Sweden has a reputation for providing expensive cradle-to-grave social welfare protection, but in 1998 the country put in place a public pension reform more conservative than most of the plans now sponsored throughout the industrialized West. The 1998 reform imposed a budget constraint on pension spending that is enforced automatically, without the need for further approval by the Swedish parliament. As a result, while other countries with advanced economies, including the U.S., are still grappling with large unfunded public pension liabilities associated with population aging, Sweden’s new system is projected to remain in balance permanently.

Paul Samuelson showed that pay-as-you-go pensions like Social Security can provide real increases in benefits over time, consistent with demographic and economic trends. In rough terms, the generosity of the system can grow with the real growth rate of the system’s aggregate level of contributions, which is a function of growth in the size of the labor force and increases in worker productivity.

In 1958, when Samuelson’s insight was published in a famous article, it was assumed that Western democracies would continue to have high fertility rates and thus also steady growth in their labor forces. Politicians felt safe voting to increase the generosity of pay-as-you-go pensions because they were told that population growth would make it affordable.

Read More: AEI