394 The ‘global financial crisis’ is focusing the minds of pension policy makers in the EU. A report describes some of the pension options that EU countries are implementing. “Tough policy decisions” seem indicated; quality data an essential starting point.2010-08-30T11:59:082010<strong>PensionReforms’ summary and comments</strong><br />
Past pension policies in the EU have made their mark on current risks of pensioner poverty that are “…the largest in Latvia (51%), Cyprus (49%), Estonia (39%) and Bulgaria (34%), and the lowest in Hungary (4%), Luxembourg (5%) and the Czech Republic (7%).”<br />
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Does the future hold a similar promise? The report looks at how current generations of workers might fare, “…using the best knowledge currently available, in the form of projections and simulations on income entitlements of future retirees in EU countries.” The current global financial crisis, and the “fiscal austerity” measures that governments are taking provide the backdrop.<br />
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“Yet, this acceptance [of the need for change] has masked the relationship between the action taken now and the extent and nature of fiscal and social challenges arising in the future: this Brief raises the awareness for policymakers of impacts of decisions on policy issues upon the pension structures and income arrangements for future pensioners.”<br />
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The trouble with some options is that what might help to reduce pension costs might have implications in other parts of the economy and may not, in any event actually work.<br />
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“An attractive policy option to improve public finances, touted as a ‘step in the right direction’, is to increase the legal retirement age, and thus encourage older workers to extend their working careers. Such a reform increases the contribution base, while reducing the duration of retirement during which pension benefits are paid, and seems a natural and beneficial policy reform. However, as is the case in Spain, the current crisis has left many young people unemployed, and many argue that youth employment must be promoted, even at the expense of pushing older workers into early retirement. Any such proactive policy of forced early retirement, a misconception due largely to the ‘lump of labour fallacy’, is not likely to solve longer-term issues, instead leading to further increases in public spending on pensions and accentuating challenges with respect to the sustainability of public finances in the future.<br />
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The report defines “fiscal sustainability” as the long-term ability of the government to meet the financial obligations linked with its current and future expenditures and debts.” The actual measure is what is known as the “fiscal sustainability gap” that measures the gap as a proportion of GDP that “must be closed to ensure the government is able to finance all public obligations in the infinite future”.<br />
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PensionReforms notes that projections of these kinds are utterly dependent on the underlying assumptions and what looks like a quite small change can make large differences over the “infinite future”. That said, a large group of EU countries need to pay close attention:<br />
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“Countries are divided into categories of high, medium and low risk, with as many as 13 EU countries [of 27] being considered high risk countries. Among them, Ireland, Greece, the United Kingdom, Slovenia and Spain have serious challenges ahead, as their sustainability gap is in excess of 10% of GDP. Latvia, Romania and Cyprus are not far behind, at just below 10%.<br />
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Five countries are in the ‘low risk’ category: in order (from the lowest) Denmark, Belgium, Estonia, Sweden and Finland.<br />
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The report looks at different policy options either decided or being considered in the EU. For example, the “benefit ratio” is expected to decline, but that may not help pensioners in countries with an already high risk of poverty in old age. Then, a fall in the “gross replacement of earnings” of the “first pension”, seems likely:<br />
“…the generosity of the first pension from public pension schemes is set to decline in a number of countries (ranging from a massive 43% in Estonia, 37% in Sweden and 33% in Latvia to only 7% in Belgium and 3% in Portugal).”<br />
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Another measure of expected change can be seen by comparing “Net Replacement Ratios”. These can be aimed at increasing support for the lower paid (as in the UK and Belgium) or an overall decrease (such as in France and Finland) with the country showing the largest such cut across all pensioners being Portugal.<br />
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“The next few years will undoubtedly be a crucial time as EU national governments look for the ‘magic formula’ in the shape of proactive economic and social policies which not only strengthen their recovery from the crisis, but also help them stay clear of dangers of national insolvency and avoid the damage to future generations that would be a failure to attend to issues of pension sustainability. Achieving this delicate balance requires not only the political will to make tough policy decisions, but also the ability to persuade the public that its own interest requires it to make some current sacrifice to ensure sustainability of pension systems.”<br />
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The report notes that most of the data were collected before the full impact of the global financial crisis was felt and that it would be interesting to update that.<br />
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PensionReforms agrees that change seems indicated across the EU but suggests that governments should perhaps focus on things they can change (poverty in old age) and reduce their involvement in things that should perhaps be left to individual decision.<br />
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PensionReforms endorses the reports call “…for continued high-quality and independent evidence base to address both current and future fiscal and social issues: the better the evidence, the easier it becomes to formulate policy responses and persuade the public about the need for, and the consequences of change.”<br />
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PensionReforms also agrees that engaging with the public on these issues is more likely to produce a sustainable political outcome. Having governments make “tough policy decisions” implies that everyone is not involved in the decisions. In PensionReforms experience, voters can be told the truth as long as it is based on “high quality and independent evidence”. With that, everyone can perhaps understand the trade-offs. (File size 745 KB; 17 pp) 394<br />http://www.euro.centre.org/detail.php?xml_id=1665Fiscal and Pension Sustainability: Present and Future Issues in EU Countries393Ukraine recently carried out a ‘natural experiment’ when it upped its nearly universal, minimum pensions by 250%. Pension-aged poverty was eliminated, at the cost of a 2.4% reduction in the size of the labour force. Is that a reasonable price to pay? 2010-08-30T11:52:152010<strong>PensionReforms’ summary and comments</strong><br />
Ukraine has a mandatory Tier 2 state pension that, though contribution-based, for the near future will resemble a universal age pension, with women qualifying from age 55 and men from age 60. The near-universality is product of the fact that “those Ukrainians close to retirement age have accumulated most of their employment histories during the Soviet era and in a labor market that was characterized by full employment”. The high level of benefit compression reflects wage compression of the Soviet era, coupled with a minimum pension guarantee.<br />
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In order to reduce poverty among the elderly, the Ukrainian government increased the minimum pension from around 100 Ukrainian Hryvnia (UAH) a month to over 280 UAH in late 2004, and then further, to almost 350 UAH in early 2005. Total expenditure on pensions increased from nine percent of GDP in 2003 to 15 percent in 2005, with the vast majority (88 percent) of pensioners receiving a minimum pension. This minimum pension was extremely generous, exceeding even the legal minimum wage after September 2004.<br />
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Not surprisingly, the increase in the minimum pension has greatly reduced poverty among the elderly. “However, the main contribution of this paper lies in the analysis of unintended labor supply consequences of the reform,” i.e. the effect on participation of pensioners in the labour force. Large numbers of pensioners have continued to work in the Ukraine; as in Russia, this has been “attributed to the insufficient pension entitlements of many elderly”. The report notes that the sharp increase in the minimum pension is a natural experiment that can be used to estimate the effect on labour supply of a sudden increase in income. “If poverty was the cause of the elderly staying at work, a significant non-anticipated pension increase like the one in 2004 should allow more pension-aged to afford retirement without falling into poverty.”<br />
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“As old-age pensions are neither means-tested nor conditioned on retirement, the rise in benefit levels will induce a pure income effect, which enables an individual to afford more leisure.” This implies that the pensions are not taxed as income, so would not place a worker in a higher tax bracket. The author finds measured “strong disincentive effects on the labor supply decision of elderly people”. More precisely, the threefold increase in the minimum pension leads to an increase of 37-47 percent in male retirees at age 60, and a 30-39 percent increase in female retirees at age 55. The author chooses to emphasise this finding, warning: “The policy goal to combat poverty via pension increases might become ineffective and fiscally extremely costly, when the pension aged withdraw their manpower from the labor market.”<br />
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PensionReforms notes that it is important to keep in mind that few workers in the Ukraine were retiring at the statutory age (55 for women and 60 for men) prior to pension reform, so the denominators of these 30-47 percent figures are not very large. The effect of the pension increase on the size of the labour force is much smaller, simply because the denominator is somewhat larger. In the words of the author “The overall effect of the pension increase can be expected to amount to roughly 413,000 persons or 2.4 percent of the pre-reform labor force.” Moreover, this reduction in the labour force was predominantly the result of the retirement of women and service sector workers with little education, so the effects on the economy would be even smaller. PensionReforms thinks that this seems to be a price worth paying to eliminate poverty in old age. That price would be lower still if the pension age were increased to, say, 65 years from the current 55/60 years.<br />
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The author reports interesting findings on retirement effects by levels of education (years of schooling), but neglects to provide any reasons for the findings. “Up to 14 years of schooling, the pension increase induced additional retirement, while no impact can be detected for the best educated.” PensionReforms notes that 12 percent of the pensioners were not affected by the increase in minimum pension, because they were already receiving a pension larger than the minimum. If workers with post-secondary education receive higher than minimum pensions, this alone would explain the author’s findings. The retirement decisions of those with high pensions were not affected because their pension benefits did not change!<br />
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Finally, PensionReforms would like to have seen a discussion of the future pension system of the Ukraine, which is one far-removed from a universal, flat pension. The author mentions this topic only briefly, in a footnote. The system apparently commenced in 2007 and is “designed to rest on three pillars”, two based on mandatory contributions and one on voluntary contributions. The implications for poverty in old age seem dire, indeed, and cry out for analysis. That is totally lacking in the present report. (File size 650 KB; 66 pp) 393<br />
http://ftp.iza.org/dp4726.pdfRetirement Responses to a Generous Pension Reform: Evidence from a Natural Experiment in Eastern Europe 392<div align="left" style="margin-left:0cm;text-align:left;text-autospace:none"><span style="Book Antiqua";
color:windowtext;">Australia’s mix of a Tier 1 income- and asset-tested pension along with a compulsory Tier 2 pension and expensive tax breaks for all retirement saving produces patchy outcomes, at best. After 18 years of full compulsion, 60% of pensioners have less than $20 a week in private income.</span></div>2010-08-30T11:38:172009<div align="left" style="margin-left:0cm;text-align:left;text-autospace:none"><b>PensionReforms summary and comments<br />
</b>Australia takes its retirement income policies seriously, certainly with regard to those in employment. It has an odd mix of arrangements. There is a relatively generous Tier 1 pension (linked to average wages) that started in 1909 and that is both income and asset-tested. At present, that costs about 3.8% of GDP. <br />
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Then there is the compulsory Tier 2 requiring employers to contribute 9% of pay. Those contributions are, surprisingly, tax exempt and attract concessional tax treatment within the schemes, along with Tier 3 savings into approved ‘superannuation’ schemes. The tax concessions are very expensive at about 3.4% of GDP (see <a href="http://www.pensionreforms.com/Preview.aspx?280">here</a> for more). That’s about the same as the amount spent on the Tier 1 pension.<br />
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So, although the headline pension cost (3.8% of GDP) looks modest by comparison with nearly all OECD countries, the total cost (including tax concessions for private provision) is currently about 7.2% of GDP. The question addressed by this report is whether this is ‘working;’. It was intended to inform the ‘Henry Review’ into Australia’s Future Tax System that has since issued its report: see <a href="http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm">here</a>. PensionReforms will review the Henry Review’s work later.<br />
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Currently, about one in eight of Australians is over the State Pension Age and that is expected to become one in five by 2028. The ratio of ‘working age’ to those age 65+ was 4.6 in 2008 and is expected to be 3.0 in 2028 and 2.5 in 2048.<br />
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The report uses information from the Australian Bureau of Statistics’ Survey of Income and Housing (SIH). The SIH included information from 2005/06 on “…on homeownership, net wealth, asset ownership and the value of assets.”<br />
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“With an ageing population the government needs to ensure that the available funds for those in retirement are targeted at the most needy. The analysis of equivalent disposable income in this report shows that, when compared with all Australians, almost two-thirds of those on the Age Pension are in the bottom income quartile and nine out of ten are in the bottom half of the income spectrum. When just Age Pensioners were analysed, six-in-ten were found to have income other than government benefits of less than $20 per week. Even more disturbing is that 83 per cent of renters have private incomes of less than $20 per week.”<br />
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As might be expected, those at the top, a much smaller group of Age Pensioners who are in the highest income quartile (2.4%) are doing very well.<br />
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The income test that applies to the Tier 1 pension almost certainly affects these numbers. So does the parallel asset test:<br />
“The wealth of those on the Age Pension compared favourably with the entire population. In fact almost 70 per cent are located in the middle two quartiles. However, the majority of the wealth is in the family home and not assessable under the assets test. The outcome of this is that the current asset test has little impact and is of no significance to those in the lower half of the wealth and income spectrums.”<br />
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Amongst pensioners, the ‘low wealth, low income’ categories were dominated by single pensioners who did not own their own homes. Despite the Age Pension’s objective to “provide support for a basic standard of living”, around 24% of the aged population are “living in poverty”.<br />
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Although Australia has had full compulsion at Tier 2 since 1992 (and a lesser version for a further six years) the amount that Australians aged 44-64 in 2006 had saved in those schemes was strikingly low:<br />
“The figure shows that 40 per cent of men and 62 per cent of women approaching retirement currently have less than $20,000 in superannuation. Without considerable accelerated superannuation savings over the next few years, superannuation will not make a significant impact on their standard of living in retirement.”<br />
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The report suggests that the current asset test isn’t ‘working’ because of the relatively well-off who still receive the Age Pension. That is because the principal home is exempt.<br />
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“The report has presented a range of options. Some are aimed at greater equity by increasing payments to the most in need, while others are aimed at encouraging people to save in a form that will provide income in retirement. Finally, other broader policy options are presented to address inequities in the system by reducing payments to those where the need is not as great.”<br />
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These options covered in the report (including estimates of their likely cost) include:</div>
<ul>
<li>a universal pensioner concession card – because qualification for this currently depends on there being at least $1 a year of Age Pension being payable, there is a significant discontinuity of entitlement at the margin.</li>
<li>universal age pension – though this would increase costs (by 43% before tax), it would significantly simplify the pensions environment;</li>
<li>increasing the base rate for singles to address poverty from the group most clearly affected.</li>
<li>increasing rental assistance.</li>
<li>changing the thresholds and tapers for the Age Pension.</li>
<li>assessing the home value (above a certain limit) as an asset.</li>
<li>changing taxation arrangements; and</li>
<li>broadening superannuation contributions.</li>
</ul>
<div align="left" style="margin-left:0cm;text-align:left;text-autospace:none"><br />
PensionReforms thinks that some of these suggestions merit debate. Australia has one of the more complicated pension systems that seems not to be working (because of poverty levels amongst the old). Change is definitely indicated – PensionReforms will review the results of the Henry Review later. (File size 246 KB; 32 pp) 392<br />
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</b></div>http://www.bsl.org.au/pdfs/NATSEM_BSL_Reform_of_Australian_retirement_income_system.pdfReform of the Australian Retirement Income System391The UK’s complex pensions landscape will get more complicated when the new auto-enrolment NEST gets underway. It will change the face of pensions, perhaps in unexpected ways. Perhaps fewer Defined Benefit accruals; more Defined Contribution and a smaller employer involvement? 2010-08-05T17:18:502009<strong>PensionReforms’ summary and comments</strong><br />
As PensionReforms has observed before, the UK’s pensions’ environment (public and private) is probably the most complex set of arrangements in the world and, from 2012, it will become even more complicated with the addition of the auto-enrolment, opt-out “National Employment Savings Trust” (NEST), previously known as Personal Accounts. Under the current settings, pensions (public and private) apparently deliver an average of about 60% of retirement income. For poorer pensioners, most of that is delivered by the state.<br />
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“A new pensions landscape will emerge due to the Government’s state and private pension reforms, and to changes already occurring in the private pensions market. In the future, state and private pension income is still likely to provide the majority of retirement income for most pensioners and the importance of private pensions for many pensioners is likely to grow.”<br />
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The changes will increase the contributions from state pensions as the ‘Basic State Pension’ will now increase with wage increases (rather than prices). There will also be a reduction in some inequalities “…such as those between men and women, and between employees and carers”.<br />
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The additional layer of pension savings (NEST) will see more pension scheme members and a greater proportion of Defined Contribution saving schemes, where the risks rest with savers, rather than with sponsoring employers as is the case with Defined Benefit schemes.<br />
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The report notes that about 40% of the working age population (around 14 million people) are saving in a private pension schemes. In due course, the report expects the following:
<ul>
<li>“Assuming that opt-out rates after auto-enrolment are in line with Government expectations, the proportion of people with private pension savings after 2012 could rise from around 40% of the working age population today (around 14 million people) to around 21 million people, or roughly 60% of the UK working-age population once the Government’s reforms are fully implemented.</li>
<li>Active membership in Defined Benefit schemes could reduce by around 40% in the private sector by 2050, from current levels of around 2.5 million active members to around 1.5 million by 2050.</li>
<li>Active membership in Defined Contribution schemes could reach around 15 million by 2020 and around 17 million by 2050, compared to an estimated 5 million today.</li>
<li>The amount held within DC pension funds could grow from around £600 billion today to between £700 billion and £900 billion (2009 earnings terms) by 2050, depending on how employers respond to the private pension reforms.”</li>
</ul>
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The changed environment will probably see a greater future demand for annuities, though initially that could reduce and perhaps there will need to be a greater flexibility in the options available to retirees with “small to median pension pots”. <br />
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Information requirements will also change:
<ul>
<li>“People may have more complex combinations of income and assets to manage in future; some low to moderate and higher earners could have state pension entitlement, residual DB pension entitlement, DC pension savings, other financial savings and assets, housing assets, and earnings.</li>
<li>Generic financial information and guidance services will need to be able to support people, mostly low earners, who are making decisions for the first time regarding the accumulation of savings and investments in working life and their use in retirement.</li>
<li>Advice and information services will need to be able to support people who are likely to have to make more choices and more complex financial decisions about their retirement savings during their working life, at the point of retirement and during retirement.”</li>
</ul>
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The mix of outcomes will vary depending on income levels while working. Low lifetime earners will depend more on the more generous state pension and will have a relatively small private pension but there will be many more in that position than now.<br />
