30 percent of Swedish pensions from real savings for those who are entering the system now. At the moment, the private accounts system holds about $20 billion.
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http://www.nytimes.com/2005/02/12/business/worldbusiness/12pension.html