Investment Choice in the Swedish Premium Pension Plan
Journal of the European Economic Association Papers and Proceedings, Vol. 5, pp. 636-646, 2007
23 Pages Posted: 22 Jun 2008 Last revised: 11 Jun 2013
Date Written: April 1, 2005
Abstract
In 1998, Sweden passed a pension reform that introduced a second tier of mandatory individual accounts, the Premium Pension, in the public system. Of the total contribution rate of 18.5 percent, 2.5 percentage points go to the accounts. The first investment selections in the Premium Pension plan took place in the fall of 2000 when all Swedes born after 1938 were able to choose how to invest their contributions from a menu of about 650 mutual funds. Approximately 70 percent of participants made an "active choice" while the remaining participants' contributions were invested in a government-run default fund.
This paper examines investment choice in the Swedish individual account scheme. First, do workers with high risk in their human capital diversify their overall portfolio by investing their pension funds in low-risk funds? Second, to what extent do participants exhibit "home bias" and invest their pension funds in Swedish assets?
The results show a positive relationship between income and the level of risk in the portfolio. But, looking into the details, the relationship is actually somewhat U-shaped: low-income investors take on more risk than middle-income earners. It also seems as if women who qualify for the guarantee benefit (low-income earners) take on more risk than motivated by their situation. We also find that workers in the manufacturing sector - that is, the sector that is probably most correlated with the Swedish stock market - are less likely to invest in foreign assets and thus are exhibiting "home bias."
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Heuristics and Biases in Retirement Savings Behavior
By Shlomo Benartzi and Richard H. Thaler
-
By Gur Huberman and Paul Sengmueller
-
Investor Behavior and the Purchase of Company Stock in 401(K) Plans - the Importance of Plan Design
By Nellie Liang and Scott J. Weisbenner
-
Investor Behavior and the Purchase of Company Stock in 401(K) Plans - the Importance of Plan Design
By Nellie Liang and Scott J. Weisbenner
-
Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(K) Plans
-
Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(K) Plans
By Jeffrey R. Brown, Nellie Liang, ...
-
Defined Contribution Pension Plans: Determinants of Participation and Contributions Rates
By Gur Huberman, Sheena S. Iyengar, ...
-
401(K) Matching Contributions in Company Stock: Costs and Benefits for Firms and Workers
By Jeffrey R. Brown, Nellie Liang, ...
