The Swedish Pension System and the Economic Crisis

The steep drop in financial markets in 2008 coupled with the ongoing economic recession pose immediate challenges for some public pension systems, particularly those that rely partly on equity investments. In the case of Sweden, the crisis provides an initial ‘stress test’ for a major pension system reform implemented earlier this decade. The new system created by the reform was designed to be fiscally sustainable by including automatic adjustment mechanisms to maintain balance in response to short-term economic and financial fluctuations and long-term demographic changes. Last fall’s plummeting stock market produced a decline in Sweden’s pension reserve funds and triggered a first-time automatic reduction in the pension indexation scheduled to occur in 2010. In response, policymakers decided to spread out the required adjustment over a longer period. This brief is organized as follows. The first section describes how the Swedish pension system is designed to maintain fiscal stability. The second section documents trends in the system’s financial status. The third section explores the potential impact of the economic crisis on pension benefits under the system’s original rules. The fourth section describes the policy response. The final section concludes that even automatic adjustments may produce offsetting political considerations.