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“Low to moderate earners (for example, earning £11,200 - £37,000 p.a.):
<ul>
<li>Will receive more from state pensions as a result of the state pension reforms.</li>
<li>May benefit from auto-enrolment and compulsory employer contributions by saving in a private pension for the first time or receiving contributions from their employer for the first time, or could see no change to their pension, or could see a reduction in their current employers pension contributions if, as a result of the reforms, their employer reduces the generosity of contributions to their existing pension scheme.</li>
<li>May accumulate several small pots of DC and DB pension savings if they change employment several times, although they are more likely to be offered a private DC pension by their employer than a DB pension in the future.</li>
<li>May have some savings from other financial products when they retire.”</li>
</ul>
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Higher earners and, probably, public servants will probably be OK and can anyway look after themselves though it is likely that public servants will see fewer occupational benefits coming from Defined Benefit schemes.<br />
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In PensionReforms opinion, the NEST reform won’t deliver the changes that the UK needs urgently – addressing the high levels of poverty amongst the over 65s. Even when the NEST is fully mature, the expected outcomes for low lifetime earners seem driven mostly by changes in the Tier 1 Basic State Pension. That’s as it should be. But instead of spending yet more tax dollars on the NEST savings (and requiring employers to contribute as well), PensionReforms thinks the UK government should have focussed more resources on what it can actually change – the present living standards of the currently old. <br />
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Overall, the expected outcomes for the largest group (“low to moderate earners”) seem patchy, to say the least. More state control of pensions; less direct involvement from employers and increased overall complexity with no clear expression as to how all this might help the UK to deal with increasing numbers of pensioners. That’s not really good enough. (File size 576 KB; 63 pp ) 391<br />
https://www.pensionspolicyinstitute.org.uk/default.asp?p=12&publication=0252&Retirement income and assets: how can pensions and financial assets support retirement?390In the context of the expected costs of demographic change, some think that because ageing societies need more children, parents should be rewarded in retirement for producing offspring. Current policies lead to “inefficiently low fertility”. Really?2010-08-04T11:57:342010<strong>PensionReforms’ summary and comments</strong><br />
Societies are ageing as baby boomers move into retirement. There will be more retirees and relatively fewer workers and so the costs to retirement income systems (and health services) will rise as a share of national incomes.<br />
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Immigration may help but then a country will be importing the ageing populations of other countries, particularly if the immigrants’ parents are allowed to accompany their children. <br />
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Might encouraging the child-bearing proportion of the population to have more children help? Yes, according to this report.<br />
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“In this paper we propose and analyze a particular market failure that may lead to inefficiently low equilibrium fertility and therefore to a need for government intervention. The friction we investigate is related to the ownership of children. If parents have no claim on their children’s income, then the private benefit from producing a child may be smaller than the social benefit. We present an overlapping-generations (OLG) model with fertility choice and altruism, and model ownership by introducing a minimum constraint on transfers from parents to children.”<br />
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According to the report, the OLG modelling demonstrates that “…whenever the transfer floor is binding, fertility choices are inefficient.”<br />
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One of the problems with countries’ current arrangements is that “…a PAYG social security system cannot be used to implement the efficient allocation. To achieve the efficient outcome, government transfers need to be tied to a person’s fertility choice in order to provide incentives for child-bearing.”<br />
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Apparently the problems started when parents no longer controlled their children’s incomes:<br />
“We start by documenting that in most developed countries, laws implemented in the last two centuries effectively reallocated property rights from parents to children.”<br />
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This, according to the report, means that the children tend to look after themselves, rather than their parents:<br />
“We show that when children own themselves, the costs and benefits of having children are not aligned, which can lead to inefficiently low fertility. Furthermore, we show that property rights are relevant in reconciling results from models with and without altruism, and with and without endogenous fertility. We also show how property rights over children interact with other intergenerational policies. We show that a standard PAYG system will not lead to an A-efficient allocation because even though taxes when middle-aged are lump sum to children, they are distortionary from the parent’s point of view.”<br />
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This leads ‘naturally’ towards a pension regime that rewards fertility though this can, the report acknowledges, create problems. What, for example, do we do about those who suffer from “involuntary infertility”?<br />
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A ‘logical’ progression then suggests that, perhaps, the “shifts in property rights” and PAYG pension systems “…may help account for fertility patterns over the past two centuries, including the baby boom and bust.” That topic will be the subject of further work by the authors.<br />
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PensionReforms suggests that all this analysis is based on a fundamental misconception, so to speak. It is certainly the case that PAYG pension systems have, in the last 100 years or so, changed the face of society and hugely improved the lot of the old. It is also true that over at least part of the last 100 years, the fertility rate has declined significantly. But that need be no more than correlation rather than causation.<br />
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As PensionReforms has noted previously (see <a href="http://www.pensionreforms.com/Preview.aspx?76">here </a> and <a href="http://www.pensionreforms.com/Preview.aspx?67">here</a>, for example), while birth rates may have fallen and while governments may, contemporaneously, have introduced PAYGO pensions, PensionReforms thinks it highly unlikely that the latter causes the former. Even if we accepted that proposition, it is even less likely that a pension system, necessarily individualised, might induce younger citizens to have more children. PensionReforms acknowledges that financial incentives can affect the birth rate, (not itself an argument for or against them) but the ones that work are those that deliver money immediately to young families themselves. <br />
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PensionReforms thinks there would be more of a financial incentive for producing children if more were to be spent directly on the children themselves. <br />
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If the decision about pension entitlements is made at age 65, based on the number of children already born, ex post, (and how well they are contributing to society?) the incentive to have children disappears. It's rather unlikely that a 20 year old would be able to decide what to do when faced with this kind of decision. Alternatively, if the childless (voluntary or not) are effectively penalised through higher taxes and/or a poorer pension, what might persuade them to stay in their country of origin? Perhaps the report’s recommendations will then depend on all countries’ adopting the child-based pension calculation.<br />
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And then what about the delinquent (usually male) parent who has plenty of children but plays no real part in their upbringing? Perhaps that might need some kind of discount for parental quality to be applied (based on years of ‘hands-on’ custody?).<br />
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PensionReforms concludes that this kind of analysis has an ‘other-worldliness’ feel to it. The outcomes are the product of models that try to mimic the real world but can’t: life is just too complicated. The analysis has been captured by the model without a real-world sense test being applied. Do potential parents really think about the security of their retirement incomes when deciding whether to have children or, having started, how many to have? How does anyone seriously propose the “ownership” by parents of the economic incomes of their children, even in theory? Asking potential parents whether any of this is even a remote possibility should elicit comments that once and for all will discourage further research in this particularly murky part of the retirement incomes’ puzzle. (File size 304 KB; 48 pp) 390<br />http://siepr.stanford.edu/system/files/shared/PropertyRightsPaper46.pdfWho Owns Children and Does It Matter? 389A new look at New Zealand wellbeing and hardship numbers show that the old are relatively well-off by comparison with other groups. They also fair well in international comparisons so local retirement income policies seem to be ‘working’. Those with children are another story.2010-07-28T16:28:462010<b>PensionReforms’ summary and comments</b>
<div>The New Zealand government’s Ministry of Social Development has taken a new look at well-being and hardship levels amongst different groups in society. PensionReforms has already summarised two earlier reports that came to broadly similar conclusions as this latest one – see <a href="http://www.pensionreforms.com/Preview.aspx?89">here</a> (from 2006) and <a href="http://www.pensionreforms.com/Preview.aspx?325">here</a> (from 2009, looking at data over the period 1982-2008).</div>
<div> </div>
<div>The latest 2008 findings are limited to non-income comparisons to establish those with low living standards (those experiencing material hardship). The interviews were carried out before the effects of the Global Economic Crisis affected things. However, New Zealand was already entering a recessionary period.</div>
<div><b> </b></div>
<div>“The 2008 New Zealand Living Standards Survey (2008 LSS) was a nation-wide face-to-face survey of 5000 households carried out by Colmar Brunton for the Ministry of Social Development (MSD) from June to October 2008. The 2008 LSS followed two earlier Living Standards Surveys conducted in 2000 and 2004.</div>
<div> </div>
<div>“These surveys collect information from respondents about their material circumstances, including questions about ownership of household durables and their quality, their ability to keep the house warm, pay the bills, have broken down appliances repaired promptly, pursue hobbies and other interests, pay for a night out, and so on. Income information is collected but the main focus is on non-income indicators of material living standards.”</div>
<div><b> </b></div>
<div>The report suggests that this kind of measure supplements the more common income-based approach and noted that conditions and the relative differences between groups in society had not changed very much over the 2004-2008 period.</div>
<div> </div>
<div>“…older New Zealanders (65+) have low hardship rates (4%) relative to the whole population (13%), and children (0-17) have relatively high hardship rates (19%), using the quite stringent Level 2 threshold on the ELSI [Economic Living Standards Index] measure.”</div>
<div> </div>
<div>The report concludes that “…the mix of current public provision (mainly NZS) and private provision built up by most of the current cohort over their lifetime (including equity in own home) are ensuring very low hardship rates among older New Zealanders.”</div>
<div style="margin-left: 0cm;">There was a different story however for, particularly sole parents (39% hardship rate) by comparison with two parent families (11%). Families with more than four children also suffered higher rates.</div>
<div> </div>
<div>Beneficiary families were even worse off – 51% suffered hardship by comparison with working families (11%).</div>
<div> </div>
<div>Also, “…Maori and Pacific people have hardship rates some 2 to 3 times that of those in the European or other ethnic groups.”</div>
<div> </div>
<div>The report found some improvements for children over 2004-2008, reflecting the introduction of a new family support programme ‘Working for Families’. However, there was “...some evidence of an increase in hardship rates for adults in low to middle income households without dependent children.”</div>
<div style="margin-left: 0cm;"> </div>
<div style="margin-left: 0cm;">PensionReforms thinks that comparing these kinds of numbers across countries is difficult but the report does what it can:</div>
<div>“Using the recently adopted official EU measure of material hardship ….</div>
<ul>
<li>overall population hardship rates (13%) are around the median for the expanded EU (EU-25) and at the lower end of the rankings the ‘old EU’,</li>
<li>older New Zealanders have low hardship rates (3%) relative to their counterparts in EU nations (EU-25 median is 14%) ….</li>
<li>… but hardship rates for New Zealand children (18%) are above the EU-25 median (15%).”</li>
</ul>
<div> </div>
<div>PensionReforms suggests that New Zealand can take considerable comfort from the report’s findings on hardship rates measured in the report for the over age 65s. Public policy on retirement income support seems to be working and that is principally because of the universal, relatively generous state pension (‘New Zealand Superannuation’). PensionReforms thinks that, if other countries are serious about reducing poverty levels amongst the old, they could learn a lot from the New Zealand experience.</div>
<div> </div>
<div>However, as the report clearly explains, there is a rather different story when families with children are similarly analysed.</div>
<div> </div>
<div>Regardless, PensionReforms thinks that a country cannot measure the success or otherwise of a retirement income policy unless it tests the outcomes either by incomes or, as here, by living standards or, even better, by both in respect of the people for whom the policy was designed. Even before the Global Economic Crisis and especially now with the financial worries faced by European countries, there was a lot to do. From now, there will probably be even more. (File size 1.23 MB; 77 pp) 389</div>http://www.msd.govt.nz/about-msd-and-our-work/publications-resources/monitoring/living-standards/living-standards-2008.htmlNon-income measures of material wellbeing and hardship: first results from the 2008 New Zealand Living Standards Survey with international comparisons388In the UK, social welfare programmes are funded mostly with a tagged tax called National Insurance contributions. There are 3,400 civil servants responsible for making sure workers and employers pay the right amounts: at no small administrative cost.2010-07-21T09:40:412009<div><b>PensionReforms’ summary and comments</b></div>
<div>As in many countries, the UK’s health and welfare programmes are paid for by a separate tax called the National Insurance contributions. The current regime started in 1948 and is complex. The contributions are applied in four different “classes” – see <a href="http://www.hmrc.gov.uk/rates/nic.htm"><u>here</u></a> for the detail. They are calculated separately from income tax but administered by the National Insurance Contribution Office (NICO) in conjunction with tax.</div>
<div> </div>
<div>The “class 1” contribution rates are as follows:</div>
<div><span>-<span> </span></span>Employees: 11% of covered earnings:</div>
<div><span>-<span> </span></span>Employers: 12.8% of covered earnings.</div>
<div> </div>
<div>Then there are rebates where the pension scheme is contracted out of the State Second Pension (S2P), married women’s (lower) rates and separate rates for the self-employed, credits for the disabled, and so on.</div>
<div> </div>
<div>When National Insurance started....</div>
<div>“Features of the scheme included:</div>
<ul>
<li>no means testing of benefits - the amount of benefit paid in respect of any claim by a claimant was the same whether the claimant was rich or poor, depending only on the completeness of the claimant's contribution record;</li>
<li>a cap on the system's scope for redistribution. Above a certain level of earnings or profits no extra contributions were payable;</li>
<li>the payment of a contribution by an employer for each employee comparable to that paid by the employee.”</li>
</ul>
<div> </div>
<div>Entitlement to many benefits depends on whether a claimant is or has been making contributions. For example, the age pension (‘Basic State Pension’) depends on a complete contribution record so that pensioners with a less-than-complete record receive smaller pensions. A working life can stretch over nearly five decades so the record-keeping function is significant. Until 2007, a ‘complete’ record for a male was 44 years; 40 for females. Now it is 30 years for both but achieving that doesn’t let contributors off the hook – they continue paying.</div>
<div> </div>
<div>The original system had a card for each contributor. That was computerised in 1975 at the same time as the contribution collection process was attached to the PAYE tax system. In 2009, a new system was installed, combining the PAYE and National Insurance records. In fact, the NICO is part of the tax department (Her Majesty’s Revenue and Customs or HMRC). When that happened in 1999, there were 8,500 employees in the NICO. There are now only 3,400 (40% of the original tally) but the NICO still cost £70 million in 2009.</div>
<div> </div>
<div>The report looks at the NICO’s push to reduce costs while, at the same time, improving performance. Technology is at the heart of the changes – for example, electronic filing is now required for all employers with more than 50 employees.</div>
<div> </div>
<div>“The introduction of Lean methodology has enabled NICO to reduce staffing by over 500 people (around 15%) in the last 3 years, whilst improving performance with productivity increases averaging 15% to 30% in the main processes.”</div>
<div> </div>
<div>With respect just to the state provision of incomes for the old, the UK has one of the most complex systems anywhere. Part of that is to do with the separation between ‘National Insurance’ and the government’s other system of income taxes and payments. </div>
<div> </div>
<div>Given that National Insurances contributions are the second largest source of revenue for the UK government (at £98 billion in 2009), there seems a case to consider changing the contributions-based system of entitlements in favour of benefits that are paid direct from general tax revenue. The marginal cost of collecting extra income tax (equal to £98 billion) would be somewhat less than present arrangements.</div>
<div> </div>
<div>Delinking benefits from contributions would also allow for a considerable simplification of current entitlements. That would help citizens to better understand those and to make easier the decision as to whether additional, private provision were needed. It would also allow the current ‘contracting-out’ provisions that apply to the S2P to be eliminated. PensionReforms thinks that would be an improvement in benefit design anyway but it would also have the advantage, again, of simplying the pensions environment.</div>
<div> </div>
<div>However, none of that will happen. Instead, the UK will be adding soft compulsion (with new contribution rules) in the shape of the new Personal pension Accounts on top of an already numbingly complex framework.</div>
<div> </div>
<div>The NICO has done a good job in the last 11 years or so to improve the collection of National Insurance contributions while at the same time taking large costs out of the system. In PensionReforms’ view, the pity of that effort is that it still maintains the separate stream of tax collections that operate in an entirely different way from income tax, even sometimes perversely. They are regressive at the lowest and highest income levels by comparison with income tax with the exemptions that can apply to that. It should be time for a radical re-think but PensionReforms does not expect that. (File size 105KB; 18 pp) 388</div>http://cis.ier.hit-u.ac.jp/Japanese/society/conference1001/mcdonald-paper.pdfNational Insurance Administration in the UK387<div>Many countries in the EU have high proportions of the pensioner population being ‘at risk of poverty’ (using 60% of median incomes as the benchmark). 14 of the 27 countries have even higher rates suffering “material deprivation. Not good enough really.</div>2010-07-12T20:48:282010<div>PensionReforms has already looked at international comparisons of pensioner poverty: <u><a href="http://www.pensionreforms.com/Preview.aspx?289">here</a></u>, from the OECD and <u><a href="http://www.pensionreforms.com/Preview.aspx?289">here</a></u> about Europe. Also, this most recent report’s author was involved with further reports on EU countries <u><a href="http://www.pensionreforms.com/Preview.aspx?51">here</a> </u>and <u><a href="http://www.pensionreforms.com/Preview.aspx?53">here</a></u>.</div>
<div> </div>
<div>International comparisons of most things economic and financial are difficult but especially poverty levels. They depend completely on the measures used to establish relativities. The measures may not translate easily from one country to another. That said they can be used, with caution, as a report card on the measurement of progress towards improving conditions. The measure of those ‘at risk’ used in this report is having an income of less than 60% of the local “national equivalised median income”.</div>
<div> </div>
<div>A new measure, the “material deprivation rate” is also used. This “...offers a more absolute approach to reflect on incapacity to afford some items which are considered desirable or even necessary by most people to have adequate living standards. It is defined as the “enforced” lack of at least three of “ nine ‘essential’ items.</div>
<div> </div>
<div>“This policy brief provides the latest evidence on how EU countries differ in terms of poverty risks for older people (aged 65 years and over). Results derived from the latest EU-SILC data for 2008 [based on 2007 incomes] show that, on average, older people face a higher poverty risk rate (19%) than the working age population (15%).”</div>
<div> </div>
<div>Poverty rates amongst the elderly in some countries seem
<div>extraordinary and the range between top and bottom is very wide:</div>
<div>“The highest poverty risk rates for older people were observed in Latvia (51%), Cyprus (49%), Estonia (39%) and Bulgaria (34%), and the lowest in Hungary (4%), Luxembourg (5%) and the Czech Republic (7%).”</div>
<div> </div>
<div>The report says there seems no one explanation for the differences but countries with a good safety net seem to fare best. Pension arrangements that have strong redistributive effects also help.</div>
<div> </div>
<div>“The overlapping group of single elderly women and the oldest age cohort 75+ have, in general, a much higher poverty risk rate compared to other subgroups of older people. The low pension income for older women is mainly due to the fact that their working lives experienced patterns of employment which have generally low coverage of pension scheme affiliation, and also they had childcare related gaps in their employment record.”</div>
<div> </div>
<div>PensionReforms wonders why pension entitlements reflect work and pay experiences at all. It isn’t clear why, for example, the elderly widow of a deceased retired worker who experienced long periods of unemployment or ill health should suffer financially at the hands of the state.</div>
<div> </div>
