Why America Should Be More Like Sweden (It's Not What You Think!)

Sweden reformed socialistic aspects of its pension system and introduced partial privatization.

I recently had a fascinating meeting with the Swedish ambassador to the United States, Urban Ahlin, who made me wonder if America should be more like Sweden. Over lunch, Ahlin explained that Sweden actually balances their annual budget. I asked myself, could Europe's socialists actually be more fiscally responsible than Democrats, and even some Republicans? 

Before his appointment as ambassador to the United States for Sweden's current conservative-led government, Ahlin was a longtime Social Democrat, the former speaker of the Riksdag (the Swedish equivalent of speaker of the House), and once the chair of the Socialist Group in the Organization for Security and Co-operation in Europe Parliamentary Assembly. So imagine my shock when he explained to me that no political party in Sweden would support a government retirement pension program that doesn't balance.

Impressively, the Swedes feature partial privatization in their pension system, tie benefits to contributions, and vote each year on supplemental benefits based on demographic and economic conditions, all while balancing their budget. 

By rejecting socialism and embracing privatization as well as mechanisms to prevent overspending, the Swedes demonstrated that reforming entitlement programs in a fiscally prudent way is not a pipe dream after all.

Conversely, U.S. Social Security benefits are guaranteed regardless of economic or demographic conditions. Social Security, among other programs, is deliberately excluded from our government's normal budgetary process. Social Security and other entitlement programs are considered "mandatory spending," in which funding is provided without congressional debate or action.

Putting entitlement spending on autopilot means the federal debt, currently standing at $34 trillion, will only grow. Mandatory spending, which includes, but is not limited to, Social Security, accounts for about two-thirds of government spending. The annual total dollar amount of mandatory spending increases by an average of about 10 percent per year.

The level of automatic mandatory funding demonstrates the staggering extent of the federal government's spending problem. Last year's tax revenue, about $4.4 trillion, just barely pays for mandatory entitlement spending. Therefore, much of the remaining $1.7 trillion we spend on our military and other programs is funded with borrowed money.

Unlike Congress, which continues to ignore our spending program, Sweden's leaders enacted reforms that made its pension system solvent.

Sweden previously promised a socialist pension program similar to Social Security. Under that retirement system, Swedish citizens were, subject to certain requirements, entitled to a universal basic and supplemental income.

Facing alarming projections of insolvency in the 1980s, Sweden established a commission to review the pension program's fiscal sustainability and develop options for reform.

Sweden's efforts were not immediately successful. The pension commission presented its recommendations during an economic downturn in 1990, which the Swedish parliament rejected. But Sweden continued to seek a solution. A new working group, comprised of representatives of each of the seven political parties, found that the aging Swedish population, inflation, and rising unemployment eroded the sustainability of the Swedish pension system. The working group also found that, barring reforms, the payroll tax would need to rise from 18 percent to 30 percent to support the program. The Swedes rejected both an initial set of reforms and a confiscatory tax increase.

So how did the Scandinavian country get back on the path to a sustainable pension system?

The Swedes' pension reforms worked because they abandoned many of the socialistic aspects of its previous system. Sweden rejected Social Security–like defined benefits in favor of a defined contribution rate. Sweden also introduced some privatization into the system, which empowers beneficiaries to determine how to invest their retirement funds and take an active role in planning for their own future.

Critically, the new system features a mechanism called the "brake," which is designed to prevent overspending by automatically preventing benefits from growing quicker than contributions.

The new Swedish system was fully implemented in 2003, and it has withstood the test of time. Swedish benefits have consistently increased, and their pension program has featured a surplus in all but three of the last 20 years. For the last 10 years, the program experienced a consistently growing surplus. Even during the 2008 financial crisis and the COVID-19 pandemic, the Swedish pension system remained strong. Conversely, the nonpartisan Congressional Budget Office projects that the Social Security's retirement account will be depleted in 2032.

Today, the Swedish system consistently ranks among the world's best-performing retirement income programs. This feat was accomplished because Sweden recognized the most socialistic aspects of the program were failing and implemented reforms to avoid the same problems that plague Social Security: unsustainability and passing the costs of overspending to future generations.

America's officials should act like adults and acknowledge that Social Security can only be strengthened by ending the problem of uncontrolled costs. In this sense, maybe America should be more like Sweden.