Social Security Privatization in Sweden - Research Paper Example

Social Security Privatization Introduction Social security privatization has become common in most of the countries. The reason is the increase in the number of residents. Social security systems have been used in almost all the countries to have a control over the citizens. This ensures that the government can access every citizen’s information. Most of the countries continue to use their traditional and reliable method of maintaining the social security information by using an age old system. But certain countries like those from Europe and other developed nations of the world decided to privatize the security systems. Privatizing social security is a process of replacing the traditional method by introducing a privately managed organization. The economic status of a country is the main factor which decides the privatization of social security. The administration is also an important aspect since privatization requires an efficient administration that can manage social security much better than how the government does. This privatization can be achieved by implementing a strategy that ensures that it provides more benefits to the country as a whole. Though privatization seems to be an easier task, the amount of risk involved is high. The level of positive benefits purely depends on the country and the administration of the government. The risk mainly revolves around the financial market of a country as the economic status plays a major role. Criteria for Social Security A social security system must be efficiently designed to suit the needs of the country. The governmental policies and laws differ from one country to another and privatization must be done only when these laws and policies can be followed. The financial and the economic status of the country are the major criteria when it comes to privatizing the social security. (Choi, 2003). Once privatized, the social security will not be taken care of by the government. But initial funding and financing must be done by the respective government. Privatization is the private management of the social security but it requires funding from the government. The traditional system does not require external funding, since most of the operations are performed by the government officials. Privatization not only has advantages but it also has certain disadvantages. These disadvantages are considered to be the major reason for several failures. Hence, the numbers of nations which opted for privatization of social security is less when compared to the countries which are have actually considered implementing it, in the initial stages. (Weaver, 1990). Swedish System Social security privatization has proved to be successful in some countries but it turned out to be worse for Sweden. The Swedish system failed and this eventually led to a situation where the country suffered with issues arising from both administrational as well as deployment level. The reason for such failure was attributed to the ineffective plan that deteriorated the existing social security system. On post analysis, it turned out that Privatization in Sweden was a haphazard decision without understanding the consequences of the decision. Other nations of the world, fortunately, had Sweden as an example for identifying the issues of failure during the process of privatizing the social security. The plan of Sweden included several ideologies that stated the social security privatization in a simpler manner. The people involved in this privatization were given an opportunity to create their own portfolios. Then they were allowed to select the funds from a pre approved list that was initiated by the government. Among the five funds, one was approved as a default fund. The plan had an option to change their contributions whenever they wish. (Rosenthal, 1967). Though the future contribution was up to the choice of the participant, the amount of contribution was determined by the initial contribution. People were provided with complete information regarding the funds, transfers and contributions. The major drawback in this plan was the option to give a default plan. The participants and the investors were offered a single default fund and this was the only option that was given to any participant. Even this default fund was not allotted according to the choice of the participant. Mere selection of portfolios did not fetch any benefit since the important aspect of selecting the remaining funds was not provided. The participants were not allowed to make an active choice and instead, portfolio selection was given the importance. Though the participants were keen on making an active choice, they were not permitted to do so. If they were permitted to make an active choice, the situation would have improved. The reason to say is that is because the investors then would have had an idea regarding their investment and the funds they can put in. Chile’s Privatization On the other hand, Chile, well known for its success in privatizing the social security system, went through various battles before landing on a success note. There were many reasons as to why Chile opted for privatization of social security. The major reason was the cumbersome process involved in the public pension program. The system was not efficient and it could not manage the contribution, pension benefits, rates of interest and other financial transactions. As a single system was responsible for all these operations, the process became still more problematic. (Tanner, 2004). Even the