"Pensioners' finances have never been better"

Johannes Hagen, Assistant Professor in Economics at Jönköping International Business School, Jönköping University, is the co-author of a report for the Swedish Fiscal Policy Council on pensioners' income in Sweden from 1991- to 2019. One of the conclusions drawn in the report is that retirees' finances have never been better.

Photo: Pixabay

The report, written by Johannes Hagen together with Mårten Palme, Stockholm University, and Lisa Laun, Institute for Labour Market and Education Policy Evaluation, has served as a basis for the Swedish Fiscal Policy Council's specific study on the pension system and pensioners' income, which was published on 6 May.

"This report was written in response to the need for careful and consistent empirical analyses of the development of pension income and the income situation of Sweden’s older population. As everyone knows, pensions have become one of the most contentious issues ahead of the 2022 elections with significant reform proposals from both political blocs,” says Johannes Hagen.

The fundamental aim of the report was to examine the extent to which pensioners’ financial opportunities have improved between 1991 and 2019. It is a question that, according to the researchers, has been interpreted in at least three different ways:

  1. How have pensioners' real incomes changed?
  2. How have their incomes changed in relation to the working population or other age groups in the economy?
  3. How does pensioners' income relate to the income they had before retirement?

The researchers' empirical analysis provided unequivocal answers to the first two questions: real disposable incomes have increased markedly throughout the distribution.

Relative to the income development of the working population, the income of pensioners has also risen throughout the distribution. Compared to the 34-64 age group, pensioners' disposable income has developed favorably at both the bottom and top of the income distribution – while the development of those in the median income part of the distribution has been strikingly similar to the compared age group.

However, compared to the 20-34 age group, pensioners' disposable income has increased markedly faster – across the entire distribution.

The distribution has become more uneven

Overall, however, the distribution of disposable income within the pensioners' population has become more uneven. According to the report, this can be attributed to the upper part of the income distribution mainly due to increased labor income and occupational pensions.

“In the light of this background, it is difficult to push the thesis that pensioners are generally a financially vulnerable group. Therefore, the need for broad, taxpayer-funded increases in pensions can be questioned. They have both questionable redistributive effects and jeopardise important principles in the pension system and thus represent a risky way forward," says Johannes Hagen.

To the third question, however, the answer, according to the researchers, is more complicated.

"On the one hand, the average compensation rate in terms of disposable income has been relatively high throughout the period – over 90 per cent throughout the whole distribution. On the other hand, the average compensation rate in terms of pension income has fallen markedly since the early 2000s. These two results may seem contradictory. Above all, the public pension has decreased in relation to earned income before retirement, but this has been compensated by increased occupational pensions and earned income and by lower taxes," say the authors of the report.

The report also shows that the narrowing of the gender pay gap, pushed through over the past decade, has not yet reached the retired part of the population. The economic disparities between men and women appear to be strikingly unchanged.

It also shows increased differences in pension income between those who immigrated and those born in Sweden. The likely background to this is a changed composition of the immigrant community.

The researchers also see that salaried employees have pulled away at the top of the income distribution as a result of increased occupational pensions and the fact that pensioners in big cities have a higher income than pensioners in smaller cities and rural areas. Even so, the development has primarily run parallel during the period.

Since the retirement age has not increased in relation to life expectancy, the accrued pension entitlements have had to suffice for more and more years in retirement. One way to raise pension levels is to increase the pension contribution. But it should be remembered that fee increases reduce the salary space for those who work and are also not a viable path in the long run. The most important thing for pensions is a high level of employment and that working life is extended when we live longer.

In particular, the Council points to the low employment rate of low-skilled and foreign-born people as a problem in the future.

"Measures that strengthen the motives to work and enable more people to work further up in age are the best way to increase monthly pensions," says Johannes Hagen.

-“The report's conclusions were presented by the council at DN Debatt and had a major impact on the media. They have also attracted the attention of several editorials on Expressen, DN, Di, SvD and kkuriren. Clearly, there has been a need to nuance the pension debate," he concludes.