Sweden lives on in the memories of American progressives as a big-government paradise with an all-encompassing welfare state. But that version of the country has not existed for many years.
The Swedish Social Democratic Party ruled the country from 1932 through 1976. That included the 23-year premiership of Tage Erlander, who created much of the Swedish welfare state. Those were the big-government glory days that leftists romanticize. (You can read more about the history of the Swedish economy in this Capital Matters piece from last year.)
In reality, a long period of uninterrupted far-left rule did in Sweden what it normally does anywhere. The economy stagnated, state-run monopolies fell apart, and the people became upset. By the 1990s, the far-left Social Democrats had lost their seemingly permanent grip on power. The party itself moderated, and centrist and right-wing parties were able to form a few governments.
It was in that context that Sweden reformed its social-security program, as Johan Norberg writes at the Wall Street Journal. Swedes saw firsthand the consequences of unconstrained welfare spending, and their elected representatives, rather than lie to them, took some responsibility and made changes. Norberg writes:
In 1994 the Social Democrats agreed with the four center-right parties to create an entirely new system based on the principle that pensions should correspond to what the beneficiary pays into the system — a system in which the contribution, not the benefits, is defined.
The reforms were designed to make it impossible to run a deficit and pass the costs to future generations. Crucially, the agreement introduced a balancing mechanism nicknamed “the brake.” When the economy is doing worse than expected, pension benefits are automatically reduced, and when the economy picks up again, the brake is released.
Sweden introduced partial privatization of the kind the American left derides as a Republican plot to gamble our money away on the stock market. The Swedish government withholds roughly 2.3% of wages and puts it into individual pension accounts. Workers are allowed to choose up to five different funds in which to invest this money, according to their own risk preference, and can change them at any time free.
It has largely worked, and Sweden’s retirement system is better off than the United States’. The supposed model for the Scandinavian welfare state realized it couldn’t keep spending other people’s money forever and made sensible reforms. If Sweden can do it, so can the U.S.