funding system could not manage the transactions and it led to a situation where the system failed to generate the required funds to be paid to the retirees. The government found it difficult to handle this situation as the taxes were also comparatively high. Eventually all these problems led to the decrease in the benefits offered to the retirees. Apart from this, the system had numerous other problems and the government lost its control over the country’s economy. As a result, the government felt the pressure of poor economy and financial status of the country dipped to an improbable low. The wages of the workers went down by 50% and this drastically affected the country’s economy. The economic downtrend created a havoc which resulted in problems related to delivering pension and retirement funds. Chile was not a democracy and the government could not make any decision without considering the pros and cons. The problem prolonged for a long time until Pinochet made a revolutionary act of privatizing the social security system. The success story of Chile’s move of privatizing the social security system spread across other countries. In due progress, most of the countries believed that social security is an important part of government and it must not be privatized. Privatization Augusto Pinochet, military official from the Chilean government decided to privatize the social security system. The idea was initially objected and people opposed this policy. They felt it may worsen the problem and might lead to a situation where they may not even get their pension properly. Though several countries have already experienced the drawbacks of privatizing the social security system, Pinochet was confident enough that this would make a revolution in Chile. This system was implemented in a preplanned manner which emphasized the importance of worker’s contribution and funding. Due to this factor, the possibility of ending up in a problem became very less. This system was implemented to manage the accounts of each individual. The implementation plan included certain factors that every worker had to follow. The initial specification insisted that each worker must make a contribution of 20% from their monthly wages. (Feldstein, 1998). This contribution was diverted to an investment company that was under the government’s control. Apart from this contribution, they had to invest another 3% of their wages as a life term insurance. This policy was common for every person employed in the government or private firm. The self employed people were not compelled, but they were given an opportunity to contribute in the same way if they were interested. These accounting operations were managed by a private firm approved by the government. The companies had to follow the restrictions and policies specified by the government. This was made compulsory since the private firms may make their own decisions without the government’s consent. Any individual who invested in this investment had to sign a bond which specified that the worker will stay on with the investment firm for a minimum period of four months. They were also given an option to switch their investments from one investment firm to another. But this was possible only if they stayed in a firm for a period of four months. The investors had an option to invest their voluntary savings which could add up to their initial investment. The investors who made an additional voluntary investment where exempted from the tax. These were the various investment options provided to the workers. (Kritzer, 2000). Apart from this, the social security privatization provided several other benefits and categories for withdrawals. The investors were allowed to make a withdrawal which was based on a predefined government policy. The government implemented a schedule which helped the investors to withdraw their money as and when they requires. Though they had this freedom, this policy had certain restrictions. Another added advantage was the investor may also make a purchase of annuity based on their investment. The rate of interest and number of withdrawals were purely based on the amount of investment. For each withdrawal, the investor was given a pension benefit which was taxable. Benefits of Privatization The social security privatization brought in various benefits to the workers as well as the pensioners. The workers are allowed to retire from their service prior to their retirement age. This was not possible in most of the countries but Chilean government offered this policy so that the workers need not work till their retirement age to attain the pension benefits. This was the greatest achievement of the government and people were also satisfied with these plans and policies. The workers can opt for this scheme if they had enough savings to be equated during their pension period. A person who retired after his retirement age must contribute to the initial savings and can also contribute to the voluntary savings as well.