<div>PensionReforms also notes that where countries base pension increases on prices rather than community incomes, that also tends to penalise women. They usually live longer and so are more likely to suffer the effects of falling relative incomes.</div>
<div> </div>
<div>The report notes the relative changes between the elderly in the covered countries and households with children:</div>
<div>“In general, poverty risks for older persons had not risen for many countries during the last five years, with the important exception of three Baltic countries and the neighbouring Finland. The rise is most dramatic in Latvia, followed by Estonia and Lithuania. In Estonia and Lithuania, the poverty risk for older people increased while it was falling for children. For Latvia and Finland, the rise in the poverty risk for older people has been much greater than the rise in poverty risks for children.</div>
<div> </div>
<div>Conditions for the elderly improved in only four (of 27) countries in the five years covered by the report:</div>
<div>“Four countries observed a decline in the poverty risk for older people during the period in question, most notably Ireland, but also Portugal, Hungary and France. For these countries, the relative economic position of older people improved, since the decline in the poverty risks for older people exceeded that for children. These countries observed, in general, a more substantial rise in non-contributory social pensions during the period in question.”</div>
<div> </div>
<div>As far as pensioners are concerned, recent changes in pension systems have tended to be about reducing, rather than improving benefits. The changes have tended to be made in the name of improving future affordability.</div>
<div> </div>
<div>“In view of financial sustainability concerns linked with various forms of pension generosity in EU countries, recent pension reforms in many EU countries have tightened the eligibility conditions (especially for early retirement) and scaled down the level of pension benefits and their growth (in relation to wages). Thus, in the absence of extending working careers and greater private personal savings, it is feared that future generations of older persons will be more often poor than the rest of the population.”</div>
<div> </div>
<div>The comparison of ‘material deprivation’ measures produce similar results:</div>
<div>“...on average, 16% of the older population in EU27 could be considered materially deprived during 2008. This result compares favourably to the at-risk-of-poverty rate for the same subgroup at the EU level: 19%. Also, on average, only about one third of the older population that is at-risk-of-poverty was also disadvantaged by material deprivation.”</div>
<div> </div>
<div>PensionReforms thinks this really isn’t good enough – in the EU27 in 2008, of the population over age 65, one in six were ‘materially deprived’; one in five were ‘at risk of poverty’. And it seems this will probably worsen over coming decades. That means current arrangements will probably become less able to satisfy a country’s most basic obligation – to help those who demonstrably need it. Perhaps that needs to have a greater focus in public policy discussions over things such as whether workers might be saving ‘enough’ for retirement. (File size 1.2 MB; 23 pp) 387</div>
</div>http://www.euro.centre.org/data/1264603415_56681.pdfPoverty Risks for Older People in EU Countries - An Update386<div>The Irish government has announced the results of its thinking on pensions that started in 2007. As well as increasing the State Pension Age, it also wants something similar to the UK’s Personal Pension Accounts. Overall, this may cut the cost of pensions to taxpayers, but may not.</div>2010-07-12T20:42:442010<div align="left"><b>PensionReforms’ summary and comments</b></div>
<div align="left">The Irish government started its look at the future cost of pensions in 2007. See <u><a href="http://www.pensionreforms.com/Preview.aspx?199">here</a></u> for a summary of the 2007 ‘Green Paper’ and <u><a href="http://www.pensionreforms.com/Preview.aspx?224">here</a></u> for a local commentary on those proposals.</div>
<div align="left"> </div>
<div align="left">In summary, the Irish government proposes more radical reform than PensionReforms expected but quite a bit of that seems misdirected. The government is rightly concerned about the future affordability of current pension commitments (a projected “increase in public spending on pensions from 5½ percent of gross domestic product to almost 15 percent”) but then seems to think that partly shifting the pension burden from public to private provision somehow makes pensions more affordable.</div>
<div align="left"> </div>
<div align="left">Ireland faces the usual collection of affordability issues faced by most countries – “a tripling of the number of persons older than age 65 ... and a decline in the number of workers supporting each pensioner (from nearly 6 to less than 2).”</div>
<div align="left"> </div>
<div align="left">
<div align="left">Here are the main changes recommended:</div>
<ul type="disc">
<li>The State Pension Age will rise from 66 to 67 in 2021, to age 68 in 2028 and a current supplementary “transition pension, payable from age 65 to 66 for individuals not in paid employment, will be abolished in 2014.”</li>
<li>A new, national auto-enrolment, opt-out Defined Contribution scheme, similar to the UK’s new Personal Pension Accounts, will start in 2014.</li>
<li>Tax relief on contributions to occupational retirement saving schemes will be simplified and reduced. However, employer contributions and the scheme’s investment income will remain tax-exempt.</li>
<li>The state’s occupational schemes for its own employees will change for new hires from a Defined Benefit calculated in relation to pay near retirement to one based on career-average earnings.</li>
</ul>
<div> </div>
<div>The government says it wants to increase ‘pension coverage’ from the current 54% (early 2008). Here are the main suggestions for the new auto-enrolment ‘supplementary pension plan’ that will be administered by the government:</div>
<ul type="disc">
<li>It will be Defined Contribution and will, “if it would be prudent given the economic conditions prevailing”, start in 2014.</li>
<li>Employees aged 22 or older will be automatically enrolled on starting work.</li>
<li>They can opt out but only after three months; they will be re-enrolled after two years.</li>
<li>Contributions will be locked in after six months.</li>
</ul>
<div> </div>
<ul type="disc">
<li>Although opting out will again be possible after two years, the government will give a one-time bonus to those who contribute to the new plan for more than 5 years without a break.</li>
<li>Employees must contribute at least 4% of qualifying earnings (between unstated bands).</li>
<li>Employers must contribute 2% of qualifying earnings.</li>
<li>There will be a standard tax break on the total contributions of 33% (equivalent to another 2% of qualifying earnings) but possibly paid to the scheme rather than reducing other tax.</li>
<li>Employers that sponsor Defined Contribution schemes with higher contributions, or that offer Defined Benefits, will not need to auto-enrol employees.</li>
<li>The state will deliver the saving options from providers chosen by ‘competitive tender’ so that members will choose from a “range of funds (including a low risk default option)”. Other taxpayers will probably be relieved to hear there will be no government guarantee on the returns. </li>
</ul>
<div> </div>
<div>The proposals with respect to tax subsidies on employees’ contributions to Tier 3 occupational schemes would slightly improve the current regressivity by allowing a flat rate of 33% rather than the current range from 20% to 41%. It is intended to extend tax relief at a single rate of 33% to all pension contributions. However, maintaining tax exemptions for employer contributions and tax exempt investment income will undo much of that improvement.</div>
<div> </div>
<div>The government proposes ‘improving’ the regulation of private pension schemes. It will also simplify the way the Tier 1 pension is calculated so that it will be based on qualifying years of contributions (rather than average lifetime contributions paid) and offer new ‘credits for homemakers’.</div>
<div><b> </b></div>
<div>PensionReforms has a number of issues with the recommendations. If the government is concerned about the future cost of pensions:</div>
<ul type="disc">
<li>Increasing the State Pension Age will reduce costs (there was no real evidence-based support for this proposal other than a comment that “people are living longer and healthier lives”);</li>
<li>Levelling the tax breaks for private provision will increase costs for the lower paid members and reduce them for the higher paid;</li>
<li>The new auto-enrolment ‘supplementary pension plan’ will increase the cost of pensions because many more will be members of tax-subsidised schemes than now;</li>
<li>The shift from ‘final pay’ to ‘career-average’ pay-based benefits for its own new employees will probably reduce employees’ total remuneration and so cut costs.</li>
</ul>
<div> </div>
<div>PensionReforms suggests that the combination may, on balance, reduce pension costs to taxpayers but probably not by enough to satisfy the government’s concerns. Whether the new arrangements improve the Irish economy’s future capacity to support more pensioners is an entirely different matter. Fewer workers with more retirees means that the Irish economy must grow, perhaps by more than it has grown in recent years. The crucial significance of this received not a single mention in the report so there was no explanation as to how precisely the proposed pension framework will encourage Ireland to grow more. It may increase future retirement income (at the expense, it must be noted, of today’s incomes) but, unless the economy grows to support those higher future claims, the retirees’ increased incomes will come, presumably, at the expense of other groups in the economy.</div>
<div> </div>
<div>The government thinks “there are several reasons people are not saving for retirement” but offers no evidence that they are in fact ‘under saving’ (a completely different issue); nor any that the proposals will fix that and that people won’t simply reduce other savings to compensate for the proposed ‘supplementary pension plan’. PensionReforms thinks that would be a rational response. There is also the likely reaction from employers that will probably stop existing more generous schemes in favour of using the national scheme. The new scheme will also significantly change the funds management industry, leading to aggregation in favour of the government’s ‘chosen few’. That probably won’t be an improvement and it’s not obvious why the government might want to encourage that.</div>
<div> </div>
<div align="left">PensionReforms notes that Ireland has one of the highest pensioner poverty rates in the developed world at 31% according to the OECD – see <u><a href="http://www.pensionreforms.com/Preview.aspx?289">here</a></u> and at 29% according to the EU <u><a href="http://www.pensionreforms.com/Preview.aspx?320">here</a></u>. Even the government’s own number (cited in the report) is that “consistent poverty for older people has fallen from 3.9 per cent to 1.4 per cent while the proportion of older people at risk of poverty has fallen from 27 per cent to just over 11 per cent” in the five years to 2009.<span> </span>Presumably, the government thinks that tripping citizens into the new ‘supplementary pension plan’ will eventually fix that. That may eventually be the case but PensionReforms wonders how that might help currently poor pensioners.</div>
<div> </div>
<div>PensionReforms suggests that the report is light on detail and skips quickly over the mechanics of the new national savings scheme. How generous, for example, will an employer’s Defined Benefit scheme have to be before the employer is exempted the auto-enrolment arrangements? And why wouldn’t the employer then avoid offering membership of its own scheme? Employees who can’t afford the 4% for even two months might prefer that. Also, what about the self-employed? Presumably, they will be exempt and so their numbers will grow. This kind of crucial detail will seemingly emerge over the next four years during the implementation phase.</div>
<div> </div>
<div>Clearly the Irish government has significant current fiscal constraints and the effect of the changes proposed in the report will be to push out the implementation of what will be more costly arrangements to taxpayers and employees in combination. However, PensionReforms thinks the Irish government should instead concentrate on the things it can change (like getting rid of acknowledged old-age poverty) and leave citizens and their employers to decide what else to do about retirement incomes – and there is no need to pay them to do that through tax incentives either.</div>
<div> </div>
<div>If the Irish government is really worried about finding sufficient money to pay for the cost of a decent universal Tier 1 in the face of an ageing population, removing costly tax breaks given to “supplementary pensions” (about €2.9 billion or about 1.9% of GDP in 2006 according to the 2007 Green Paper) should do it. (File size 1.28 GB; 68 pp) 386</div>
</div>http://www.pensionsgreenpaper.ie/downloads/NationalPensionsFramework.pdfNational Pensions Framework385<div>A longitudinal survey of New Zealanders’ saving habits seems to reinforce the already known: before KiwiSaver, they did not appear too irrational. Why the government needed to start KiwiSaver in 2007 remains a mystery.</div>2010-07-12T20:37:032009<div><b>PensionReforms’ summary and comments</b></div>
<div>Until 2007, New Zealand’s private savings operated in a relatively ‘hands-off’ regulatory environment. The government provided a relatively generous, Universal Pension at Tier 1 (‘New Zealand Superannuation’) and left New Zealanders and their employers to decide whether, how and how much to save for retirement. There were no tax breaks for private provision and, unlike Australia, no compulsory private arrangements at Tier 2.</div>
<div> </div>
<div>That changed in 2007 with the introduction of KiwiSaver: see <u><a href="http://www.pensionreforms.com/Preview.aspx?133">here</a></u>. This was essentially founded on the assumption that the government needed to intervene in individuals’ saving arrangements. KiwiSaver is the world’s first, national, auto-enrolment, tax-subsidised retirement savings scheme. Evidence for that assumption of the need to intervene is actually sparse: see <u><a href="http://www.pensionreforms.com/Preview.aspx?168">here</a></u> and <u><a href="http://www.pensionreforms.com/Preview.aspx?85">here</a></u> for example. Whether or not this expensive intervention will actually work is also a moot point: see <u><a href="http://www.pensionreforms.com/Preview.aspx?186">here</a></u> and <u><a href="http://www.pensionreforms.com/Preview.aspx?255">here</a></u> for example. In fact, New Zealanders, before KiwiSaver, may actually have been slightly over-saving for retirement: see <u><a href="http://www.pensionreforms.com/Preview.aspx?11">here</a></u> and <u><a href="http://www.pensionreforms.com/Preview.aspx?121">here</a></u>.</div>
<div> </div>
<div>This latest report did not set out to discover whether KiwiSaver was a justified intervention; its genesis significantly preceded KiwiSaver with the launch in 2002 of a longitudinal study, the Survey of Family Income and Employment (SoFIE) as the
<div>first longitudinal study of its kind in New Zealand. SoFIE looks at, amongst other things, New Zealanders’ saving and wealth accumulation habits. The report analyses SoFIE’s first results: the first, that is, that cover more than one year of the eight year study. </div>
<div> </div>
<div>“Household saving rates are an important piece of evidence needed for informed policy debate particularly, but not solely, in relation to retirement income policies. Conceptually, estimates of saving rates can be based on a flow measure (income less consumption) or a stock measure (changes in net wealth). The flow measure of saving from the national accounts has shown a strong downward trend, and has been negative since 1993. There appears to be an inverse relation between this measure of savings and net housing wealth. However, regardless of whether the flow or stock method is used, the measurement of saving by households has proved less than straightforward.”</div>
<div> </div>
<div>Financial data are gathered each two years over SoFIE’s eight year life. The first of these years (2004) was well before KiwiSaver emerged. In the second year (2006), the first, modest, iteration of KiwiSaver was known about but had not started. The third look will be as of 2008, one year after KiwiSaver began.</div>
<div> </div>
<div>“After updating estimates from two the existing sources, this paper presents initial estimates derived from SoFIE. … The estimates were made by comparing net wealth in 2004 with that in 2006 at the individual level and computing the implied real saving rate on an annual basis. This yielded an overall median estimate of 16% of gross income. This is of the same order of magnitude as the long run average annual saving rate measured from the aggregate household balance sheet from [the Reserve Bank of New Zealand], which was 16% of disposable income, equivalent to about 12% of gross income.”</div>
<div> </div>
<div>This ‘cross check’ gave the report’s authors some comfort about their overall conclusions. It also confirmed the difficulties of using what the ‘System of National Accounts’ calls ‘household saving’. In New Zealand, this has been substantially negative since 1993 (see <u><a href="http://www.pensionreforms.com/Preview.aspx?168">here</a></u>).</div>
<div> </div>
<div>But, focusing on SoFIE’s medians disguises some difficulties with the data.</div>
<div> </div>
<div>“There is a strikingly wide distribution of saving rates. For example across many categories of individuals around 40% are estimated to have had a decline in net wealth implying a negative rate of saving. Some of this is to be expected as for example, when young individuals invest in education and acquire student loans, and older people draw on past savings in retirement. However, the number of negative savers exceeds that which could be attributed to these two groups.”</div>
<div> </div>
<div>The report notes that, at the ‘1<sup>st</sup> percentile’ (bottom), the ‘real saving rate was -1,723% while at the ‘99<sup>th</sup> percentile’, the ‘real saving rate was +3,326% while the ‘median’ was +16%.</div>
<div> </div>
<div>The report suggests that the dispersion could be explained by dividing ‘observed net wealth’ into two components: a ‘permanent’ component and a ‘random or transitory’ component, which apparently could be quite large.</div>
<div> </div>
<div>“Some of the transitory component could have arisen through measurement errors. For example, survey respondents may have reported having a particular asset in wave 2 [2004] and omitted to mention it in wave 4 [2006]. Some changes in wealth could have arisen through marriage dissolutions, or through equity withdrawals for consumption. Much remains to be done to develop a fuller insight into the magnitude of the transitory component of net wealth and its effect on saving rates.”</div>
<div> </div>
<div>Other difficulties with the data have prevented the authors from a full analysis of changes in wealth:</div>
<div>“Ideally, we would want to decompose the change in the gross value of all assets into that due to prices and that due to a real change in quantity (together with an interaction effect). The price effect constitutes “passive” saving, while changes in the quantity reflect ‘active’ saving.”</div>
<div> </div>
<div>Some of the data can be analysed with relative confidence. Given housing’s importance in the asset holdings of New Zealand households (a net 44.5% of all net assets – Table 5, p24), the report was able to separate housing’s price effect from the ‘active saving’ component.</div>
<div> </div>
<div>“Our estimate of the median saving rate for property holders fell from 41% to 6% when we removed an estimate of the effect of house prices. For the longitudinal population as a whole, the effect was to reduce the estimated median saving rate from 16% to 5%. Asset revaluations are therefore a potentially large contributor to changes in household net wealth.”</div>
<div> </div>
<div>However, as the report notes, there were difficulties with applying the same treatment to other assets. Also, SoFIE’s treatment of assets owned by family trusts (and the economic relationship between the household and the trust) means there is a less than complete picture of the ‘economic unit’s’ wealth and changes in that where there is a family trust.</div>
<div> </div>
<div>The report emphasises the importance of longitudinal studies:</div>
<div>“The ability to hold constant many unobservable characteristics of individuals, by observing them at repeated points in time, offers the opportunity to address a wide range of social policy questions in a manner not previously possible. As additional waves of data from SoFIE become available, the real value of a major longitudinal study will grow markedly. The evidence from long standing surveys of this type in other countries bears testimony to their value.”</div>
<div> </div>
<div>PensionReforms agrees with this conclusion. It seems a shame though that there are so many difficulties with the SoFIE data. Despite the report’s best efforts to sort the useful from the distracting, there have to be large caveats about the findings once we move too far away from results that are close to the medians. It is too late to do much about this as the last (2008 and 2010) waves of financial information will have already been, or are being, collected. What should happen next is a replacement, improved version of SoFIE; the risk is that there will be no replacement.</div>
<div> </div>
Putting that disappointment to one side, PensionReforms suggests that, before KiwiSaver, there did not seem to be too much reason to worry about what New Zealanders were doing about saving for retirement (or anything else). Although the report did not set out to question whether KiwiSaver was needed in 2007 (indeed, does not even refer to KiwiSaver because that started a year after the second tranche of data was collected), what continues to be discovered about all this makes its introduction even more of a mystery. It was probably the product of policy-based evidence gathering rather than the preferable evidence-based policy formation. (File size 726 KB; 77 pp) 3</div>http://www.treasury.govt.nz/publications/research-policy/wp/2009/09-04/twp09-04.pdfSaving Rates of New Zealanders: A Net Wealth Approach384Huge internal migration flows in China create social welfare problems. Most migrants are not supposed to be where they are and so lose local social protections. Vesting rules coupled with constant moves to follow jobs will reduce pension costs but increase poverty.0001-01-01T00:00:002008<div><b>PensionReforms summary and comments</b></div>
<div>Everything about China is very large, including the numbers of people who shift from one part of China to another. Such internal migration is subject to controls so that the authorities know how many people have been given permission to move across country/town borders and between towns. The data are quite difficult to get and often inconsistent. However, the scale of change is indisputable.</div>
<div> </div>
<div>Moving the registration of the household (<i>hukou</i>) needs the approval of both the original place of registration and the new. That number has been relatively static at about 17-20 million people since 2000.</div>
<div> </div>
<div>Needless to say, the ‘non<i>-hukou</i>’ movements are much larger – the report suggests it could be as high as 200 million. These are people who have moved without getting the required permission.</div>
<div> </div>
<div>The reasons for these large numbers of internal migrants are as expected: jobs and higher wages:</div>
<div>“The choice for rural migrant labour is mainly between a farm job (or no job) at home and a low-end job in the cities. Rural migrant labour moves across different geographic scales to make monetary gains, which can broadly considered in terms of the balance of the wage differentials and living cost differentials between the origin and the destination. Most of them go to nearby towns outside the villages; others cross thousands of miles to big cities on the coast.”</div>
<div> </div>
