Ever since the start of the debate about the importance of social capital and civil society for the quality of democracy, Scandinavia has been causing problems. In particular, observers have been bewildered by an allegedly paradoxical co-existence of a wealth of social capital and extensive welfare state arrangements. According to some theorists, large welfare states should have made engagement in voluntary associations unnecessary thereby making the production of social capital more difficult. However, empirical research shows the Scandinavian countries to have comparatively high levels of social capital. To solve this paradox, we present a theory for how the causal mechanism between variation in the design of welfare state institutions and social capital works. The empirical analysis, which is based on Swedish survey data, supports the idea 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, while experiences with needs-testing social programs undermines it. The policy implication is that governments, by designing welfare state institutions, can invest in social capital.