The Inflation Sensitivity of the Swedish Pension System : A study on how inflation affects the equality of consumption between Swedish pensioners

Sammanfattning: The much-debated topic of the pension system together with the currently elevated levels of inflation give rise to the question of how well the pension system is equipped to deal with a prolonged period of inflation. The current system was introduced in the 1990s and since then it has been operating in a period of low and stable inflation. The purpose of this project is therefore to study the inflation sensitivity of the Swedish pension system and the purchasing power of Swedish pensioners. Since the Swedish pension system consists of different parts and each part has a different inflation sensitivity, this allows me to study the inflation sensitivity of some typical cases of pensioners who has their own unique mix of pension income. I measure inflation sensitivity through the concept of equality of consumption, where utility from consumption is derived primarily from the discretionary spending that exceeds necessary expenses for survival such as food and shelter. Through this, I analyse economic inequality as measured by the amount of discretionary spending and evaluate how inflation affects these amounts for different typical cases of pensioners. The data in this study is gathered from official sources such as Pensionsmyndigheten and Statistiska Centralbyrån. I find that the nominal inflation protection provided by the Swedish pension system is high for most theoretical cases. However, inflation erodes real purchasing power for Swedish pensioners, especially for those not eligible for the housing supplement and for those who lack an occupational pension. The basic protection adds inflation protection for pensioners with a relatively low income, while occupational pensions add inflation protection for pensioners with a relatively high income. The findings suggest that the median pensioner is more adversely affected by inflation when compared to other income levels, as measured through discretionary spending.