<div>“Our analysis is consistent with the thesis that more migrants moved to distant provinces to reap benefit of the large spatial differentials of wages in China as they had acquired more information and built their networks. At the same time, long-distance migrants were increasingly concentrated and converged into one single province, Guangdong, in the 1990s, which has since become the core of the ‘world’s factory.’ ”</div>
<div> </div>
<div>As with international labour flows, the position of the ‘sending’ provinces has improved from the remittances:</div>
<div>“I have argued that migration helped to narrow regional economic disparities. This is different from the existing wisdom of rising migration and simultaneous increase in disparities in China. From a human capital perspective, it is important for the Chinese government to continue promoting education and migration as a way to narrow the gaps between the coastal and inland provinces.”</div>
<div> </div>
<div>Of significance to PensionReforms is that these very large flows of people may lead to reforms of the <i>hukou </i>system that hasn’t adapted to the new environment.</div>
<div>“Almost all the changes to the <i>hukou </i>system and new initiatives have had only marginal impact on weakening the foundation of the system – i.e. the separation of two segments of population and discrimination based on that. The <i>hukou </i>system, directly and indirectly, continues to be a major barrier in preventing China’s rural population from settling in the city and in maintaining the rural-urban “apartheid.” This problem has become more acute as rural migrant labour has turned more and more permanent …”</div>
<div> </div>
<div>The significance is that the non-<i>hukou</i> are generally not entitled to participate in local social programmes like health, education and welfare, including age pension arrangements. The report suggests that, while the central government may want to end such discrimination, “… it is questionable that local governments are ready to implement any sweeping change to the <i>hukou </i>system. China cannot abolish the system without a significant change of the rural-urban politics and economics.”</div>
<div> </div>
<div>The report notes that,”... in the early 2000s, several provinces and cities such as Guangdong, Beijing, Shanghai, and Xiamen started to set up limited social security schemes to cover rural migrant labour. By the end of 2005, about 14 million, out of more than 100 million rural migrant workers, had joined some form of pension schemes.... [A]ll the pension schemes are not portable, and given the high mobility and turnover of migrants in work, one wonders if any migrant will ever be eligible to collect the benefits when they get old.”</div>
<div> </div>
<div>Because all the schemes require migrant workers to have worked for 15 years in a specific city to be eligible for pension, a migrant moving from one province or city to another could easily end with no or limited pension rights. PensionReforms can see why the local governments might not want to change that system.</div>
<div> </div>
<div>The central government recognises the problem:</div>
<div>“... the most flagrant abuses associated with the existing <i>hukou </i>system, which left unreformed, could seriously jeopardize the lives or livelihoods of migrant labour, and perhaps disrupt “social harmony.” But these local cases also illustrate the contradictions of the new localized <i>hukou </i>management system that can – and often does – counteract the central government's rhetoric.”</div>
<div> </div>
<div>As PensionReforms has pointed out before (see <a href="http://www.pensionreforms.com/Preview.aspx?177">here</a> and <u><a href="http://www.pensionreforms.com/Preview.aspx?99">here</a></u> for example), China’s national ‘solution’ to the pensions issue isn’t working; neither apparently is local income support that depends on the <i>hukou</i> system. Something will have to change otherwise there will be another huge statistic in China – the number of elderly poor. At least they can’t vote. (File size 538 KB; 32 pp) 384</div>http://www.un.org/esa/population/meetings/EGM_PopDist/P05_Chan.pdfInternal Labour Migration in China: Trends, Geographical Distribution and Policies383The global economic crisis provides an opportunity to see whether current pension systems are working. In the EU, there are gaps in the “social model”. Pension reforms are needed to make clear the public role of “ensuring a decent standard of living.” That might be a start.0001-01-01T00:00:002009<p><b style="mso-bidi-font-weight: normal"><span lang="EN-NZ" style="mso-ansi-language: EN-NZ; mso-bidi-font-size: 12.0pt">PensionReforms’ summary and comments</span></b></p>
<p><span lang="EN-NZ" style="mso-ansi-language: EN-NZ; mso-bidi-font-size: 12.0pt">AGE</span><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100"> is an umbrella group representing the interests of 133 European organisations.<span style="mso-spacerun: yes"> </span>It has taken a look at the impact of the 2008 global economic crisis on private and public pension arrangements.<o:p></o:p></span></p>
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<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">AGE thinks it’s a good opportunity to see how the various systems have fared and what risks EU countries might be facing.<span style="mso-spacerun: yes"> </span>The recent move by countries from Defined Benefit schemes into Defined Contribution arrangements where investment returns matter might have been poorly timed.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">“The crisis shows that neither banks nor economists nor governments can prevent stock market instability and collapse, with its harmful effects on pension funds and jobs. <span style="mso-spacerun: yes"> </span>However, the crisis provides an opportunity to review the efficiency and goals of pension systems and gives a clear warning against unconditional reliance on funded pension schemes.”<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">According to the report, pre-funded private schemes “...cannot replace the security and fairness provided by state-regulated pensions.”<span style="mso-spacerun: yes"> </span>PensionReforms notes the apparent distinction between ‘state-provided’ and ‘state-regulated’.<span style="mso-spacerun: yes"> </span>Private arrangements cannot “...guarantee adequate and secure old-age income for all, including women and those with broken career histories.”</span></p>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100"><o:p></o:p></span><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">There is a long list of recommendations in respect of the various aspects of both public and private provision.<span style="mso-spacerun: yes"> </span>In summary, the report would like to see:<o:p></o:p></span></p>
<ul>
<li><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">Better regulation of share markets;<o:p></o:p></span></li>
<li><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">More oversight of pension schemes’ investment strategies;<o:p></o:p></span></li>
<li><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">Pension adequacy, a decent level of minimum income for all pensioners;<o:p></o:p></span></li>
<li><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">Safeguards for workers’ savings and pensioners’ provisions and <o:p></o:p></span></li>
<li><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">Possibilities to extend working lives.<o:p></o:p></span></li>
</ul>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">All these need “substantial improvement ... to restore confidence in national social protection systems and the EU social model.”<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">“AGE considers social protection to be essential for social cohesion and adequate pensions to be necessary for the very large majority of the EU population. <span style="mso-spacerun: yes"> </span>Pension reforms should re-establish the responsibility of public authorities to ensure a decent standard of living for people of all age cohorts, based on greater solidarity between and within generations.”<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">PensionReforms suggests that all this may be quite estimable (if not particularly detailed) but misses some fundamental points.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">First, why does the state have a role in providing income support of any kind, in this case, for all retired citizens at Tier 1?<span style="mso-spacerun: yes"> </span>That is not necessarily about continuing what happens now but establishing some basic principles about what the state will pay for.<span style="mso-spacerun: yes"> </span>Having decided the ‘what?’ and the ‘when?’, the answer to the ‘how?’ is that the state should pay for that inevitably Defined Benefit arrangement on a PAYG basis: no need then to worry about share market returns.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">Next, does the state have any sort of a role in encouraging or requiring its citizens or their employers to do more than that at Tier 2 and/or Tier 3?<span style="mso-spacerun: yes"> </span>Justifying that extra involvement may raise questions about preliminary decisions at Tier 1.<span style="mso-spacerun: yes"> </span>The state could easily conclude that it did not need to put its hand in taxpayers’ pockets at Tiers 2 and/or 3.<span style="mso-spacerun: yes"> </span>That would eliminate the need for some of the report’s suggested “safeguards” and would reduce the need for others.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100"><o:p> </o:p></span><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">Finally, is there an information/education/regulatory role for the state touching, if necessary, on all three Tiers?<span style="mso-spacerun: yes"> </span>PensionReforms suspects that the answer to that will be ‘yes, nearly always’.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100"><o:p> </o:p></span><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">PensionReforms concludes that the report would prefer things to be better (or more) than they have ended up after the global economic crisis, preferably at taxpayers’ expense.<span style="mso-spacerun: yes"> </span>It would be better, PensionReforms suggests, if the global economic crisis triggered some more fundamental questions about what European governments do for their citizens with respect to all aspects of their retirement income structures.<span style="mso-spacerun: yes"> </span>This approach to reform may obviate the need for suggested role of the Social Protection Committee (SPC):</span></p>
<p class="MsoNormal" style="margin-left: 0cm"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100"><o:p></o:p></span><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">“</span><span lang="EN-GB" style="color: windowtext; mso-fareast-language: EN-GB; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">Gathering representatives of Member States, the SPC is par excellence an intergovernmental forum for debate, but it might and should also be open for exchange with representative organisations of civil society at EU level. <span style="mso-spacerun: yes"> </span>The issues related to securing workers’ savings and payments for pensioners, ensuring the sustainability of pension systems and promoting social inclusion must be subject to a transparent discussion among such debate.”<o:p></o:p></span></p>
<p class="MsoNormal" align="left" style="text-align: left; margin-left: 0cm; mso-layout-grid-align: none"><span lang="EN-GB" style="color: windowtext; mso-bidi-font-size: 12.0pt; mso-bidi-font-family: MuseoSans-100">PensionReforms suggests that reforming pensions need not be that complicated but it does need attention in nearly all European countries. (File size 391 KB; 28 pp)<span style="mso-spacerun: yes"> </span>383<o:p></o:p></span></p>
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<p> </p>http://www.globalaging.org/elderrights/world/2009/AGE-pensions-EU.pdf2009 AGE Statement on Pensions - Ensuring adequate pensions for all in the EU - a shared responsibility for society382Mexico City started its own Universal Pension in 2001 and it has been very successful. The PACAM was sold as a right of citizenship, rather than as poverty relief but it seems to do that well enough. So how did a city decide to go it alone on pensions?2010-04-14T00:00:002009<STRONG>PensionReforms' summary and comments<BR></STRONG>Mexico City is one of only a few cities in the world that have a retirement income policy that differs from the country's: Baoji City in China is another - see <A href="http://www.pensionreforms.com/Preview.aspx?239">here</A>. PensionReforms has already noted one look at the Mexico City arrangements - see <A href="http://www.pensionreforms.com/Preview.aspx?4">here</A>.<BR><BR>This report looks at the background to Mexico City's 2001 decision to 'go it alone'. It's a master's thesis that deserves wider circulation than it has received to date (only one Google result for a search on the report's title). The report attempts to explain why the 2001 change happened and also why it didn't happen earlier.<BR><BR>The city's decision was against the backdrop of a national, Chilean-based, compulsory savings scheme at Tier 2, that started in Mexico in 1997, as described <A href="http://www.pensionreforms.com/Preview.aspx?245">here</A>. As explained there, only 30% of workers were covered by Tier 2 in 2000.<BR><BR>"After the mid-term elections, in late 2003 [2001?], the universal pension was passed into law, and since then, it has provided almost all residents 70 years of age and older a monthly pension (going from 76.4% coverage in 2001 to 95.5% by 2006), of half the minimum wage indexed to inflation, through the equivalent of an ATM card."<BR><BR>The main reason for starting the non-contributory, universal old-age pension (Pensiòn Alimentaria Ciudadana para Adultos Mayores or PACAM) in 2001 seemed to be political or, as the report puts it "because local state actors furthered their interests with it." However, there was some background here: the reducing power of the state and the "slow but constant process of political and administrative decentralization". That manifested itself in the establishment of Mexico City's own representative government in 1997. That began what the report describes as "territorial political competition in Mexico".<BR><BR>However, there remains a political mystery about the reasons for starting PACAM:<BR><BR>"One of the striking aspects of the PACAM is that there were very few, if any, non-state actors [that] promoted such policy. Previous to the establishment of the pension, there were no NGOs that promoted, no indication that labor unions, or other organized interest groups apart from party politicians, were involved in a discussion about establishing a non-contributory pension. The only institution, which seemed to discuss a non-contributory universal pension was the Consejo Nacional de Población (CONAPO) a government institution dedicated to demographic forecasts and studies..."<BR><BR>The report suggests that the political actors had to appeal to a broad part of the electorate (in this case Mexico City) to gain general political support. In this situation, the universal pension dovetailed neatly with the universal right to vote. PACAM, as the report notes, has had "permanent political success". And the relative economic strength of the city, by comparison with the problems endured by the country, helped to cement the closer relationship between the city and its residents.<BR><BR>"The PACAM is not a poor relief program since it has never been argued as a program aimed uniquely at poverty reduction, but as a citizenship right, linked to old age and not to income or employment."<BR><BR>The report suggests an international relevance for Mexico City's experience:<BR>"The international element affecting the future transformation of the Mexican nation-state is what makes the lessons from the experience in Mexico City relevant for other countries and other global cities. The changes in relative capacity between nation-states and local states make cities a more relevant global actor now than ever. The universal pension in Mexico City may just be the tip of an iceberg formed by other city level adaptations to international and national changes regarding social policy, the state and citizenship."<BR><BR>PensionReforms wonders about that. The local pension initiatives in Mexico City and Baoji City in China seem very particular as to their detail and at least partly similar as to outcomes. In Mexico City, that was perhaps a function of the changed democratic environment described in the report. But that wouldn't explain the case of Baoji City where the diversions of democracy aren't an issue.<BR><BR>What goes unexplained in the report is why other local Mexican administrations have not repeated the Mexico City experiment. Perhaps democracy is less well established in other parts of Mexico. (File size 9.8 MB; 117 pp) 382<BR><BR>The file is an imaged document.http://dspace.mit.edu/bitstream/handle/1721.1/50107/463451861.pdf?sequence=1Universal Pensions in Mexico City: Changing Dynamics of Citizenship and State Formation in a Global City381Financial education is a good thing but default saving and investment options are probably better. They might address persistent 'mistakes' made by US citizens. If taxpayers might have to fix 'mistakes' then regulators need to be involved.2010-04-08T00:00:002008<P><STRONG>PensionReforms' summary and comments<BR></STRONG>Saving decisions are about providing for the future - giving up consumption today in favour of consumption tomorrow. They require good information about the why, the when and the how. That's an almost impossible task for individuals to acquire for themselves so they need help, both to understand what's involved and the choices faced.<BR><BR>Providers of financial services cannot assume that their prospective customers are financially literate: "This raises concerns about how to communicate information effectively, particularly to those who need it most. Given low numeracy and low literacy, it may be useful to consider more effective ways of communication."<BR><BR>In past, simpler times, there were many fewer choices but things are now different:<BR>"Given the increased complexity of financial instruments, the evidence of illiteracy raises the question of whether consumers will appreciate and take advantage of the opportunities offered by financial markets or more easily fall prey to scams or unscrupulous brokers."<BR><BR>The report suggests that, while financial education programmes might have been tested against specific outcomes, "[n]o studies definitively provide an evaluation of the costs of financial education programs and, without that information, it is not possible to estimate a return on financial education programs. Moreover, as previous studies show, few employees ever attend education programs and of those who attend, many do not modify behavior, at least in the short run."<BR><BR>The report does not suggest abandoning financial education programmes but more seems needed. Here are the report's suggestions:<BR><SPAN lang=EN-US style="mso-ansi-language: EN-US"><FONT face=Garamond>. </FONT></SPAN>".default options are clearly an effective remedy. Defaults are the most powerful and innovative programs in the field of saving and pensions and they should be exploited."<BR><SPAN lang=EN-US style="mso-ansi-language: EN-US"><FONT face=Garamond>. </FONT></SPAN>Requiring individuals to "renew" their selections annually or when they change jobs.<BR><SPAN lang=EN-US style="mso-ansi-language: EN-US"><FONT face=Garamond>. </FONT></SPAN>Requiring individuals to obtain basic financial knowledge and a "financial license" before they are allowed to "contribute to pensions, invest pension assets, or borrow to buy a house." The report draws an analogy with drivers' licences. If taxpayers might be asked to compensate individuals for the consequences of bad decisions (through, say, income support in old age) then perhaps taxpayers need to mitigate the risks in a similar way to the approach taken for vehicle drivers.</P>
<P>The report recognises the potential dangers of default options:<BR>".the design of defaults is crucial; low contribution rates and investment in too-conservative assets may eventually offset the benefits of default enrollment in saving programs. Moreover, since close to half of private-sector workers do not have pensions, it is important to expand automatic enrollment to other saving instruments."<BR><BR>Consumers face considerable competition for their saving dollar:<BR>"It is also important to recognize that, while the private industry is spending millions of dollars every year advertising products to entice consumers to spend more, relatively little is spent in encouraging people to save and provide for their future. However, if consumption is excessive and saving too scarce, taxpayers may be asked to support those who have not provided enough for retirement. Thus, the government may have to think of ways to engage in marketing campaigns." <BR><BR>PensionReforms acknowledges the report's starting point - the hugely complex arrangements, private and public, that together comprise the financial services industry in the US (and elsewhere). If it is difficult for advisers to follow then pity the poor citizen. We should not be surprised to hear that, in the face of such complexity many do nothing.<BR><BR>PensionReforms suggests it is appropriate to take a step back before applying further regulatory fixes to what is already a heavily regulated environment. Taking just the retirement saving decision as an example: at present, employees who choose not to join a subsidised 401(k) or other scheme are giving up remuneration (the value of the subsidy) and are also passing up the chance to be paid by other taxpayers to save (the tax breaks on favoured saving arrangements). The 'price' of those concessions is complicated rules imposed by both the employer and taxpayers as to how much can be contributed, where it goes and when and how the money emerges at the other end. Weighing up all these rules and the trade-offs involved apparently obscures the financial advantages of joining so fewer than 50% of eligible employees do that. So what really is the problem here?<BR><BR>PensionReforms thinks it might be more fruitful to think about the following:<BR>- Removing all tax advantages from retirement saving programmes of all kinds. That will allow all the rules to be disposed of as well.<BR>- Employers can then wonder why employees who join subsidised saving programmes are paid more than those who do not. They might conclude that such a distinction can't be justified.<BR>- Then financial services providers (and employers) can design their marketing and communication programmes that let savers understand why they should save (if they need to). It's for the best reason of all - they can help achieve whatever future financial goal savers decide is relevant to their needs. That is actually a fairly simple message.</P>
