ISF Report 2014:4 The Development of the Swedish Social Insurance since the 1990s Swedish Social Insurance Inspectorate Stockholm 2014 Inspektionen för socialförsäkringen 1
Summary The Swedish Social Insurance Inspectorate (Inspektionen för socialförsäkringen, ISF) is an independent supervisory agency for the Swedish social insurance system. The objectives of the agency are to strengthen compliance with legislation and other statutes and to improve the efficiency of the social insurance system through system supervision and efficiency analysis and evaluation. The ISF s work is mainly conducted on a project basis and is commissioned by the Government or initiated autonomously by the agency. This report has been initiated by the agency. Background The purpose of social insurance is to provide financial security in the event of illness and disability, to the elderly and to families with children. The Swedish social insurance is individually based and compensates for loss of income when individuals are unable to support themselves by working as a result of, for example, illness or caring for a child. The Swedish social insurance system is primarily funded by statutory contributions from the employer and employees. The social insurance covers all Swedish residents. Generous benefits and high replacement rates have been characteristic of the Swedish social insurance for a long time. However, many benefits are not automatically adjusted to changes in the price or income levels. The real value of the benefits and the replacement rates have therefore changed over time. 2
Objectives The objective of this report is to describe and analyse how the benefit levels, both in nominal and in real terms, and the replacement rates in the Swedish social insurance have changed since the 1990s. Methods The consumer price index is used to calculate the benefit levels in real terms in each year. The replacement rates are calculated for different wage levels using Statistics Sweden s data on structural wages. The social insurance benefits analysed in this report include parental benefits, sickness benefits, unemployment insurance, child allowance, housing benefit, maintenance support, child care allowance and adoption allowance. The report also analyses the development of the national norm for income support. Findings and conclusions The report shows that many of the social insurance benefits have not followed the changes in prices or wages after the economic crisis in the 1990s when the benefit levels were cut or frozen. The maximum benefits in sickness and parental insurance follow the development of prices. However, wages have increased much more rapidly than prices and an increasing share of the working population has an income that exceeds the income ceilings in these insurances. In 2010 nearly half of the men and a quarter of the women aged 20 64 years had an income that exceeded the income ceiling in the sickness insurance. In 1992 only 14 per cent of the men and 2 per cent of the women in this age group had an income exceeding the ceiling. The benefit levels in the unemployment insurance have not been increased for more than a decade and today the ceiling in the unemployment insurance is lower than the lowest decile in the wage distribution. In 1992 the ceiling in the unemployment insurance was higher than the median wage. One of the few indexed benefits is the child care allowance (financial support to families with an ill or disabled child that needs special supervision or care). The child care allowance follows the annual changes in prices. Many other benefits in the Swedish social insurance are defined in nominal terms and the levels are not automatically adjusted to changes in prices or wages. In these cases active measures from the Parliament and the Government are required 3
to change the benefit levels. One example of such a benefit is the child allowance. The child allowance has been raised a few times since the 1990s and the real value of the benefit (the purchasing power) is now about the same as at the beginning of the 1990s. The maintenance support, though, has decreased by 14 per cent in real terms since the beginning of the 1990s. The housing benefit is not indexed either, but the real benefit level is higher now than in the 1990s. However, the income limit for the maximum housing benefit has not been raised since 1996. The level of adoption allowance was raised considerably in 2001 but the nominal level has remained unchanged since then. The adoption allowance is still higher than in the 1990s in real terms. However, adoption costs have increased much more rapidly than both prices and wages in Sweden. The national norm for income support for single-person households has remained unchanged in real terms since the beginning of the 2000s, but the norm for income support has increased for households with children. The report also presents how the disposable income for different types of households with children has changed between 1992 and 2012. These calculations take into consideration the total effect of changes in the social insurance benefits, household income and income taxes. The calculations show that the real disposable income of working households increased between 1992 and 2012, mainly due to higher real wages. Social insurance benefits are more important for non-working households and frozen benefit levels over a long time period therefore affect non-working households more than working households. The disposable income has increased slightly for almost all non-working households analysed in this report. However, the development of the real disposable income was slightly negative for some households, for example for single-parent households that received minimum benefits from the disability pension or activity support (paid to the unemployed participating in an active labour market policy programme). Keeping the nominal benefit levels unchanged over a long time period may increase the income inequality as well as affect the economic development through increased saving. However, high benefit levels are also problematic because the system is financed 4
by distortionary taxes. In addition, high benefit levels and high marginal effects also have negative effects on employment and the labour supply. However, economic incentives have little effect on the labour supply of individuals with a very limited capacity for work. Since the Swedish social insurance covers a decreasing share of the income loss in the case of sickness, unemployment or parental leave, the share of the working population with supplementary private and collectively agreed insurance schemes has increased. Payments from these supplementary insurance schemes are of great importance for many. However, the supplementary insurance schemes increase the complexity of the social insurance and can cause considerable extra costs for the work force. The increased need for supplementary insurance schemes can also weaken the legitimacy of the social insurance. The Swedish social insurance is based on the principle of income replacement. However, the development of the social insurance during the past 20 years shows that the income replacement system with high replacement rates is gradually shifting towards a basic income security system. In unemployment insurance a basic income security system has already been established. 5