In the current financial crisis, the automatic balance mechanism will most likely be activated in 2010. However, for the long-term sustainability of the pension system it is a good thing that this mechanism exists.
From an interview with Anna Hedborg, Chairman of Första AP-fonden and one of the architects of the pension system.
Life expectancies are rising steadily around the world and the pension systems of most countries have been unable to withstand the resulting pressures, which are both too expensive and too difficult to come to grips with. Sweden is one of the few nations that has carried out a pension reform aimed at ensuring that there is enough money to keep our promises.
A pension system of this type is a fundamental condition for sound economic development. It is also vital that a country’s pensioners can rely on the availability of sufficient funds to cover the system’s obligations.
The Swedish pension system contains a balance mechanism that has come to be a topic of heated discussion, perhaps more than it deserves. The debate is often fuelled by the presumption that balancing is something to be feared, which is not the case. Balancing is a mechanism that safeguards the system’s ability to quickly adapt to critical events in the economy. The burden of adaptation is shared by all. Current pensioners will bear their share, and those currently earning their future pensions will bear their own. Because the adaptations are made quickly and in direct response to possible future threats to the pension system, the effects are less dramatic than in the case of a “wait and see” approach.
As soon as possible, when the economy improves again, our system is also designed so that indexation can be resumed at the level that would have applied without balancing.
In the current financial crisis, the balance mechanism will most likely be activated in 2010. And as this happens for the first time, it is unfortunate that the amount will probably be fairly large, significantly larger than in the case of a typical recession. Consequently, there is a risk is that this aspect will be dramatized in the debate and that people will not realize the exceptional nature of the current economic situation.
We are in the midst of a major financial crisis, the worst in a great number of years, and it is no wonder that it should also have implications for our pensions. Global crises of this magnitude are extremely uncommon. When we experience a more typical market recession and economic slowdown, the impact is nowhere near as powerful. In the normal case, the necessary adaptations would involve a change of only a few percentage points in indexation of pension benefits.
I can understand that people may see it as a huge event when the balance mechanism is activated for the first time, regardless of the resulting amount. At the same time, it is a good thing that it exists so that we don’t end up paying out benefits beyond the long-term capacity of the system. The positive side is that once we have emerged from the crisis, there is also a rule that allows us to begin reinstating pensions at the level that would have applied without balancing in 2010.
