Sweden stands out among OECD countries. While our Nordic neighbors actively stimulate private pension savings through tax incentives, Sweden has lacked tools to encourage employees to save for their pension since 2016. This peculiarity is becoming increasingly problematic as demographics change and we live longer.
The abolition has created a systematic injustice where private business owners benefit from generous deduction rights for pensions, while employees are disadvantaged by no longer having access to this opportunity. The last system from the 1970s provided the possibility of deductions for pension savings for both business owners and employees. But the system was abolished for several reasons. Primarily because it favored high earners who could make deductions at 50 percent marginal tax and later withdraw the money as pensioners at 30 percent tax. For low earners the effect could be the opposite - you received less in deductions on the deposit than what you later had to pay in tax on withdrawal. The system also became increasingly complicated with special rules, exceptions and political meddling that spread with constant adjustments of rules. The state also saw a risk that tax revenues would be lost when pensioners settled abroad.
A demographic crisis is at the door while our aging population faces a silent economic crisis. More and more Swedes risk an economically uncertain retirement, while the opportunities to influence their future pension decrease with age. The big question is therefore not whether we should reintroduce incentives for pension savings, but how.
Our neighboring countries show different paths forward. Norway has chosen perhaps the simplest - deduction rights up to 40,000 kr per year regardless of income. Denmark has a similar system plus lower taxation when you actually withdraw the pension. Finland has chosen a model with deductions against capital income: If you save 50,000 kronor for pension during a year and have capital income of at least the same amount from for example stocks or rental income, you can deduct the entire amount from your capital income. With Finland's capital tax rate of 30 percent, this means a tax relief of 30 percent of your pension savings. Withdrawal must take place over at least 10 years and cannot begin before age 70. This creates a clear and predictable tax effect since the capital tax rate is the same for everyone unlike income taxes which vary with income level.
A common criticism is that these systems mostly lead to people moving money between savings forms. Danish research shows that this is precisely what happens - only 15 percent increase their total savings when tax advantages are introduced. There are certainly many reasons for this: uncertainty about long-term savings, political meddling with constant rule changes to balance the state budget, and that it takes time for people to gain confidence in and adapt to new savings systems.
Even if many would save anyway, there are significant advantages to steering savings toward pension purposes. It is long-term locked, protects against short-term consumption and dampens inflation. The "compound interest effect" also becomes more favorable when it includes unpaid taxes and is combined with lower ongoing taxation.
The insurance industry has proposed state matching at 20 percent up to a ceiling. This would avoid the distorting effects of the old deduction system since subsidies would be the same regardless of income level. But it risks becoming expensive for the state while it may still be difficult for low earners to forgo enough of their disposable income to receive full matching. But perhaps we are too fixated on finding the perfect system that treats everyone exactly the same. In a market economy there will always be differences in savings capacity between different income groups. What is important is still to create reasonable opportunities to build up pension capital, while the system is reasonably efficient from a socioeconomic perspective.
Finland's model with deductions against capital income creates neutrality in capital taxation and avoids the greatest injustices of the old Swedish system. The proportional capital tax rate also makes tax effects more predictable than with progressive earned income taxation.
There are also reasons to accept certain differences in the incentives' effect between different groups - increased savings among high earners reduces the risk of future need for public support, frees resources for basic protection and contributes to higher total savings with positive effects on investments and growth.
Sweden should introduce a system that combines elements from neighboring countries, but adapted to our Swedish conditions. One possibility is optional deductions against either a fixed capital tax rate as in Finland or earned income as in Norway. This would provide flexibility and predictability while avoiding the worst injustices of previous systems.
Refraining from stimulating private pension savings is not neutral - it is an active decision to make it more difficult for people to take responsibility for their economic future. In a time when we live increasingly longer and have increasingly varied working lives, we can no longer turn a blind eye to the need for supplementary pension savings. The perfect solution probably does not exist but that must not prevent us from introducing a system that is significantly better than today's total absence of incentives. We cannot let the perfect become the enemy of the good.
Michael Guldstrand
entrepreneur and business operator in financial services, IT and public real estate
