The Swedish pension system: From building a nation to building financial markets?

The Swedish pension reform of 1994 offers an interesting case for the study of public-private interaction in social protection. The way that social politics may interact with fiscal and economic politics can be crucial for the development not only of social protection as such but also for the development of financial markets and thus for the political economy at large. Whereas public pension funds in Sweden were used for public investment in the 1960s and 1970s, recent developments exhibit a very different character where pension funds instead have been channeled to the financial markets. This has partly to do with the introduction of individual fully funded accounts within the framework of the statutory system. These individual accounts were part of a broader political deal where the political center-right accepted increased contributions in exchange for individualized accounts to be placed on the market, and the social democrats saw this as a way of getting broad political support for maintaining reasonable benefit levels in the light of ageing populations demanding increased contributions to the pension programs. It is evident that this pension reform has had a number of important repercussions, also on the financial markets. The occupational plans have been converted to DC plans with individual fully funded accounts. On the financial market, advisors have mushroomed to help ordinary citizens with choices. Yet the tax expenditures for individual pension saving plans have been reduced, stepwise, and interestingly by government of different colors, which has moderated the growth of such policies. The paper explains these developments and explores the consequences for the political economy of social protection?