<P>Default options are not, in PensionReforms' view, the answer. They are more a symptom of what's wrong with the way things are presently organised. (File size 135 KB; 44 pp) 381<BR></P>http://www.dartmouth.edu/~alusardi/Papers/Literacy_Information_Education.pdfHousehold Saving Behavior: The Role of Financial Literacy, Information, and Financial Education Programs380People undervalue a life annuity; or rather don't understand how expensive they can be. Many Americans would choose to swap part of their Social Security pension for a lump sum of lower value. Might that be a way of reducing pension costs?2010-04-08T00:00:002007<STRONG>PensionReforms' summary and comments</STRONG><BR>In PensionReforms' experience, there is a quite low understanding of the net present value of a life annuity, even amongst the financially literate. That disconnect becomes greater if the value of automatic increases and a contingent dependant's annuity must be factored in to today's price.<BR><BR>This 2007 report confirms that information gap amongst those with a future entitlement to Tier 2 Social Security benefits in the US. The report tested whether they might be prepared to give up part of that pension in exchange for a lump sum. It used answers to questions from 1,000 participants in the 2004 Health and Retirement Study. <BR><BR>"Given the prior literature on annuities suggesting that there are important benefits from annuitization, the new evidence presented here is striking: most respondents indicate a preference for exchanging Social Security's lifelong annuity payment for a lump-sum combined with a reduced annuity benefit. This finding is robust across virtually every demographic subgroup in the sample. In other words, most individuals do not appear to value annuities as highly as standard economic models would suggest, a finding that also casts doubt on the ability of several leading hypotheses to explain this aversion to annuities."<BR><BR>Unsurprisingly, in PensionReforms' view, the report found that older people (aged in their early 60s) placed a higher value on annuities than did younger. And those in poor health, sensibly, thought that a lump sum would be better value than a life annuity; as did those who thought they had a lower expectation of life.<BR><BR>"The latter finding underscores the potential for adverse selection in annuity markets: to the extent that individuals have private information about their health status or longevity expectations that lead shorter-lived individuals to avoid annuitization, this will tend to raise average annuity prices."<BR><BR>However, preferences seemed not to be driven by the longer-lived being more likely to buy an annuity. Rather, they seemed framed by the negative - those who were in poorer health would prefer cash rather than a pension.<BR><BR>"We also find many factors that have limited / no influence over the annuity vs lump-sum choice, despite the prominent role played by some of these variables in theoretical models. These include such as risk aversion, sex, marital status, income, wealth, having a pension plan, or having children. We do find that, conditional on education, more financially sophisticated individuals prefer to annuitize. We also find that individuals who place a higher probability on the outcome that future Social Security benefits will be cut are more likely to choose the lump sum option, suggesting that individuals do discount future benefits for political risk."<BR><BR>The options discussed in the paper are not of immediate moment as the lump sum alternative isn't available for a Social Security pension but could be significant, given that some reform options include having Defined Contribution accounts as part of a reformed structure. Might future retirees prefer an annuity choice, rather than be forced into swapping the Defined Contribution balance for a pension? Received wisdom has it that retirees should have regular annuity-based income because it will be better for them, over all.<BR><BR>"In contrast, our results imply that a majority of individuals not only value the Social Security annuity less than would be predicted by the life-cycle model, but, in fact, value the Social Security annuity at less than its actuarial value. As such, it raises the possibility that compulsory annuitization is not as welfare-enhancing as standard life cycle theory would suggest, or at least that it is not perceived as such."<BR><BR>PensionReforms thinks it is perhaps a step too far to suggest that citizens' preferences at the point of retirement should drive the design of State-administered retirement income support. It is in the nature of all retirement income designs that some will be better off under either a Defined Benefit or a Defined Contribution arrangement if the only measure is the net present value of those benefits at either the date of retirement (effectively used in the report), or at death when full account can be taken of all the necessary contingencies.<BR><BR>But that kind of analysis misses the point in PensionReforms' view. Public policy on this issue should not about welfare-enhancing at an individual level but rather at a societal level - balancing the needs of different groups against the community's resources. And anyway, PensionReforms suspects that attitudes may have changed since the global economic crisis.<BR><BR>PensionReforms takes particular issue with this from the report: If retirees tend to consistently underestimate the true value of an annuity, ".then it suggests that one potentially feasible path to reducing the long-term liabilities facing the U.S. Social Security system would be to allow individuals to voluntarily convert part of their Social Security annuity to a lump-sum at less-than-actuarially favorable rates. Even in the presence of (mild) adverse selection, our results suggest that such a voluntary approach could reduce net liabilities of the Social Security system."<BR><BR>PensionReforms suggests that is probably the worst reason for introducing a Defined Contribution/annuitisation option. The costs will almost certainly fall more heavily on those least able to cope - the poor and the very long-lived. What should matter is how to ensure that state interventions limit or even prevent poverty amongst the old.<BR><BR>The report acknowledges the potential exposure of more individuals to the downside of longevity risk might lead to "higher rates of poverty at advanced ages." PensionReforms observes that poverty levels amongst the old in the US are already high (34% according to an OECD report reviewed <A href="http://www.pensionreforms.com/Preview.aspx?289">here</A>). Reducing that, rather than running the risk of increasing it should be a key objective of any change. (File size 230 KB; 29 pp) 380<BR>http://www.nber.org/papers/w13800Who Values the Social Security Annuity? New Evidence on the Annuity Puzzle379A 2007 report on household debt from the US Federal Reserve was published just as the financial crisis started. The large rise in debt was about smoothing consumption off the back of rising house prices and financial innovation. Not too much to worry about (in 2007).2010-03-31T00:00:002007<STRONG>PensionReforms' summary and comments</STRONG><BR>This 2007 report on US household debt was published just as the global economic crisis was getting properly under way. By the report's publication, there had been a "dramatic deterioration in the performance of subprime variable-rate mortgages". The report looked at why household debt had risen so much in recent years; from an average of 60% of aggregate personal incomes in the 1980s to 100% in the 1990s.<BR><BR>The report relies on data from the Survey of Consumer Finances gathered at three yearly intervals between 1983 and 2004. On balance, the report thought that the large increase in debt was explainable and of not that much regulatory concern:<BR> "The debt of U.S. households has risen very substantially relative to income, especially in the past five years or so. This increase mainly reflects the efforts of households to smooth consumption over time in response to shifting perceptions about future income, wealth, and interest rates, along with the effects of financial innovation that has reduced constraints on the ability of households to realize desired consumption patterns."<BR><BR>The report suggested that households seemed not to have been overdoing things. They seemed not to be more "impatient"; nor ".did we unearth strong evidence of reduced risk aversion or perceived risk as a motive for borrowing and spending more now instead of saving."<BR><BR>It also seemed that, while households seemed to need lower 'precautionary' savings, that seemed to account for only a small part of the overall trends in debt accumulation. Of greater significance seemed to be the ageing of the population.<BR><BR>"Demographics have probably contributed to greater indebtedness, through both the greater concentration now of baby boomers in the part of the lifecycle where debt use is highest and the increases in educational attainment, likely a proxy for higher lifetime earnings as well as more-sophisticated use of financial instruments."<BR><BR>The long term reduction in the cost of debt ".may have also boosted debt to some extent."<BR><BR>Had incomes grown, we might have expected increase in overall debt levels as the ability to service loans grew. But ".median real incomes have not grown very rapidly in recent years, and survey responses suggest that households have not been very optimistic about their earnings in the immediate future over the past several years, when the growth in debt has been especially strong."<BR><BR>PensionReforms observes that events subsequent to the report suggest that US consumers were right not to be optimistic.<BR><BR>"The most important factors behind the rise in debt and the associated decline in saving out of current income have probably been the combination of increasing house prices and financial innovation."<BR><BR>There are now more ways of raising debt and at lower cost.<BR><BR>"One implication of this analysis is that a portion of the rise in debt relative to income probably reflects a shift in the level of spending that is not likely to be repeated unless house prices continue to increase as quickly as in the past and financial innovation continues to erode cost and availability constraints at a rapid pace."<BR><BR>In summary, the authors conclude that there did not seem then to be too much to worry about. The increased innovation and ".the increase in access to credit and levels of assets over time should give households, on average, a greater ability to smooth through any shocks."<BR><BR>However, the group of households with a large amount of debt relative to assets is more vulnerable. Those households may have what the report calls "unreasonable expectations about future income or asset appreciation". "Although these households represent a relatively small share of the population, in some circumstances such developments could have effects large enough to show through to the macroeconomy."<BR><BR>PensionReforms notes that was then. The global economic crisis has exposed some of the conclusions. For example, US house prices have fallen since their peak in the second quarter of 2006. According to the S&P case-Shiller Index (see <A href="http://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index">here</A>, the fall in the subsequent three years to 2009 across the US as a whole was 41%.<BR><BR>The apparently "improved assessment and pricing of risk" now seems to have been illusory. And the "expanded lending to households without strong collateral; and more widespread securitisation of loans, which has likely lowered the cost of credit" are now widely seen to have contributed to the crisis. It is, however, very easy to be wise after the event. (File size 148 KB; 45 pp) 379http://www.federalreserve.gov/pubs/feds/2007/200737/200737abs.htmlThe Rise in U.S. Household Indebtedness: Causes and Consequences378Surveys on individuals' retirement preparations and preferences are often unhelpful because they are framed by the single viewpoint of the survey's designer. A new 'multideck' approach can react to basic preferences. It is tested in three countries: Netherlands, UK and Germany.2010-03-31T00:00:002009<P><STRONG>PensionReforms' summary and comments<BR></STRONG>When employers (or countries) are re-designing retirement income or saving arrangements, it should be important to understand individuals' current preparations and preferences. It's possible that they like what they already have and may not 'need' change, especially if they are already doing a good enough job.<BR><BR>For an employer, the need to find out what employees know or need may need to be more detailed than for citizens as a whole. Employees' preferences will usually drive their interest in new features and the national pension/saving framework will have a significant impact on their interest in changes. Before employers decide to spend money on new initiatives, knowing whether they represent value should be important.<BR><BR>The report describes a new way of getting at relevant data:<BR>"...we take a closer look at employees' retirement preferences for specific pension plan features to get an understanding of what employees really want. A novel "multideck" survey methodology which actively engages employees to understand their underlying retirement preferences is used."<BR><BR>The new approach is tested on 6,000 employees working for largish employers in three countries - the Netherlands, the United Kingdom and Germany. Are individuals rational enough to make appropriate decisions about their retirement saving needs? Do they need the kind of help offered by strategies based on the principles recommended by 'behavioural economics'?<BR><BR>"A multideck survey has three decks of questions - the first deck is similar to a traditional survey, the second deck - or dashboard - explicitly shows each respondent the outcome of earlier answers and provides the opportunity to revise them, and the third deck seeks to understand why respondents made the changes they did."<BR><BR>The new approach has uses in various kinds of surveys but the report applies it specifically to retirement income issues:<BR>"We first asked the relatively standard questions typically asked in financial planning surveys: information about their desired pension income, retirement age, risk tolerance, and savings rate. We then used the data to populate a dashboard that allowed individuals to explore trade-offs between contribution levels and benefits and between higher risk and higher benefits. In other words, the dashboard calculates how closely the respondents' desires correspond with real-life choices. Where there is a gap, respondents can modify their initial responses in up to 10 iterations to close it."<BR><BR>The authors describe the "core results" of the report's survey across the three countries:<BR>"Individuals appeared to appreciate risk-return tradeoffs in retirement benefits. And they were willing to pay more for secure benefits.</P>
<P>"But, at the same time, their preferences were highly heterogeneous. Individuals not only wanted very different levels of replacement rates but also dispersion of replacement rates (risk) to reflect their individual circumstances..."</P>
<P>PensionReforms thinks this shows individuals can be 'rational' when the issues are explained to them in ways that are relevant to their own circumstances. It also undermines the significance of surveys that, for example, start with an assumed target retirement income applying to all participants; or that assume the employer's saving plans are the only way that employees make provision for their retirement income.<BR><BR>The report's survey took place in April 2009. That places it in the period after the worst effects of the global economic crisis on investment markets were known (though perhaps still not yet advised in the benefit statements). The results showed some variation across the three countries:<BR><STRONG><SPAN style="COLOR: #0d0d0d; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: 'Times New Roman'; mso-bidi-font-family: Arial; mso-fareast-language: EN-GB"><FONT face=Garamond>. </FONT></SPAN>Netherlands:</STRONG> "Of the three interrelated qualities of pensions - certainty, price and quality - certainty and quality seem most important to Dutch employees. The vast majority of them accrue pensions in defined benefit (DB) systems and want to continue doing so. The preference for DB plans versus defined contribution (DC) systems is overwhelming. In addition, employees are willing to contribute more rather than, for example, lower their pension ambitions or retire later to close the gap between their retirement desires and probable outcomes."</P>
<P class=MsoNormal style="MARGIN: 0cm 0cm 0pt; TEXT-ALIGN: left" align=left><STRONG><SPAN style="COLOR: #0d0d0d; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: 'Times New Roman'; mso-bidi-font-family: Arial; mso-fareast-language: EN-GB"><FONT face=Garamond>. </FONT></SPAN>United Kingdom:</STRONG> "Employees in the United Kingdom display a strong preference for earlier retirement and an apparent willingness to make larger contributions to pay for it. Moreover, their risk tolerance is limited. However, a large minority remain unable to reconcile their goals for retirement with what they can reasonably expect, with one-fifth of respondents missing their retirement income target even after repeated use of the financial planning tool."</P>
<P class=MsoNormal style="MARGIN: 0cm 0cm 0pt; TEXT-ALIGN: left" align=left> </P>
<P class=MsoNormal style="MARGIN: 0cm 0cm 0pt; TEXT-ALIGN: left" align=left><STRONG><SPAN style="COLOR: #0d0d0d; mso-bidi-font-size: 12.0pt; mso-fareast-font-family: 'Times New Roman'; mso-bidi-font-family: Arial; mso-fareast-language: EN-GB"><FONT face=Garamond>. </FONT></SPAN>Germany:</STRONG> "Generally, German employees are rather risk averse with respect to their retirement planning. Although German DC occupational pension plans typically offer minimum guarantees, thus limiting the investment risk, workers generally strongly prefer fully guaranteed benefits. Beyond this, our survey shows that German employees are skilful at optimising their post-retirement consumption, an willing to accept more risk to achieve desired replacement rates."<BR> <BR>The report points out that the large differences in countries' retirement income arrangements affect employees' attitudes. PensionReforms agrees: for example, where DB arrangements already play a large role in retirement income provision (the Netherlands in the present case; by contrast with the UK), we should expect perhaps a greater willingness to take chances with supplementary DC top-ups. The fact that the Dutch apparently want guarantees as part of that deal is unsurprising. The 'sum at risk' is less relative to the whole and so the cost of the guarantee appears relatively small. On the other hand, a reason that more UK employees had trouble reconciling goals with resources may be the probably large gap between DB-based entitlements and the large sums needed to provide the required certainty for the 'gap'. Bridging that may require greater risk taking to make it seem achievable. Whether savers actually carry through with that strategy is another issue.<BR><BR>The real question is who might provide the underpinning guarantees? If employers are pulling back from DB arrangements, the only other provider (at a reasonable price) seems to be the government. The answer, according to the report, is not default enrolment into schemes that don't deliver what savers apparently want.<BR><BR>The report's author is the consulting firm that resulted from the January 2010 merger of Towers Perrin and Watson Wyatt Worldwide. (File size 3.95 MB; 40 pp) 378</P>http://www.watsonwyatt.com/pubs/directions/default.aspA new lens on retirement preferences377The economic crisis undermines pension promises of all kinds. The World Bank urges Europe and Central Asia to stand firm despite falling economic output, asset values and contributions. It says the coming demographic 'crisis' will be much worse.2010-03-24T00:00:002009<STRONG>PensionReforms' summary and comments<BR></STRONG>There are 30 countries in the area covered by this World Bank's briefing note on pensions. They stretch from the former Eastern Europe and on through Russia. They offer different mixes of PAYG pensions with those based on 'points', 'notional accounts' across the different 'pillars'.<BR><BR>"The financial crisis has significantly impacted pension systems in the Europe and Central Asia region (ECA) tempting governments to make policy changes in response to the increased pension deficits they are facing. The crisis exacerbates the existing financial imbalance in the public pension systems by reducing contribution revenues sharply while leaving expenditures constant or even higher. The crisis also resulted in a sharp drop in financial asset values which affects pensions provided by funded pillars. Consequently, no pension system, however structured, has been immune to the crisis."<BR><BR>PAYG schemes are affected by falling tax revenues and tagged contributions. Pre-funded, Defined Contribution schemes have suffered falling asset values - also contributions but, as benefits are tied to contributions, declining contributions do not immediately threaten the scheme's 'solvency' but they will eventually produce smaller than expected benefits. That could place pressure on other parts of the government's welfare system.<BR><BR>But all this is as nothing compared with the upcoming pressures created by ageing populations:<BR>"Despite the severity of the financial crisis, it pales in comparison to the demographic crisis which the region will face. Therefore, countries are urged not to make long-term policy changes to address short-run fiscal concerns. Any short-run responses should be consistent with strategies to address the long-run challenges to the pension system."<BR><BR>The report urges countries to instead focus on strategies that "...include:<BR>(i) protecting the purchasing power of pensioners and fiscal sustainability of the system, both during the crisis and beyond, by shifting to inflation indexation of pensions, <BR>(ii) encouraging individuals to work more and longer by raising retirement ages, equalizing retirement ages between men and women, and curbing early retirement, and <BR>(iii) enhancing public awareness of the increasingly limited capacity of publicly provided pensions as populations age."<BR><BR>Where there is a pre-funded component to the public system, those countries should also "...focus on:<BR>(i) providing better insurance for second pillar pensions through life cycle portfolios or guarantees, <BR>(ii) accelerating regulatory reforms to enhance the rates of return, and <BR>(iii) building a market for inflation-indexed bonds which will allow insurance companies to offer inflation-indexed annuities."<BR><BR>The World Bank has a model that demonstrates what might happen. It's called the Pension Reform Options Simulation Toolkit (PROST). It constructed a 'typical' country for the territory and ran some scenarios through PROST. Pension expenditures, held constant, would see costs rising by 0.5% to 0.8% of GDP as economic output falls in the short run. There is a lesser impact on Pillar 2 and 3 schemes because they are relatively new (a maximum of ten years old) and will not be so affected by falling asset values. However, the report warns that members' confidence in the schemes will be affected by poor, even negative returns.<BR><BR>Some of the changes already made by countries (reducing contributions, compensating losses, delaying increases, changing indexation) may help in the short-run but are, the report suggests, short-sighted sticking plasters and could worsen the impact of the demographically driven changes yet to come.<BR><BR>The size and scale of the global economic crisis with the "...rapid deterioration in output, employment, asset values, fiscal balance, and access to domestic and foreign financing has led to a rapidly worsening situation for the entire pension systems in the region and to early policy reactions by authorities in response to the crisis."<BR><BR>But, according to the report, that should not tempt countries to pull back from the reasons pension systems were recently changed - to limit the imposition on future generations of "...bigger financial burdens when they will be even more constrained than they are today."<BR><BR>PensionReforms suggests that the report highlights one of the key deficiencies of the complex web of pension arrangements many of the countries now have. There are too many levers for the governments to pull. In large part, these are legacies of the countries' pasts. The really significant issue is that, from a country's overall perspective, it does not much matter how pension systems are arranged - they are all different ways of allowing the retired to make claims on tomorrow's economic output. From an individual's perspective, however, it matters greatly who bears the ultimate economic risks as that will affect the distribution of economic gains and losses.<BR><BR>What really matters now and into the future from a macro perspective is economic growth. That will give countries choices about how to deal with the growing proportion of older people. PAYG and pre-funded schemes are not materially different in the way they allow pensioners as a group to make those claims.<BR><BR>The World Bank probably did not anticipate such early stress tests for the pension reforms it has been encouraging. PensionReforms suggests it is as well they have happened earlier, when there is less at stake, rather than later. The very poorest countries in the world that are now looking at the pension issue (<A href="http://www.pensionreforms.com/Preview.aspx?212">Lesotho</A>, <A href="http://www.pensionreforms.com/Preview.aspx?375">Zanzibar</A>, <A href="http://www.pensionreforms.com/Preview.aspx?263">Sri Lanka</A>) may provide better examples of building more robust income support systems for their oldest citizens. The principles need be no different for the ECA countries covered in this report. (File size 276 KB; 25 pp) 377<BR>http://siteresources.worldbank.org/ECAEXT/Resources/258598-1256842123621/6525333-1260213816371/PensionCrisisPolicyNotefinal.pdfPensions in Crisis: Europe and Central Asia Regional Policy Note376Zanzibar is a very poor part of a poor country (Tanzania). The old seem particularly poor and many are responsible for raising children. A Universal Pension of 20% of per capita GDP would make all the difference. This seems an efficient way to deliver direct monetary aid.2010-03-24T00:00:002009<P><STRONG>PensionReforms' summary and comments<BR></STRONG>Zanzibar is a semi-autonomous part of Tanzania and is a low-lying archipelago in the Indian Ocean. Its population is about 1 million that is largely dependent on growing cloves and also on tourism for income. Tanzania as a whole is a poor country with an estimated per capita Gross Domestic Product of $US1,400 a year (estimate for 2009). The report says that the number for Zanzibar alone is less than half that - an estimated $US513 a year.