The pension system
Everyone who has worked and paid taxes in Sweden is entitled to a national public pension. Every year 18.5% of a person’s pensionable income is paid in to the pension system. This is done in part through payroll taxes, which are paid by employers, and in part through the national public pension tax, that all wage-earners pay. How large a person’s pension will be depends on his or her earned income throughout their working years, but also on other income, such as sickness benefit or unemployment benefit.
The public pension system is made up of two parts: income pension and premium pension. The largest portion, 16 percentage points, is allocated to the income pension. The pension contributions paid in by those who have worked during the year are used to pay out pensions to current pensioners. Since 2009 the four AP Funds together have paid a net total of SEK 291 billion to the pension system.
The AP Funds have been net payers mainly because the number of people born each year during the 1940s was so large that today there are more pensioners in Sweden than previously. This also means that the AP Funds will be net payers for an estimated another some 20 years, before the inflow to the buffer funds once again begins rising.
Income pension is the part of the public pension system where the pension contributions paid in by people who have worked during the year are used to pay out pensions to current pensioners. If payments to the system during a given year are less than what is needed to pay out pensions, a deficit arises. In such case, the AP Funds’ managed capital is used as a buffer to cover the deficit, and conversely, if payments in to the system are greater than what is needed to pay out, the money goes to the AP Funds for management. This is why the AP Funds are also referred to as buffer funds. The system is designed to ensure that no generation receives a higher pension at the expense of another. If the pension system comes into an imbalance, i.e., its obligations become greater than the assets on hand, a balancing mechanism is activated. Through this balancing, income pensions are upwardly indexed at a slower pace until the pension system’s assets are once again as large as its obligations.
2.5 percentage points of a person’s pension contributions go towards their premium pension. This is the portion of the public pension that every individual can influence by deciding which securities funds the pension contributions are to be invested in. If a person does not make a personal choice, the money is invested in AP7.
In addition to the public pension system, many people who work also have pension savings that are paid for by their employer – a so-called occupational pension. These can vary in their design and are determined either through a collective agreement between the employer and trade unions or directly by the employees themselves.