How Sensitive is Old Age Poverty to Financial Crisis? A Micro- Simulation Experiment for Sweden.

Abstract

Pensions are both directly and indirectly affected by financial crises. The reform of the Swedish pension system into a notional defined contribution system with a minor funded part has attracted international attention for its solutions to ensure fiscal sustainability. As the financial crisis devaluated the buffer funds this released the automatic balancing mechanism that is designed to decrease the pension liabilities. The pension system is, however, still in transition and the long-term consequences in a fully mature system cannot be straightforwardly deduced from this incident. We use an agent-based model approach to study how the mature Swedish pension system may react to a financial crisis. First of all, of course, the funded parts of both the public and the occupational pension system will be directly affected. Through the automatic balancing mechanism that ensures financial stability also the buffer funds will release an automatic cut in pension rights. In our results we try to establish what the effects on poverty rates are for birth cohorts who are at different stages in their life course when the financial crisis hits. Our preliminary results indicate that cohorts just on the verge of retirement will be hit hardest. In another dimension men are harder hit than women, partly due to the fact that only females are allowed to vary labour supply.