<BR><BR>About half of the population lives below the official poverty line of $US182 a year.<BR><BR>The last Census (2002) found that only 4% of population was aged over 60: About two-thirds of older people are dependent on agriculture or fishing to feed themselves..<BR><BR>"Zanzibar runs a system of contributory pensions covering those employed in the public and formal sectors. All current workers are now paying into the Zanzibar Social Security Fund (ZSSF). The fund had 53,798 members in September 2008representing 10 per cent of the overall workforce (taken as those aged between 18and 60). This scheme has been operating since 1998...<BR><BR>"Alongside the contributory pension system the government also runs a small cash transfer scheme for vulnerable groups (including older people), which is administered at community level. Recipients now receive 5,000 TZS (US$3.8) a month, increased n 2007 from 500 TZS (US$0.38), the original amount when the scheme was introduced in 1966."<BR><BR>However, only 40% of older people receive any form of regular cash payment. The true value of the 5,000 TZS (US$3.8) a month is clear: it covers only about one third of the cost of food.<BR><BR>The report documents an attempt to find out how old people are faring by asking them and running basic medical checks. Some of the findings included:<BR>- More than half of older people are caring for young dependants; either their own or their children's.<BR>- If they received a "small amount of extra money", those on the lowest (or no) incomes would spend it on food. Others would "use the money to invest in income-generating activities, for example, purchasing a cow in order to sell the milk."<BR>- Older people tended not to be supported to a satisfactory level by their families. In one district, about one third received no family support.<BR><BR>The report then looked at the options open to Zanzibar. Improving the contributory ZSSF depends on growing the formal work force. However:<BR>"Reforms to the existing contributory system do not address the current levels of poverty amongst older people, nor the situation of those reaching retirement age in the next 20-30 years when they will not have had time to build up contributions."<BR><BR>Extending the current monthly cash grants' system looks more promising. However, the local control of that scheme is potentially problematic.<BR><BR>A Universal Pension seems the best way forward:<BR>"A small pension payment to all older people in Zanzibar would provide them and their wider households with significantly increased protection from poverty. The cash would help older people to afford food, enable them to access services such as healthcare, support the caring role that older people play and facilitate investment within communities. The pension could provide income to the 16.5 per cent of households headed by older people, and to other households where older people are present, particularly the most vulnerable, in which both older people and children live. For older people who are currently dependent in these households, the cash would enable them to make a positive contribution rather than being regarded as afinancial burden."<BR><BR>The report suggests that a Universal Pension has the following potential "...benefits:<BR><SPAN style="FONT-SIZE: 12pt; FONT-FAMILY: 'Garamond','serif'; mso-bidi-font-family: Wingdings-Regular; mso-fareast-language: EN-GB; mso-fareast-font-family: Calibri; mso-ansi-language: EN-GB; mso-bidi-language: AR-SA">. </SPAN>significantly lower administrative costs as compared to means-tested schemes, due to the scheme's simplicity and ease of administration.<BR><SPAN style="FONT-SIZE: 12pt; FONT-FAMILY: 'Garamond','serif'; mso-bidi-font-family: Wingdings-Regular; mso-fareast-language: EN-GB; mso-fareast-font-family: Calibri; mso-ansi-language: EN-GB; mso-bidi-language: AR-SA">. </SPAN>ensuring coverage of all poor older people - experience across the world has demonstrated that universal schemes have been very successful in reaching poor older people. The eligibility rules for universal schemes are much easier to understand and communicate.<BR><SPAN style="FONT-SIZE: 12pt; FONT-FAMILY: 'Garamond','serif'; mso-bidi-font-family: Wingdings-Regular; mso-fareast-language: EN-GB; mso-fareast-font-family: Calibri; mso-ansi-language: EN-GB; mso-bidi-language: AR-SA">. </SPAN>the possibility of running a universal scheme at national scale from the outset rather than gradually scaling up. The size of the scheme can also allow for the use of private sector delivery mechanisms and thus for the improvement of financial or communications infrastructure across the country.<BR><SPAN style="FONT-SIZE: 12pt; FONT-FAMILY: 'Garamond','serif'; mso-bidi-font-family: Wingdings-Regular; mso-fareast-language: EN-GB; mso-fareast-font-family: Calibri; mso-ansi-language: EN-GB; mso-bidi-language: AR-SA">. </SPAN>the political popularity of universal pension schemes as older people know that they will receive the payment and those who are not currently of pensionable age expect to receive it in the future."</P>
<P>The report then modelled a number of alternative amounts from alternative starting ages. A mid-point 30% of per capital GDP represents approximately the current food poverty line. The total cost of that varies from 1.27% of GDP from age 60 to 0.53% from age 70. With economic growth, the monetary value of pensions will increase but fall over time relative to GDP.<BR><BR>The recommendation:<BR>"Given the retirement age and life expectancy in Zanzibar, the pension should benefit all citizens over 60 years of age. In terms of affordability, HelpAge International Tanzania suggests a starting amount of 11,500 Shillings per month equivalent to 20 per cent GDP per capita. This should be indexed to inflation and can be increased to respond to market changes in the future."<BR><BR>The report then discussed implementation issues - registration procedures, delivery responsibilities, and payment processes. And then there is the problem of finding the money. Donors will pay a significant role here.<BR><BR>PensionReforms applauds the report and will keep an eye out for future developments in Zanzibar. If there has to be cash aid paid to poor countries, delivering it through Universal Pensions seems like a good idea. (File size 305 KB; 30 pp) 376<BR><BR>Search on the linked page for report - stored in date order<BR></P>http://www.helpage.org/Researchandpolicy/Socialprotection/ResourcesSocial protection policy: responses to older people's needs in Zanzibar375Auto-enrolment into employer-sponsored saving schemes should mean more members and a higher cost for employers. That could reduce the average amount spent on each member. US evidence seems to support that; other US evidence might conclude otherwise.2010-03-08T00:00:002009<P><STRONG>PensionReforms' summary and comments<BR></STRONG>Many think that employees aren't saving enough for retirement. Supporters of the principles of 'behavioural economics' think that employees should be forced to address the issue of retirement saving by being auto-enrolled into the employer's scheme when first starting work. Then they can have a choice about whether to continue as members by opting-out.<BR><BR>Auto-enrolment will certainly increase the number of members but whether it means more retirement savings depends on at least two considerations:<BR>- Do the employees who remain members reduce other savings they might be making outside the employer-sponsored scheme? We should expect at least some substitution.<BR>- Is there a finite budget for the total amount the employer is prepared to spend on the retirement saving schemes of all its employees? If there is, the more employees who join, the less will be spent on each employee.<BR><BR>This report looks at the second of these propositions. Do employers with auto-enrolment saving schemes subsidise those savings on a different basis from employers with voluntary schemes? The answer to that seems to be 'yes' for the sample of employers measured.<BR><BR>"We use data from the Form 5500 and the Pensions & Investment top 1,000 pension funds. The 5500 data include the full universe of private pension plans but does not include information on automatic enrollment; the P&I 1,000 data represent a limited number of plan sponsors but include an automatic enrollment indicator. Our analysis sample resulting from merging the Form 5500 data for 2007 with the P&I 1,000 is limited to 826 plans from 532 employers. Yet, these plans hold about half of the total 401(k) assets and accounts for about 30 percent of all participants in the system."</P>
<P>The report acknowledges the limitations of the sample but finds that "...firms with automatic enrollment have employer match rates that are about 7 percentage points lower than those without automatic enrollment, even after controlling for firm characteristics."<BR><BR>The report notes that the regressions they carried out suggest a relationship between automatic enrollment and match rates but don't necessarily mean that auto enrollment causes lower match rates.<BR><BR>Even with the reduced match, the auto-enrolment schemes still cost the employers more than the alternative:<BR>"...our calculations suggest that a 7 percentage point reduction in match rates would offset at least 42 percent of the increase in costs for firms with participation rates of 60 percent or more before automatic enrollment."<BR><BR>Presumably, the reduction in costs will be somewhat less if the participation rates, before auto-enrolment, were less than 60%.<BR><BR>"The findings of this paper indicate that while automatic enrollment is likely to achieve the goal of increasing pension coverage, it might also work against the principal goal of increasing retirement savings."<BR><BR>PensionReforms doesn't follow this conclusion. Based on the average results found in the research, the reduced match rates still left the average auto-enrolment scheme 58% more expensive (the reduced rate offset only 42% of the increased cost). That means there is more money coming from employers than under voluntary schemes. On the other hand, the average contributed for each employee member will be less and perhaps that is what the report means.<BR><BR>The report also notes that, with a lower match in auto-enrolment schemes. Members might be encouraged to contribute less themselves, so reducing the total amount saved in respect of each member.<BR><BR>The report's findings have been challenged by one other organisation - the Employee Benefit Research Institute (EBRI). Its press release is <A href="http://www.ebri.org/pdf/PR.863_21Jan10.Matches.pdf">here</A>. The problems, in brief, seemed to be the report's constructed match rates and the failure in the report's database to identify the date when auto-enrolment was introduced. EBRI will apparently produce its own report on this topic - PensionReforms will cover that. It isn't easy to see from the EBRI press release why the report's findings might be wrong.<BR><BR>In PensionReforms' opinion, the report's findings seem like common sense and suggest that employers might have a total budget for remuneration (including subsidised benefits). The more employees who join, the less there is available for each. Auto-enrolment might get employees thinking about retirement saving issues but any decision they make (or don't make in an auto-enrolment environment) can't be costless. Someone has to pay for it and the choices are limited: shareholders, taxpayers, ratepayers, customers and now, according to the report, fellow employee-members. (File size 156 KB; 36 pp) 375<BR></P>http://crr.bc.edu/images/stories/Working_Papers/wp_2009-33.pdfWill Automatic Enrollment Reduce Employer Contributions to 401(k) Plans?374New Zealand's taxpayers face increasing future costs as public spending per head rises: demographically induced (and otherwise). Some changes to spending priorities will be better than others. Better growth rates will make most things affordable, including the Tier 1 pension.2010-03-08T00:00:002009<STRONG>PensionReforms' summary and comments<BR></STRONG>The New Zealand Treasury has reported to the government on long-run income and expenditure trends. In the midst of the aftermath of the 2008 global economic crisis, the government is running deficits for the first time in ten years. In 2009, the deficit was equivalent to 3.3% of GDP. If current patterns persist, the government's debt level could become 223% of GDP by 2050 (currently 9.5%). In the equivalent 2006 report, the expected 2050 debt was 106% of GDP so the intervening three years implies debt of more than double by 2050. The new 2050 number would imply a debt servicing cost of about 13% of GDP.<BR><BR>"This Statement shows that aggregate spending and revenue determine whether the fiscal position is sustainable, and that various policy mixes can achieve this. At this stage, we do not know the exact mix of policies that will be required by future generations of taxpayers, nor do we know what shocks the economy will experience over the decades ahead. However, some changes are likely to be better than others for our future welfare and fiscal sustainability."<BR><BR>Clearly, the increases in government expenditure that characterised the previous government's regime cannot persist. Both raising taxes and/or debt are not attractive options.<BR><BR>The available choices are reasonably obvious and are grouped by the report under five major headings:<BR>"<SPAN style="mso-bidi-font-size: 12.0pt"><FONT face=Garamond>. <STRONG> </STRONG></FONT></SPAN><STRONG>Make early changes</STRONG>. ...Making early incremental policy change reduces the risk of eleventh-hour decision-making, and gives people time to adjust.<BR><BR>"<SPAN style="mso-bidi-font-size: 12.0pt"><FONT face=Garamond>. </FONT></SPAN><STRONG> Keep debt under control</STRONG>. If current policies lead to increasing debt, the resulting financing costs can quickly spiral out of control. Future generations will find it difficult to set their own spending priorities, or meet unforeseen challenges, if a large part of future revenue is required for servicing debt built up by previous generations.<BR><BR>"<SPAN style="mso-bidi-font-size: 12.0pt"><FONT face=Garamond>.</FONT></SPAN> <STRONG>Encourage workforce participation.</STRONG> Demographic shifts mean all developed countries will be competing for labour and skills. Policies that encourage people to enter work, to stay in New Zealand or to return after their overseas experience, will help grow the economy and the tax base. Particularly important will be tax settings that spur employment, and policies that encourage older people to continue paid work that suits them.<BR><BR>"<SPAN style="mso-bidi-font-size: 12.0pt"><FONT face=Garamond>.</FONT></SPAN> <STRONG>Focus on growth.</STRONG> Stronger economic growth means the country and individuals will be wealthier, resulting in a larger tax base. Decisions about fiscal settings should consider the impact on growth - this is particularly relevant for the overall level and mix of spending and tax. ...<BR><BR>"<SPAN style="mso-bidi-font-size: 12.0pt"><FONT face=Garamond>.</FONT></SPAN> <STRONG>Keep spending under control and lift public sector productivity.</STRONG> This would involve governments pursuing an ongoing strategy that includes:<BR>"- Reprioritising within existing spending ...<BR>"- Setting a high threshold for new spending ...<BR>"- Securing a cost-effective mix of price, volume and quality for services ....<BR>"- Looking at institutional arrangements ...<BR>"- Managing public expectations - publicly debating what services the government can reasonably afford to provide, and to whom, given the negative economic consequences of higher taxes or debt."<BR><BR>In PensionReforms' view, none of this seems radical and is mostly connected with maintaining a close relationship between income and expenditure.<BR><BR>"This is not a case for despair, but for beginning to act soon. The largest single driver of the fiscal position is the policy choices governments make on behalf of society, which means that we have the power to make the necessary changes."<BR><BR>The report focuses on the influences that demographic changes will have on expected government expenditure - principally pensions and health costs - and their after-effects: debt servicing. This is in the context of what the report labels the "sustainable debt scenario":<BR>"Beyond 2023, and consistent with the Government's Fiscal Strategy Report, this scenario projects net debt declining to around 20% of GDP in 2050."<BR><BR>The report then looked at the major spending areas - health, justice, education, benefits and age pensions. What follows focuses on the age pension or "New Zealand Superannuation" (NZS).<BR><BR>NZS currently costs a net 4.3% of GDP and that is expected now to increase to 8% by 2050. It is a Universal Pension (paid without income, asset or work tests) that has largely eliminated poverty amongst the over age 65s (see <A href="http://www.pensionreforms.com/Preview.aspx?325">here</A> for more). There is a modest level of pre-funding through the New Zealand Superannuation Fund though contributions to that have been suspended for the next ten years or so.<BR><BR>The report then analysed three possible changes to the shape of NZS:<BR><BR><STRONG>Increasing the State Pension Age:</STRONG> The report notes that a number of countries are lifting their State Pension Ages: "Australia and Germany to 67; the United Kingdom to 68; and Denmark to 67. Along with Norway, Iceland and the United States, that brings to seven the number of OECD countries that already have or plan to have pension ages above 65." Recently, New Zealand's near neighbour Australia announced that it would increase the State Pension Age from 65 to 67 between 2017 and 2023. The report suggests that New Zealand's State Pension Age of 65 could follow Australia's but also then increase as life expectancy increased. On that basis, the State Pension Age would become age 69 by "the late 2040s". That means a larger workforce and a greater economic output. The combined effect would see the cost of NZS fall from an expected 8% of GDP to 6.5%.<BR><BR>PensionReforms agrees this is an area that requires discussion. The additional twist of a life expectancy-based uplift sounds logical but seems an unnecessary complication. It would be preferable to focus on a particular age but the other effects on work, different types of employees and the social implications requires more work than was apparent here.<BR><BR><STRONG>Changing the basis for increases:</STRONG> The report also looked at changing the link that NZS currently has with wage increases to one based on price increases from 2017. The report suggests this would see NZS falling to about half its present real level by 2050 (from a net 40% of wages to about 23%). It then states that this would be similar to other countries' Tier 1 schemes. Perhaps so but PensionReforms observes that the other countries cited (United States, Denmark and Germany) spend very considerable tax dollars on other parts of their retirement income systems. The report's comparison here is simplistic. PensionReforms suggests that the preferable approach would be to move to a new proportion of the average wage if that can be justified. Using changes in prices fails to recognise the distinct lack of success for this technique elsewhere (such as in the UK).<BR><BR><STRONG>Targeting NZS:</STRONG> The report looked at limiting NZS payments for the top quartile of income earners. If they received no NZS, it would cut the total cost from 8% to 6% of GDP. PensionReforms suggests that this potential saving is somewhat optimistic. New Zealand's recent experience with a modest income test (the so-called 'surcharge' that applied from 1985 to 1998) illustrates the political difficulties that any means test might encounter. A look across the Tasman at Australia's experience with an income-tested Tier 1 should also give the Treasury pause for thought.<BR><BR>PensionReforms agrees that New Zealand needs to start a national discussion about the future size and shape of New Zealand's Tier 1 pension. None of the information contained in the report is new - the Treasury's own Long term Fiscal Model (see <A href="http://www.treasury.govt.nz/government/longterm">here</A> for more) has flagged the significant numbers since 2000. The expected 2050 net cost of NZS has been at about 7-8% of GDP since 2003.<BR><BR>Unfortunately for New Zealand, politicians of all parties have a poor past record in relation to age pension changes and the current government has stated quite firmly that it would not contemplate changes. PensionReforms suggests that the Treasury is right to draw attention to the long term cost of NZS but that it will be difficult politically to draw the New Zealand public into a sensible discussion on the issues. (File size 666 KB; 75 pp) 374<BR>http://www.treasury.govt.nz/government/longterm/fiscalposition/2009/ltfs-09.pdfChallenges and Choices - New Zealand's Long-term Fiscal Statement373Public 'pension reserve funds' have great potential political use. A 2008 OECD report tested eight countries' reserve funds against six basic requirements and found general compliance. Some could do a little better.2010-02-27T00:00:002008<STRONG>PensionReforms' summary and comments</STRONG><BR>A recent PensionReforms' abstract <A href="http://www.pensionreforms.com/Preview.aspx?363">here</A> reviewed a 2008 World Bank report on four newish 'public' pension investment funds. This 2008 OECD report tests a wider group of eight countries (Canada, France, Ireland, Japan, Korea, New Zealand, Norway and Sweden) against the "OECD standards of good pension fund governance and investment management" and finds them "largely compliant".<BR><BR>"In particular, the requirements of accountability, suitability and transparency are broadly met by these reserve funds. However, some specific details of the fund's governance structure and investment management could be improved to better isolate them from undue political influence, ensure a level-playing field in the institutional investment market, and to enhance the expertise in the management of the funds."<BR><BR>The following summarise the tests applied by the report - the "reserve funds" should: <BR>- ".be under the ultimate oversight responsibility of a board (the governing body) composed of members with the necessary collective investment knowledge and experience to carry out their functions effectively." <BR>- ".be served operationally by an autonomous management entity, dedicated exclusively to the administration and investment of the reserve fund assets." <BR>- ".aim to carry out as much as possible of their investment via external asset managers, selected where relevant (mandates) via a competitive bidding process."<BR>- ".have clear mandates and specific measurable objectives, such as funding ratio and investment return targets. The performance of the board should be measured against these objectives."<BR>- Have "legal investment restrictions [that] should be limited to those concerning basic diversification, such as exposure to single issues or issuers. The setting of restrictions on broad asset classes should be left to the board of the reserve fund as part of the design of the investment policy."<BR>- ".be subject to a strict disclosure policy, requiring them to make their annual report publicly available, containing its audited financial statements as well as information on asset allocation and performance."