Design Choices in Privatized Social-Security Systems: Learning from the Swedish Experience

In the 2000 U.S. Presidential campaign, George W. Bush advocated a partial privatization of the Social Security system. According to his plan, a portion of the payroll tax would be designated for individual savings accounts. At the same time as this issue was being debated in the United States, Sweden was in the process of launching a system that is very similar to President Bush’s proposal. Although Bush’s plan did not get much attention in the early years of his administration, the proposal may resurface either in the United States or in other countries. If so, important lessons can be learned from the Swedish experience. In particular, the Swedish plan adopted an interesting mix of design choices that can now be evaluated based on three years of post-implementation experience. Although there is a large literature in economics on the design of social-security systems, most of that literature is concerned with macroeconomic considerations such as funding. In contrast, there has been much less attention devoted to the details of how plans might be designed, in part because these details do not seem important from a standard economic perspective. In this paper, we reverse this usual pattern and focus our attention on the design aspects of the Swedish plan. We find that, although most of the design choices are those that might be approved by most economists, in some cases these choices produced undesirable consequences.