(Cronqvist, 2004). The initial stages of privatization did not receive much acclaim as people were hesitant to make an investment in private firms. Once the government approved the investment and financial concerns, people felt a sigh of relief. Though these reforms began way back in 1981, the numbers of investors was less. Around the year of 1995, the investment companies had around 5 million investors. The numbers of beneficiaries also increased due to the extensive schemes and its advantages. The main reason for the success of social security privatization was the in-exorbitant approach of including various schemes that helped the investors. Reasons for Chile’s Success Chile was the only country which succeeded in the privatization of social security. When compared to other countries, Chilean government had a wide range of options for the investors which turned out to be the secret of their success. The investors had the freedom to choose the investment policies and beneficiary plans. The investment firms also helped them in providing great benefits to each and every individual. The major reason was the additional option to change their investment plan and firms made people to invest more. Since the financial institutions were approved by the government, people relied on them to invest their funds. Social security privatization was made possible only after their idea of funding and management. The workers could easily select from the available investment options and retirement benefits. In this case the decision makers were the investors themselves. In most of the countries the investment decisions were made either by the government or by the financial institution. But Chilean government insisted that people were the sole owners of their money and they were allowed to make a decision in any situation.(Samuelson & Zeckhauser, 1998). The people were extremely satisfied by the government’s step of including people in decision making process. Retirement benefit is generally calculated based on the return a person will get form his own investment. If the rate of return is considerably more, people would certainly opt for that policy. Instead of investing in a fund that does not fetch maximum benefit, people decided to invest in voluntary funds that would fetch them the maximum return. The rate of return was also little higher when compared to the normal investment. Transfer of funds was considered as the greatest advantage since people were permitted to transfer their funds from one plan to another plan. The government implemented this policy of funds transfer to enable people to invest more in each and every policy of theirs. Voluntary investments were also a part of the investment process and it increased the number of investors each year. Sweden Vs Chile The major reason for Sweden’s failure and Chile’s success was the method used in investment and the way in which each government approached the people. Privatization cannot be achieved overnight and it requires months of hard work. A government must be capable of maintaining private organizations that have been approved by the respective governments. A private organization cannot acquire a ransom investment if it is not approved by the government. Instead the company must make sure that the investment plans yield more benefits to the investors. The financial firms approved by the government had no other option but to follow the government policies and abide by their regulations. Due to this reason they provided the investors with the most beneficial policies. Sweden’s privatization failed since the investment policies were not open to public’s ideas. (Idemoto, 2000). Instead the government imposed stringent rules that made the people to have a second thought regarding investment funds. Pros and Cons of Privatization Individuals can contribute their required amount of funds and they have an option to invest in voluntary funds. Due to this factor, most of the investors received tax exemptions as they saved in government funds. The income was not a major criterion for investment. Instead the worker must invest only 2% of his income. Retirement was not a major concern since people can fetch more amounts even if they retire before the proposed retirement age. (Brown, 2010). The major drawback of privatization was that the there was a reduction in the security benefits. The implementation of privatization would cost more and the government may not be in a situation to manage such huge costs. The governmental insurance policies may get reduced when compared to the private listings. Conclusion Privatization is beneficial in some of the countries where as most of the countries faced severe losses. The countries did not have the ability to manage the investment funds and serve the public in a proper manner. This led to the privatization of social security system. Works Cited Weaver, Carolyn. Social Security’s Looming Surpluses: Prospects and Implications. U.S.A: University Press of America Inc, 1990. Rosenthal, Albert. The Social Programs of Sweden: A Search for Security in a Free Society. U.S.A: North Central Publishing Company, 1967. Tanner, Michael. Social Security and its Discontents: Perspectives on Choice. U.S.A: Cato Institute, 2004. Feldstein, Martin. Privatizing Social Security. London: University of Chicago Press Ltd, 1998. Cronqvist, Henrik. “Design Choices in Privatized Social Security Systems: Learning from the Swedish Experience”. 94.2 (2004): 424-428. Web. 7 January 2011. Samuelson, William and Richard Zeckhauser. “ Status Quo Bias in Decision Making”. Journal of Risk and Uncertainty 1 (1988): 7-59. Web. 7 January 2011. Choi, James. “Active Decisions: A Natural Experiment in Savings”. (2003). Web. 7 January 2011. Brown, Robert. “Criteria for the Optimal Design of Social Security Retirement System”. Waterloo Research Institute(WatRISQ). (2010). Web 8 January 2011. Idemoto, Steve. “Social Security Privatization in Chile”. Economic Opportunity Institute (2000): 1-5.Web. 8 January 2011. Kritzer, Barbara. “Privatizing Social Security: The Chilean Experience”. Social Security Bulletin 59.3 (1996): 45-54. Web. 7 January 2011. Read More