<BR><BR>"The study has revealed that the reserve funds surveyed follow most of the practices above. In particular, there is a high degree of public disclosure and oversight by parliament or public sector entities and relevant experience requirements on board members, though these vary across countries. There are only a few exceptions to this generally positive assessment. For example, the Korean and the Norwegian reserve funds are under a governing body housed in a ministry, rather than under an independent committee or the board of an autonomous management entity. The asset allocation of the Japanese reserve fund (the GPIF) is also decided by a Ministry, rather than the GPIF's board. In the other countries surveyed, the governing body is either an independent committee or the board of an autonomous management entity, and its members are required to have some expertise and knowledge in investments and fund management. The absence of an arms-length relationship between the government and the reserve fund's governing body can also facilitate political interference in the management of the fund. Both the Japanese and Korean reserve funds have been used in the past for financial stability and developmental goals that may come into conflict with their stated objective to achieve a good investment performance in order to improve the financing of the pension system."<BR><BR>Norway has an apparent problem because the reserve fund there is not directly tied to pensions - too flexible, suggests the report.<BR><BR>Other funds have less than clear investment mandates or targets in the context of the OECD Guidelines on Pension Fund Asset Management.<BR><BR>"In countries such as Korea, Japan and Norway where the ultimate decision-making body is a government ministry or parliament, changes in the fund's investment policy can also become mired in political debate."<BR><BR>Ideally, according to the report, external asset managers should be used to reduce ".the possible concerns over political influence and public control of private companies. However, for some of the larger funds, the direct investment of part of the portfolio is an inevitable consequence of the attractions of economies of scale."<BR><BR>But the overall standards of governance and investment management amongst the eight countries' funds are "relatively high" but some could do better. The report suggests that the analysis could usefully be extended to non-OECD countries. PensionReforms expects that the report cards for those will probably show 'considerable room for improvement'. <BR><BR>PensionReforms notes that the report did not really question the need for the pension reserves and that wasn't the objective. It might help public debate in the subject countries if that were the topic of specific study on the 'why?' rather than, as here on the 'how?'. The pension reserve funds in any of the affected governments with any public debt (that's all the eight countries covered here) are effectively 100% leveraged. It is often a bad idea for individual savers to borrow to invest, particularly in financial assets. The same applies to governments. (File size 396 KB; 43 pp) 373http://www.oecd.org/dataoecd/27/48/40196093.pdfGovernance and Investment of Public Pension Reserve Funds in Selected OECD countries372In the UK, moving to a lower 'taper rate' for income-tested retirement income supplements need not, it seems, increase government spending. That's partly because of behavioural responses by affected citizens.2010-02-27T00:00:002005<STRONG>PensionReforms' summary and comments<BR></STRONG>The complex system of retirement income support in the UK includes two separate elements of income testing:<BR>- the Guarantee Credit, currently payable from age 60 (formerly called the Minimum Income Guarantee (MIG)) and <BR>- the Savings Credit, payable from age 65 that aims to reward those who have made some private provision for retirement.<BR><BR>A full explanation of the UK's system is given in the report covered by PensionReforms <A href="http://www.pensionreforms.com/Preview.aspx?221">here</A>.<BR><BR>This 2005 report study looks at how retirees would be treated, and how they might react, by reducing the 'taper rate' (rate of reduction in state-provided subsidies) under the then MIG with the 'gentler' then Pension Credit (PC). Understandably, the results of this analysis depend on whether retirees have private savings.<BR><BR>There are four key groups identified:<BR>"1. <STRONG>Households on very low incomes</STRONG>, who do not save any wealth under the MIG - comprising 17 percent of the population in 2004. The behaviour of these households is affected only slightly by replacing the MIG with the PC. These households do not save for retirement and choose to exit the labour market before state pensionable age because of their low labour incomes (relative to welfare benefits), rather than in response to the effects of means tested pensions.<BR><BR>"2. <STRONG>Households</STRONG> (other than those described under 1) <STRONG>for which a marginal increase in savings would be subject to a 100% taper</STRONG> under the MIG - comprising 12 percent of the population in 2004. Substitution effects dominate with the introduction of the PC, and these households choose to increase their savings for retirement (by £11,000 on average between ages 60 and 64), and to choose a later retirement age (an additional 18% to 20% choose to be employed between ages 60 and 64).. The responses of this population group consequently appear to most accurately reflect the suppositions of those who argued for a move away from the MIG.<BR><BR> <BR><BR>"3. <STRONG>Households</STRONG> (other than those described under either 1 or 2) <STRONG>with sufficient savings under the MIG to generate incomes close to the upper threshold</STRONG> for which benefits can be received under the PC - approximately corresponding to the third population quintile (31% of the population). These households are unambiguously better off under the PC. In the absence of behavioural responses, some of these households would receive a state retirement benefit under the PC where they would not under the MIG, and the PC implies a smaller cost of consumption during the working lifetime than the MIG. Hence, both substitution and income effects motivate these households to reduce their retirement savings (by £6,500-£7,300 on average between ages 60 and 64), and to take earlier retirement (between 4% and 7% fewer choose to be employed between ages 60 and 64) under the PC relative to the MIG. The behavioural responses of these households draw a clear contrast with those described under 2.<BR><BR>"4. <STRONG>Households that earn sufficiently high incomes,</STRONG> so that they lie beyond the thresholds of means tested pension benefits under either the MIG or the PC - comprising the fourth, and in particular, highest population quintile (approximately 40% of the population). As could be expected, these households do not appear to be much affected by the policy counterfactual considered here."<BR><BR>Overall, the report suggests that the change in the long term will see an additional 0.5%-1.4% of poorer households' choosing to work between ages 60-64 and that, overall, there would be "an insubstantial fall in aggregate population savings".<BR><BR>The effect on government spending will probably be neutral according to the report so, in PensionReforms' view, it isn't easy to see how "the reduction in pensions means testing will reduce the reliance on the welfare state."<BR><BR>"Our analysis, however, implies that lower income households will actually impose a smaller burden on the public purse under the PC than they would have under the MIG, because of their responses to the improved incentives to save. This net benefit to the government budget is almost exactly offset in our analysis by the responses of middle income households, who save less and retire earlier under the PC. The finding of budgetary neutrality is important as it suggests that the policy reform is welfare improving, since all households are at least as well off under the PC as they would have been under the MIG, and some are made strictly better off."<BR><BR>The report then suggests that introducing a Citizen's Pension equal to the MIG, "exaggerates the behavioural responses of households in the first and second quintiles, increases the consumption (both pre and post retirement) of households above the second quintile, and imposes a higher cost on the public purse."<BR><BR>Surprisingly, the report concludes that having lower taper rates does not "impose a substantial additional burden on the government budget" if "plausible assumptions about elasticities of labour supply and intertemporal substitution" are used.<BR><BR>"Indeed, we find that expected lifetime utility is higher under the PC [40% withdrawal rate] than the MIG [100% withdrawal rate] when taxes during the working lifetime are adjusted to obtain budget neutrality. Furthermore, we find that when means testing is eliminated from the pension system entirely, the tax adjustments necessary to maintain budget neutrality imply a fall in expected lifetime utility. Hence, the Pension Credit appears to provide a reasonable compromise."<BR><BR>PensionReforms wonders about that conclusion that seems to be driven, at least in part, by the report's model. If the Citizens Pension is tax-free (as the model assumes), then replacing the income test with the Citizens Pension must increase government spending and increase taxes. But if the Citizens Pension were taxed as ordinary income, that would be similar to the PC's 40% taper rate.<BR><BR>But, as the report itself concludes "The above findings should, however, be treated with caution. As the sensitivity analyses that are presented reveal, the results depend heavily upon the assumed contextual environment." (File size 568 KB; 72 pp) 372http://www.niesr.ac.uk/pubs/dps/dp265.pdfThe Effects of Means-Testing Pensions on Savings and Retirement371In the US, Social Security benefits are 'paid for' from an earmarked tax on payrolls. Whether the lifetime taxes are 'fair value' depends on the benefits; the present value of those depends on the discount rate. The balancing rate is 1.35% for benefits to equal taxes.2010-02-18T00:00:002007<STRONG>PensionReforms' summary and comments</STRONG><BR>In the US, the Old Age and Survivor's Insurance (OASI) is financed by a payroll tax (Social Security 'contributions'). The employer and employee share this but, on the actuarial assumptions used by the Trustees, this will not be enough to cover future payments.<BR><BR>This 2007 report looks at projected OASI benefits (excluding Disability Insurance contributions and benefits) through to 2220 (including the cohort of those born in 2100) and compares the present value of those benefits with the value of contributions that beneficiaries are expected to pay during their working lifetimes. According to the report, this is done on a ".more comprehensive, more accurate historically and extensive prospectively, and/or conforms more closely to the official Trustees Report projections than analogous estimates in previous analyses."<BR><BR>Whether today's and tomorrow's contributors receive 'fair value' depends on the amounts they will contribute, the benefits they expect to receive, and the chosen discount rate, the last being necessary in order to compare the two financial streams. The report notes that ". the choice of an appropriate risk-adjusted interest rate [i.e., discount rate] to evaluate program outcomes is difficult and controversial."<BR><BR>The results are that, if the discount rate is 1.35% or less, ".even the most distant birth cohorts will receive their money's worth from the OASI program." But, if ". a risk-adjusted real interest rate of 2 percent or above is deemed appropriate, then no cohort born after about 2015 is projected to receive its money's worth by this measure under either of the balanced budget policies considered."<BR><BR>In fact, however, the true value of money's worth depends on the difference between the discount rate and the rate of growth of the tax base (real wages); the tax base is simply assumed to grow at 1.35% a year. Because of that:<BR>". lifetime benefits will tend to be greater (less) than lifetime taxes if the risk-adjusted interest rate series used in the calculations is generally less (greater) than the growth rate in the program tax base."<BR><BR>The report then looked at what it calls the "legacy debt" that benefits early cohorts in a PAYG scheme. Again, the choice of discount rate is crucial:<BR>"As such, the typical practice of using the trust fund or other market interest rate unadjusted for risk in the legacy debt calculation may produce a quantitatively misleading or even qualitatively invalid indication of any "debt" or "burden" imposed by the program on present and future cohorts."<BR><BR>PensionReforms wonders at the utility of these kinds of calculations. They happen because there are earmarked taxes (Social Security 'contributions') that are paid to the Social Security 'Trust Fund' and that are reviewed regularly by the actuaries to the Fund. These taxes are different from other taxes in the more a person pays, the greater his or her entitlement. (Payment of more school taxes or road taxes, for example, does not give rise to greater entitlement to use of public schools or roads.) Apparently, contributors for this reason need assurance that what they will be paying will be a reasonable investment, especially in the face of the now reducing value of Social Security (the State Pension Age is increasing).<BR><BR>The 'Trust Fund' is a notional affair (wholly invested in untradeable government bonds) that notionally sets aside only a portion of the cost of future pensions: most of the costs will be financed on a pay-as-you-basis out of tomorrow's tax receipts ('Social Security contributions'). Given that today's voters cannot force tomorrow's politicians to do anything in particular, future governments might choose to default on these pension promises (in the same way the current government is now), just as they might choose to default on payment of the special government bonds, although with fewer consequences in the financial markets. <BR><BR>Given the uncertainty of returns on this 'investment', PensionReforms thinks there seems not to be a lot of point in working out whether Social Security contributions are (or will be) 'fair value'. (File size 543 KB; 104 pp) 371http://www.socialsecurity.gov/policy/docs/workingpapers/wp110.pdfCohort-Specific Measures of Lifetime Social Security Taxes and Benefits370The Swedish NDC pension scheme is supposed to partially link contributors' retirement income expectations to investment returns. Recent returns should have triggered a largish automatic reduction in pensions. It didn't - the politicians have decided to spread the reduction.2010-02-18T00:00:002010<STRONG>PensionReforms' summary and comments</STRONG><BR>The Center for Retirement Research in Boston puts out an excellent series of Issues in Brief that PensionReforms doesn't usually cover because they are, well, brief. We make an exception for this one because, in observing how the Swedish Notional Defined Contribution (NDC) scheme has reacted to the global economic crisis, it illustrates one of the difficulties that PensionReforms has with NDC arrangements. The last abstract looked at what lessons the US might learn from the Swedish experience: see <A href="http://www.pensionreforms.com/Preview.aspx?368">here</A>. Here we have an illustration of the implications of <EM>realpolitik</EM> for schemes of any shape. The example just happens to be about Sweden's NDC scheme.<BR><BR>The Swedish pension system was changed in 1999 and comprises two sections:<BR>- 16% of pay goes to a complex NDC scheme;<BR>- 2.5% goes to a pre-funded Defined Contribution section that lets contributors choose from about 700 alternative investment managers: see <A href="http://www.pensionreforms.com/Preview.aspx?2">here</A> for more on this.<BR><BR>The NDC section grows entitlements on the basis of contributions and a notional rate of return based on wage increase. At retirement, the final amount is converted to an annuity that takes into account the then expected mortality. There are also 'buffer funds' within the system, of which about 60% is invested in share markets. And that's why the global economic crisis matters - the buffer funds declined by 21.3% in 2008.<BR><BR>"In the case of Sweden, the crisis provides an initial 'stress test' for a major pension system reform implemented earlier this decade. The new system created by the reform was designed to be fiscally sustainable by including automatic adjustment mechanisms to maintain balance in response to short-term economic and financial fluctuations and long-term demographic changes. Last fall's plummeting stock market produced a decline in Sweden's pension reserve funds and triggered a first-time automatic reduction in the pension indexation scheduled to occur in 2010."<BR><BR>Pensions should have reduced by 4.6% in 2010 if the automatic mechanism (that was supposed to take political decisions out of the equation) had been applied. A further reduction of 1.6% was expected in 2011. Instead, policymakers have intervened to spread out the required adjustment over a longer period by averaging investment returns over three years. The reduction in 2010 will be smaller (3.0%) but larger in 2011 (2.8%). In addition, there will be a further reduction in 2012 of 0.5%. All political parties have signed up to the change.<BR><BR>PensionReforms wonders why Sweden has made its pension system so complicated. If it needed to cut costs, it would surely have been clearer to simply reduce benefits. Once the full effect of the reductions is in place by the third year (a pension of 100 in 2009 will be 93.81 in 2012), PensionReforms suspects that the true political strength of the NDC arrangement might be tested. (File size 507 KB; 5 pp) 370<BR>http://crr.bc.edu/images/stories/Briefs/ib_9-25.pdfThe Swedish Pension System and the Economic Crisis369The US can draw lessons from the experiences of Chile and Sweden when it thinks of replacing the current Defined Benefit state schemes. The answer is that the US could adopt Defined Contribution but should it? Probably not.2010-02-18T00:00:002009<P><STRONG>PensionReforms' summary and comments<BR></STRONG>Many countries have shifted part or most of their Tier 2 pension obligations from a Defined Benefit (DB) to a Defined Contribution (DC) basis; sometimes even Tier 1 (basic) pensions as in Australia. This is allegedly to face the issues created by ageing populations and to make pensions 'more affordable'.<BR><BR>For some time now, the US has been discussing the possibility of moving some of the current Tier 2 'Social Security' benefits on to a DC basis. In part, that is because actuarial projections seem to suggest that Social Security is potentially insolvent. PensionReforms has questioned this fundamental precept: see <A href="http://www.pensionreforms.com/Preview.aspx?182">here</A> and <A href="http://www.pensionreforms.com/Preview.aspx?229">here</A> for examples.<BR><BR>Other reasons for change include increasing private savings, giving beneficiaries a more direct relationship with investment, financial education etc. However, the apparent cost of existing state schemes seems the principle driver.<BR><BR>The report looks at the cases of Chile (replacing a plethora of state schemes with a 'pre-funded defined contribution' Tier 2 compulsory scheme) and Sweden that introduced a 'notional defined contribution' (NDC) scheme on top of reduced DB entitlements - see <A href="http://www.pensionreforms.com/Preview.aspx?81">here</A> for more on NDC arrangements.<BR><BR>One proposed US reform would see something similar to the Swedish model adopted for the US Social Security system. The President's Commission to Strengthen Social Security - PCSSS - (2001) suggested three alternatives to 'improve' the state scheme's financial position and each involved "voluntary individual retirement accounts". None of the three options looks likely to proceed. Nonetheless, the report uses the proposals as a backdrop to see how well Chile and Sweden have faired in relation to the PCSSS 'Model 2' (giving contributors the right to have 4% of Social Security contributions to a maximum of $US1,000 credited to an investment account with an equivalent reduction in the value of remaining benefits) .<BR><BR>"The replacement of a DB social security retirement system by a DC system raises many important social and economic issues. Thoughtful consideration must be given to the choice of criteria for prioritizing objectives and outcomes, as well as in weighing the advantages and disadvantages between different cohorts."<BR><BR>The report describes the main issues that need examination, including "...financial markets, economics, and demographics necessary to enable a move to DC accounts. In addition, it identifies the characteristics of the financial markets necessary to support payments (wealth transfers) to retirees from a DC social security retirement program."<BR><BR>The report summarises the strengths and weaknesses of the Chilean and Swedish alternatives (that has been running for a relatively short time) and draws lessons that might inform a debate on the PCSSS Model 2<BR><BR>"In examining the Chilean and Swedish reforms and the Model 2 proposal in the United States, it would appear that the aspects that make the biggest difference to the financing and the equity of the system could be accomplished in a PAYGO DB framework, through parametric rather than structural reform. Thus, a structural move to DC may not be the answer."</P>
<P>PensionReforms agrees but not for the reasons offered in the report. In Chile's case, the system certainly needed reform in 1981 but that was because of the complexity and cost of the many different schemes. Because of the political situation, some form of private provision may have been inevitable but that need not be the case now. That situation is not relevant to the current US situation.<BR><BR>Sweden's reform was precipitated by a heavy state involvement in expensive pensions with a contribution requirement of 18.5% of earnings. The introduction of the NDC arrangements was an attempt to control costs and to shift the burden of the change on to the current contributors. Again, that is not directly relevant to the US. Although currently required contributions seem inadequate to pay for future benefits, the cost of Social Security is expected to rise initially but to then fall (as a proportion of economic output from 6.0% of GDP in 2030 to 5.8% in 2082: see <A href="http://www.pensionreforms.com/Preview.aspx?229">here</A>.<BR><BR>In PensionReforms' view, any State involvement should be limited to flat Tier 1 pensions financed on a PAYG basis out of general tax revenues, rather than an earmarked tax. Any cost concerns can be resolved from time to time (with plenty of notice to allow time for savers to adjust) through adjustments to the starting value of the pension and the State Pension Age.<BR><BR>Once the state's welfare obligations are satisfied at Tier 1, it should have no particular view as to how or how much its citizens save for retirement income. On that basis, pensions become much simpler and citizens are able to see more easily whether they need to do more to prepare for their own retirement.<BR><BR>Both the Chilean and Swedish systems need significant reform and do not therefore offer the US a model, other than of what not to do. The PCSSS Model 2 should be discarded for similar reasons. That still leaves much work to be done on reforming the US Social Security arrangements. (File size 179 KB; 17 pp) 369</P>http://new.soa.org/library/journals/north-american-actuarial-journal/2009/no-02/naaj-2009-vol13-no2-andrews.pdfIs Defined Contribution a Panacea for Defined Benefit Social Security Problems? Lessons from Two Countries368Relative to the working age population, US 'aged' households are better off than had been thought: that's if all the income they receive is counted. Key surveys miss or miscount things like work-place saving accounts, capital incomes and housing income.2010-02-11T00:00:002007<STRONG>PensionReforms' summary and comments<BR></STRONG>To know whether the retired have adequate resources to support a reasonable standard of living, policy makers (and financial planners) need to know how much income they are receiving. That is one way of testing whether a country's retirement income arrangements are 'working'.<BR><BR>In this 2007 report, the authors have identified some quite significant gaps in the way two important US data sources count 'income'. The surveys are the Current Population Survey (CPS) and the Survey of Consumer Finances (SCF). The data used in the report are quite dated now (based on 2000 and 2001 returns) but the principles will probably not have changed.<BR><BR>"Capital income flows to both aged and nonaged households are underreported in most household surveys, including the principal surveys used to estimate the size distribution of U.S. income. Some of the understatement occurs because capital income that should be reported by survey respondents is incompletely reported or not reported at all by some respondents. Most of the understatement is due to conceptual limitations of the Census Bureau's definition of "money income." The definition excludes income flows from some kinds of household wealth, including owner-occupied housing and assets held in DC pension accounts that are particularly important for households headed by an aged person."