Since the debate about the importance of social capital and civil society for the quality of democracy began, Scandinavia has caused problems. Observers have been bewildered by an allegedly paradoxical coexistence of a wealth of social capital and extensive welfare-state arrangements. Some theorize that large welfare states make engagement in voluntary associations unnecessary, making the production of social capital more difficult. However, empirical research shows Scandinavia to have comparatively high levels of social capital. To solve this paradox, the authors address how the causal mechanism between variation in the design of welfare-state institutions and social capital works. The empirical analysis, based on Swedish survey data, suggests that the specific design of welfare-state policies matters for the production of social capital. Contacts with universal welfare-state institutions tend to increase social trust, whereas experiences with needs-testing social programs undermine it. The policy implication is that governments, by designing welfare-state institutions, can invest in social capital.