Labor Force Participation, Income Inequality and Social

Security in Sweden

Mårten Palme

Department of Economics

Stockholm University, Sweden

Pre-reform pension system

• The public old-age pension scheme consists of three parts: a basic pension, a special supplement and a supplementary pension (ATP).

• All are defined benefits PAYG schemes. Indexed by CPI (almost).

• Benefit level in the supplementary pension are determined as 60 percent of the average of the 15 best years of labor earnings. Linear reduction if less than 30 years of contributions.

• Actuarial reduction on 0.5 percent for every month of early withdrawal before 65 year birthday.

Post-reform pension system

• Notional defined contribution scheme. 18.5 percent of the wage sum offset to pensions. 16 to a PAYG scheme and 2.5 to a fully funded scheme.

• Includes a guaranteed level of benefits.• All contributions to the scheme is counted when

the benefit level is determined.• Indexed by the average wage rate.• Replacement level on about 60 percent for

average worker.

Development of male labor force participation rates in Sweden by age group

0

10

20

30

40

50

60

70

80

90

100

1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003

Year

Labo

r F

orce

Par

ticip

atio

n

45-5455-5960-6465-6965-74

Development of male labor force participation rates in age group 60-65.

Various countries.

Share of workers out of the labor force versus implicit tax rate for remaining in the work force age

group 55 to 65

Income inequality among households with household head older than age 65 in 15 different OECD countries in the

year 2000. OECD equivalence scales.

Gini coefficient estimates for income inequality among elderly (OECD equivalence scale)

00,05

0,10,15

0,20,25

0,30,35

0,4

Finlan

d

Norway

Sweden

Nethe

rland

s

Germ

any

Switzer

land

Poland

Taiwan

Canad

a

Irelan

dIta

ly

Spain UK

USA

Russia

Poverty rates among households with household head older than age 65 in 15 different OECD countries in the year 2000. Share of households below 50

percent of median income in the population of households with household head younger than age 65.

Poverty rate estimates among elderly

0,0

5,0

10,0

15,0

20,0

25,0

Nethe

rland

s

Poland UK

Canad

a

Finlan

d

Germ

any

Irelan

dIta

ly

Norway

Russia

Spain

Sweden

Switzer

land

Taiwan US

Conclusions

• Modest disincentives to early retirement through the social security system

• Low degree of income inequality and poverty among elderly despite modest income redistributions through social security system