In November, Timbro released a proposal, called Fondpension, for a comprehensive pension reform based on the research literature. It involves replacing today’s income pension with a premium pension in order to benefit from the fact that the stock market on average gives a higher return compared to the overall income trend.
Since the income pension only increases with income growth, the difference in the wallet becomes large after many years. The premium pension has given a real return of 5 percent per year since it was introduced, while salary increases have been 1.6 percent per year. If the stock market gives as good a return in the future as it did in the last 50 years, young people today will receive a 50 percent higher pension with the reform proposal than in the current system.
Two replies have come in, the first from the S-association Reformists. The criticism is sweeping and they oppose a ”right-wing privatization project”. Instead, like LO and the Social Democrats, they want to see tax-financed pension increases.
The simulations show that the pension will be higher with our proposal than in the current system with a whopping 92 percent probability.
There are several problems with their proposal. For example, the so-called respect distance, i.e. the difference in pension between those who worked and those who did not, would be hollowed out. The Swedish Pensions Authority and leading pension researchers have already criticized this. In addition, the Reformists’ proposal would mean higher taxes on work and business, while the difference in the wallet would only be a few hundred Swedish kroner – unlike Timbro’s proposal where pensions would increase by 50 percent.
The second line came from Fremia. They have two main objections, the first of which is that the size of the pension would vary greatly over time because more would be in the stock market. Given that the savings horizon for pension savers is very long, several decades, this need not be a problem. The standard option in the premium pension, AP7 Såfa, also reduces the share of shares in the portfolio from the age of 55.
In our proposal, we have taken into account and calculated with higher risks. Based on historical returns, we have carried out 10,000 simulations of the future pensions. They show that the pension will be higher with our proposal than in the current system with a whopping 92 percent probability.
In 57 percent of the simulations, Fondpension even provides a higher pension than the individual’s salary when it was at its highest during working life. An important aspect is that those who, like Fremia, LO and PRO, want to see lower risk levels are free to do so by choosing funds with a lower proportion of shares.
Fremia’s second objection is about the transition period. In today’s system, the pension payments made to the income pension are used for the payments made to today’s pensioners. In our reform, this pension liability is transferred to the state by the state issuing bonds with the same value as the accrued pension rights.
The new bonds are tied to income trends, as pension rights in the current system follow income trends. These income bonds are invested in the savers’ chosen funds in the premium pension. In this way, pension savers and pensioners are guaranteed the same amount as today. The issue of the transition period has thus been dealt with.
The advantages of Fund Pension are significantly more than the disadvantages. Pensions would be higher. Ownership rights stronger, politicians would not have the opportunity to worsen pension conditions afterwards. And the freedom of choice would be broadened. It would be wrong to deny future pensioners much higher pensions.