Sweden

FOLLOWING WORLD WAR II, Sweden developed one of the world's most advanced capitalist welfare states. This was done via a large increase in social transfers financed by a corresponding increase in taxation. Since the late 1970s, government expenditures have [Page 1049]been some 60 to 70 percent of Swedish Gross National Product. In contrast, the corresponding average for the high-income countries in Europe has been 45 to 50 percent, and for the United States approximately 33 percent.

Consequently, Sweden has been a leading country in developing “cradle to grave” economic security for its citizens. Some key economic security programs are include a universal old-age pension system, tax-financed national health and education systems, income replacement for illness, a generous unemployment compensation system, large-scale government job retraining programs, an extensive system of family benefits, and a large and highly subsidized public housing sector.

Comparisons based on the rigorous Luxembourg Income Study (LIS) clearly demonstrate the effectiveness of Swedish antipoverty policies. For example, dramatic differences are shown when Sweden is compared with the United States, a country with many small social transfers.

Specifically, LIS data from the mid-1980s show that before taxes and transfers, the U.S. poverty rate was almost 20 percent whereas the corresponding figure for Sweden was even higher, some 26 percent.

However, after cash and in-kind transfers, the Swedish poverty rate fell to 4.3 percent, almost a 22-per-centage-point decline. In contrast, the U.S. poverty rate fell only 6.6 percentage points, remaining above 13 percent. Moreover, the LIS data show that the effectiveness of Swedish social programs in reducing poverty among children is even greater than for the general population.

Relative to most other countries, Sweden's social transfers are significantly larger and better targeted. To begin with, Swedish old-age pensions replace approximately 65 percent of previous income and provide a standard minimum pension floor at 50 percent of median income or higher. In contrast, the United States has no effective standard old-age pension floor at even 40 percent of median income. Even more important as an antipoverty policy is Swedish family policy, since in Sweden, as elsewhere, family poverty is strongly linked to number of children.

First, Sweden provides to each family a significant cash transfer per child. Second, the government guarantees child support payments to families. Consequently, families do not suffer economic hardship because an absent spouse fails to provide the legally mandated child support. Finally, Sweden provides a range of programs to help single parents enter and remain in the labor force with earnings close to 50 percent of median income or above. Chief among these are the provision of low-cost but high-quality childcare via a national network of public daycare centers as well as generous parental leave policies.

Sweden's system of social transfers has clearly been highly effective at reducing poverty. However, a vigorous and enduring debate focuses on the long-run viability of the Swedish welfare state. Market-oriented economists argue that the high level of taxation and massive social transfers have strong disincentive effects on labor supply, saving, risk-taking, business investment, and entrepreneurship. In addition, more subtle effects of the Swedish welfare state include potential adverse effects on the intensity and quality of work, investment in education both with respect to the level of schooling and the field of study, choice of occupation, and geographic labor mobility. The potential adverse effects noted are argued to be largely responsible for Swe-den's lagging economic growth since the early 1970s. For example, in 1970 Sweden's income per person ranked fourth in the world. By the mid-1990s Sweden's income had fallen to 16th position.

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