Everyone in Sweden has an account. Even King Carl Gustav and his wife, Queen Silvia. Is it a Twitter account? No, it's an individual retirement savings account. Though it seems hard to believe, Sweden got ahead of the United States in introducing a capitalization system for pensions.

 

In Sweden, each person can select up to 5 private mutual funds to manage their 2.5% monthly salary contribution to the capitalization system. This system, called the Premium Pension System, was approved in 2000 by 85% of parliamentarians. Sweden also made an important reform by eliminating the old “defined benefit” system and creating a “defined contribution” system based on “notional” accounts. The contribution to this system is 18.5% of salary.

 

Hans G. Svensson, the former Deputy Minister of Health and Social Affairs and a prominent member of the leftist Social Democratic Party, was one of the first in his party to speak in favor of a reform toward capitalization. He had the difficult task of chairing the group of legislators who drafted the reform law. Many said, don't think about reforming pensions. It will never work.

 

Bo Könberg, leader of the Liberal Party and member of the parliamentary committee that implemented the capitalization system, traveled to Chile along with his entire committee to meet with José Piñera in his office in Santiago and learn from the Chilean experience.

 

Könberg puts market risks in context: “Of course, investing in the market is risky. But life is also risky. If the capital market goes down, then a portion of the savings will be reduced. But if the market goes down, it also affects the State. The key is in the diversification of investments.”

 

Like in the United States, Swedes have some experience investing in the capital markets. Although this facilitated the introduction of the capitalization system, it was not essential for its success. Peter Friberg, president of the investment fund Skandia AB, points out: “if the argument against introducing capitalization is that people ignore how capital markets work, then doing so will allow people without prior financial knowledge to become investors who will care about what happens with the companies in which their investments are.”

 

Svensson complements: “The capitalization system allows all Swedes, regardless of their social or economic position, to obtain the benefits of investing in the capital markets and participate and benefit from the country's wealth creation process.” Hans Jacobson, general director of the capitalization program for pensions, points out: “People understand that it is a long-term investment, so they are not focused on the short-term results of the month or the quarter.”

 

Friberg comments that “given a demographic in which young people are increasingly fewer, compared to the growing number of retired older adults, we had to adopt a capitalization system with a defined monthly contribution. Only then can we decide who makes the investments, the government or the people. The new capitalization system grants that freedom to choose.”