The national public pension consists of two components: income-related pension and premium pension. Each month, the employer pays in 18.5 per cent of the employee’s pensionable income to the national public pension system via the employer’s contribution. Of this, 16 percentage points go towards the income-related pension, which is administered by the Swedish Social Insurance Agency and 2.5 percentage points go towards the premium pension, which is administered by the Premium Pension Authority (PPM).
The size of the future income-related pension is based on income earned during working life, also known as life-time earnings. The contributions towards income-related pension are not physically managed from an account pending the individual’s retirement. Instead, the system is structured so that current contributions finance the payments made to today’s pensioners. In order to be able to calculate the income-related pension of each and every individual, the pension entitlement earned is registered and the amount reported is revised upwards annually using an index which measures average income growth in Sweden. When pensions are withdrawn, the payment is being financed by the current working opulation through their pension contributions.
The annual allocation made to the premium pension is saved in an individual premium reserve account at the PPM and the size of future premium pensions is determined by the growth of those mutual funds chosen by the individual and managed by private fund managers or by the Seventh Swedish Pension Fund.
In addition to the income-related pension, there is also what is known as a guarantee pension, a supplement intended for people with a low income or no income at all. The guarantee pension is financed by tax revenues through the national budget and not via the national public pension system.