<BR><BR>The report tries to fill the gaps to understand "effects of underreporting on assessments of the relative income position of the aged."<BR><BR>"Our tabulations suggest that underreporting is a major issue in both the CPS and the SCF. Compared with the CPS, the SCF uncovers a larger percentage of the total money income that is reported in the national accounts. This is mainly because high-income respondents in the SCF report much higher incomes than comparable respondents in the CPS. However, the SCF appears to miss a substantially larger fraction of the capital, labor, and transfer payment income received by households in the lower ranks of the income distribution. Thus, both surveys have major shortcomings as a source of accurate information on household incomes."<BR><BR>The report started with the census findings (labeled "Census money income" and adjusted that by "the return on net home equity", "the predicted annuity on retirees' DC pension holdings" and also looked at the implications of "the predicted annuity on households' financial wealth holdings (including DC pension holdings)".<BR><BR>Given the assets that are missed, it's no surprise to discover that:<BR>"In both the CPS and SCF files, the relative position of aged households is worse under the money income definition than it is under more comprehensive definitions, and the relative income position of aged households is best under the broadest income definition. Under the money income definition, both the median and average income of aged households are considerably lower than the corresponding income amounts for nonaged households. For example, in the CPS the median money income in aged households is 28 percent lower than the overall median income while the median money income in nonaged households is 4 percent higher than the median money income in the entire population. Under the broadest definition of income, which includes an estimate of the annuity on financial assets as well as returns on net home equity, the median incomes of people in aged and nonaged households are essentially identical. Under the money income definition, the average income of members of aged households is substantially below the average income in nonaged households. Under the broadest income definition, it is substantially higher than the average income in nonaged households."<BR><BR>The distribution of incomes at similar points amongst the aged and nonaged produce equivalent results:<BR>".the incomes of aged households in the middle of the old-age income distribution appear to be similar to those of nonaged households in the middle of the nonaged income distribution. In the top and bottom one-quarter of the old-age income distribution, incomes under the broadest income definition are substantially higher than those of nonaged households in the equivalent position of the income distribution."<BR><BR>In fact, by essentially ignoring income derived from housing and financial savings in retirement accounts, the results are not very useful in a retirement income context:<BR>"Under the standard definition of money income used by the Census Bureau, very little of the income flow that is generated by these forms of wealth is included in household income. Using a broader income definition that includes these income flows, the relative position of the nation's elderly is substantially improved. Under the broadest definition of income we consider here, the economic status of America's aged households appears to be approximately the same if not better than that of the nonaged households."<BR><BR>PensionReforms thinks this is all rather unsatisfactory. The government, employers, employees and others spend very large amounts of money (perhaps, now, too much money) on retirement incomes. It seems from this latest analysis that, relatively speaking, the aged households were quite well off in 2000/01. Government-provided data seem not to be delivering in this important (and expensive) area.<BR><BR>PensionReforms suggests that this analysis needs to be kept up to date and the associated public policy issues require identification and debate. That is a role for the government. (File size 374 KB; 59 pp) 368http://crr.bc.edu/images/stories/Working_Papers/wp_2007-21.pdfCapital Income Flows and the Relative Well-being of America's Aged Population367In Australia, retirement savings are inversely related to the number of children individuals have. Not too surprising for women as compulsory, Tier 2 contributions are directly connected to work and income. More surprising is that this can also apply to men.2010-02-11T00:00:002007<STRONG>PensionReforms' summary and comments<BR></STRONG>It is unsurprising to find that a person's current level of retirement savings is directly connected to things that are themselves unrelated to the retirement savings need. This 2007 report from Australia (based on 2002 data) reinforces the point even in the presence of a compulsory, Tier 2 retirement savings scheme.<BR><BR>The report starts with a summary of the development of Australia's retirement saving (called, locally 'superannuation') arrangements over the last 30+ years. For example:<BR>"In 1974, only 15% of female employees were members of a superannuation scheme, compared to 41% of men."<BR><BR>Some of the differences were attributable directly to discrimination, something that was outlawed from 1984. Superannuation schemes were, however exempt from compliance until the mid-1990s.<BR><BR>Even now, after 18 years of full compulsion, ".there is evidence that some employers simply do not make the contributions which they should be making. The workers who are most vulnerable in this respect are those on the fringes of the labor market - people in low-paid and unskilled jobs, people in casual and part-time positions, people in jobs with high turnover (typically young people working in the hospitality industry), and migrants: that is, people who may be unaware of their rights or reluctant to complain for fear of losing their jobs. It seems likely that females would be over-represented in this group, although of course it is difficult to obtain reliable statistics on non-compliance."<BR><BR>Members of the Tier 2 'SG scheme' can make voluntary contributions but only 30.4% of males and 21.4% of females today, despite income-tested incentives from taxpayers for the lower paid and 'stay-at-home wives'.<BR><BR>Having children reduces the family's wages (especially for women) and the pay-related contributions to Tier 2. Also, the presence of children opens potential access to a range of income-tested benefits that encourage the suppression of declared incomes.<BR><BR>"Average superannuation savings for women are much lower than those for men. However, the discrepancy cannot be entirely explained by the traditional female role in child care. Even after controlling for a range of variables, including age, number of children, education, birthplace, and marital status, women have on average $10,858 less superannuation than men. It is to be expected that a major part of this residual effect of being a female may be attributed to the cumulative effects of women's past and continuing disadvantage in the labour market both in terms of pay levels and access to higher ranking jobs associated with larger superannuation contributions as corroborated by the second model. However when one controls for the gross income from wages and salaries in 2001-02, the disadvantage of being a female is more than double that figure. Both women's incomes and their superannuation contributions were lower in proportion to men's in the past, and a control based only on current income is unable to capture this effect."<BR><BR>The report uses data from Wave 2 of the Household Income and Labour Dynamics in Australia (HILDA) Survey to see whether retirement saving by women and men vary according to the numbers of children they have.<BR><BR>"The results show that for women there is a clear inverse relationship between the value of superannuation and the number of children they have. Moreover the inverse relationship between a woman's value of superannuation and her number of children persists after controlling for an extensive range of variables which may affect both her number of children and her superannuation."<BR><BR>For men, there are lower retirement savings where there is one child but that does not change with increasing numbers, as is the case for women.<BR><BR>That's not the only thing that affects retirement saving levels:<BR>"The analysis also shows that level of education, migrant status, being an employer or self employed, marital status, age and sex are significantly related to an individuals' level of superannuation."<BR><BR>PensionReforms thinks this is all much as might be expected. The report's recommendation is vintage Tier 2 territory. Given all the rules that are needed to run a Tier 2 scheme, the 'solution' to the gaps identified is obvious - more rules; or rather targeted payments such as ".a government-paid superannuation contribution to the lower paid parent in families which receive child-related benefits."<BR><BR>In fact, since the report's data was produced, the 'co-contribution' system has been introduced and that has been 'good' for low paid women, but they have to be in work to collect the government's subsidy. The report suggests that the work requirement "seems counterproductive".<BR><BR>The report thinks that greater superannuation savings are necessarily better than less. Also that individual entitlements are more significant than household savings. Finally, there is no recognition of anything other than Tier 2 savings as contributing to the financial security of retired Australians. These all point to gaps in the report's analysis. File size 228 KB; 35 pp) 367http://www.melbourneinstitute.com/conf/hildaconf2007/HILDA%202007%20Papers/Session%202B/Parr,%20Nicholas_final%20paper.pdfThe Impact of Children on Australian Women's and Men's Superannuation366Financial modelling software can help individuals plan for their retirement income needs. Web-based versions in the US are greatly simplified (perhaps even simplistic) and will probably improve. They need to if they are to allow for expected and also extreme events like the global economic crisis.2010-02-04T00:00:002009<STRONG>PensionReforms' summary and comments<BR></STRONG>At an individual level, planning for retirement is complicated and is likely to become more so. It is no longer sensible to assume that an employee will remain in work, even at the same or an increasing pay from now until the employee's selected retirement age. Nor that the country's retirement income arrangements will continue unchanged. Then there are life's other exigencies - such as the consequences of the global economic crisis, ill health or family break down. These can all have a disastrous effect on the best-laid plans.<BR><BR>Financial modelling software can help both individuals and their advisers to map a rough way forward so how do they rate? The report looks at a number of options for how the post-retirement risks are handled. Five free "consumer programs", one "fee-based consumer program" and six "professional programs" are reviewed. The overall verdict: there is much room for improvement.<BR><BR>"Not surprisingly, we find that web-based programs aimed at the general consumer are less complex than programs used by professional financial planners. The five free web-based approaches considered here can provide a rough idea of whether the user is on target for retirement, how much additional, if any, he would need to save, and whether he should consider postponing retirement."<BR><BR>The individual programs had different but quite serious flaws, including that:<BR>- ". everyone, even if not married, receives the same Social Security benefits."<BR>- ".income sufficiency [is] based on life expectancy and overlooks the chances of living longer."<BR>- Spouse's entitlements are ignored.<BR>- Benefits from Defined Benefit schemes (and other income sources) are ignored.<BR><BR>"Programs used by financial planners are far more complex, yet none is capable of dealing with variable rate mortgages. Nor do they anticipate the situation of falling housing prices, job loss and foreclosures. We conclude that on the whole, the tools do not highlight nor address retirement risk particularly well; rather, they mainly mask risk."<BR><BR>The report recommends that individuals (and financial professionals) ".could benefit from trying alternative programs and scenarios within each program."<BR><BR>One of the problems faced by software developers is that the 'experts' themselves disagree on what might be 'optimal' advice. The developers have an apparently moving target to aim at.<BR><BR>The 'answer' to a financial planning question as complex as what to save for retirement is that there cannot be a single number that is 'right'. Individuals and their advisers, apparently, need to understand that a range of results must be a necessary result. <BR><BR>"Deterministic approaches direct consumers in appropriate to single answers, unless they undertake their own scenario testing. Stochastic modeling is seen as preferred approach, but it may not appropriately focus people on tail events or how to deal with them."<BR><BR>Models must allow people to see the implications of working longer, of falling house prices, variable house mortgage interest rates and even losing a job.<BR><BR>"In short, the software programs under-represent or fail to represent the impact of extreme events. The next generation of software must do better to inform users of such uncertainties."<BR><BR>PensionReforms thinks it is curious that after, perhaps, 15 years or more of computer-aided financial planning, there are so many gaps in the available tools. It is certainly a reflection of complexity - no two individuals will have the same history or future with respect to retirement income provision; even with something as basic as 'how long will I live?' In the face of such uncertainties, the answer will be delivered by a combination of skills in financial planning, communication, behaviour, technology and HR experience (much depends on the willingness of employers to help). That combination will eventually surface. Then it will not matter so much if individuals lack financial literacy, as long as they can use a computer or be helped through the process.<BR><BR>In the meantime, the 'answers' delivered by software provided by a firm with something to sell (other than advice) will need to be looked at with considerable caution. Paying off debt is likely to be a more sensible strategy for many than buying an investment product. But who wins from reducing debt? Not the lender (that has to find another borrower) or the promoter of an investment opportunity. (File size 92KB; 32 pp) 366<BR><BR> <BR><BR>Free registration requiredhttp://www.pensionresearchcouncil.org/publications/document.php?file=809How Does Retirement Planning Software Handle Post-Retirement Realities?365The so-called 'retirement consumption puzzle' (apparently precipitous declines in consumption after retirement) turns out not to be a puzzle. Looking at what households actually do resolves most of the issues. The bottom quintile is a potential worry.2010-02-04T00:00:002008<P><STRONG>PensionReforms' summary and comments<BR></STRONG>Knowing how much you want to live on in retirement and when you want to spend that over the two to three decades involved would be very helpful. The net present value of all those amounts, allowing for any other state or public pensions would be your retirement savings target. 'Knowing' that for an individual is virtually impossible but 'knowing' (or estimating) that for whole populations is a little easier and should be of interest to those with an interest in public policy. This normally needs complex models that gather all the available data and tries to guess what happens to people once careers end and dependencies begin.<BR><BR>This 2008 report draws together a number of papers that look at the position of workers as they move through the process of retirement.<BR><BR>"Up until recently, there was a view that consumption was not modeled well by standard lifecycle models as households transition into retirement. The basis of this claim was that even though retirement - for most households - is fairly predictable, consumption expenditures declined precipitously for nearly all households as they exited the labor force. Such a phenomenon had been referred to as the "retirement consumption puzzle"."<BR><BR>Whenever data presents unexpected or seemingly irrational results for large groups, there is often a reason that turns the unexpected into the rational. In this case, the seeming flaw in the life cycle model turns out to be consistent with observed behaviour.<BR><BR>"Aggregating results across a variety of recent research shows that the fall in expenditures at the time of retirement for the average household is confined to only two consumption categories: 1) work related expenses and 2) food. The decline in work related expenses is completely consistent with a lifecycle model of consumption where some consumption categories are complements with working. The real puzzle should have been cast as why food expenditures fall sharply despite the fact that the rest of the household's consumption bundle remained relatively constant through the retirement period."<BR><BR>In fact, what seems to happen is that retired households spend more time ".engaging in "food production" (preparing meals, shopping more efficiently, etc.), [that] reduce[s] the cost of their food bundle while keeping their food consumption relatively constant. There is strong support for such a model across a variety of data sources. The most significant finding shows no change in actual food consumption (as measured by the quantity and quality of their actual diets) as households transition to retirement (despite sharply falling expenditures). The reason that food falls in retirement relative to the consumption of all goods is that food, of all the consumption categories, is the most amenable to home production."<BR><BR>While that more comforting explanation covers most retirees, there is the group at the bottom that fares less well:<BR>".some households experience real declines in expenditures (and well being) at the time of retirement. For example, there is evidence that households in the bottom quartile of the pre-retirement wealth distribution experience declines in food expenditures that are nearly three times as large as the median households. What causes these large declines for such households with low pre-retirement wealth? There is evidence that involuntary retirements due to health shocks can explain much of this variation."<BR><BR>There is also some evidence that households in the bottom end of wealth distribution are not as good at planning for their retirement as others. PensionReforms has already looked at a report <A href="http://www.pensionreforms.com/Preview.aspx?235">here</A> and <A href="http://www.pensionreforms.com/Preview.aspx?37">here</A> that suggest this group is probably less than 20% of the retiring populations.<BR><BR>"In summary, there is some evidence that a small subset of households may be ill-prepared to sustain their consumption through retirement. However, the standard lifecycle model augmented with home production and idiosyncratic health shocks can explain the retirement consumption behavior for the overwhelming majority of households."<BR><BR>The report noted that this may change with improving mortality; also that the work was focused at the years around retirement. Also, it would be helpful to see what happened to retirees at the other end of their retirement.<BR><BR>PensionReforms notes that, again, American retirees seem generally to be doing the right thing about their retirement income provisions. Things may change but not just for the worse. More older people are working after State Pension Ages, even though those are increasing in many countries. Even the increasing retirement ages are allowing older workers more time to save for retirement, and adding to economic output on which the whole pension edifice (public and private) depends.<BR><BR>The resolution to the apparent retirement consumption puzzle shows the value of longitudinal data sets. Hopefully, the US results will stimulate similar research in other countries that have such data sets. (File size 95KB; 32 pp) 365<BR></P>http://faculty.chicagobooth.edu/erik.hurst/research/retirement_consumption_survey_nber_final.pdfThe Retirement of a Consumption Puzzle364Public pension schemes have tended to produce poor investment returns. A World Bank 2008 review of four countries' 'new' public schemes details some lessons for other countries that want to do a better job.2010-01-27T00:00:002008<STRONG>PensionReforms' summary and comments</STRONG><BR>Governments everywhere either directly run pension schemes or significantly affect what they do on a day-to-day basis. Then there are the compulsory Tier 2 schemes that usually have intricately detailed rules about what they (and their members) can and cannot do.<BR><BR>Generally, government intervention in the investment processes of pension schemes is not a great idea. They often do a poor job. They should bring scale and reduced (or no) marketing costs to that role:<BR>"But this important advantage has in most countries been dissipated by poor investment performance. The latter has been attributed to a weak governance structure, lack of independence from government interference, and a low level of transparency and public accountability."<BR><BR>The poor investment returns are particularly debilitating over the long term:<BR>"With some notable exceptions, public pension funds were historically poorly managed in most countries. They were often forced to invest in government bonds and housing loans at low nominal interest rates, while investments in foreign assets were prohibited. In countries that suffered from high inflation, real investment returns were negative, while even in countries where nominal interest rates exceeded inflation, the returns on public pension reserves were well below equity market returns and well below the returns achieved by private pension funds."<BR><BR>The report labels the past performance of a relatively long list of public schemes as "mediocre to disastrous".<BR><BR>The report looks at four relatively new public pension schemes (from Norway, Canada, Ireland and New Zealand) to see what structures have been incorporated to limit the risks that such large pools of capital in the public domain might bring with them. Each of the schemes had a slightly different genesis - Norway's started in 1990 as the Government Petroleum Fund (since 2006, the 'Government Pension Fund') and was set up to invest oil revenues. Although all decisions are made by the Ministry of Finance (with no 'arms-length' directors), it "... is required to operate with a very high level of transparency and accountability."<BR><BR>"The Canada Pension Plan Investment Board (CPPIB) was created in 1997 as part of a package of measures that aimed to prevent the insolvency of the CPP [the Tier 2 'Canada Pension Plan'] in 2015. A major change was the acceleration in the projected increase in the contribution rate from 6 percent in 1997 to 9.9 percent in 2002. This was expected to generate significant reserves and the CPPIB was established to ensure their efficient management. The CPPIB objective is to accumulate reserves equal to 20 percent or more of the actuarial pension liabilities of the CPP."<BR><BR>The Irish National Pensions Reserve Fund (NPRF) started in 2000 with the proceeds of the Telecom Eireann privatisation. It aims to build a fund that will be equivalent to "...about one-third of the cost of public pensions (social welfare and public service) between 2025 and 2055 and possibly beyond."<BR><BR>The New Zealand Superannuation Fund (NZSF) started in 2002 and allowed the government to set aside budget surpluses against the future cost of New Zealand Superannuation, the universal, Tier 1 state pension. It introduced the concept of a "smoothed pay-as-you-go" way of paying for the public pension.<BR><BR>"The paper discusses the safeguards that have been introduced to ensure [the schemes'] independence and their insulation from political pressures. It also reviews their performance and their evolving investment strategies."<BR><BR>The report suggests that, in the cases of Ireland, New Zealand and Norway, with their low levels of public debt "the authorities did not face a difficult policy dilemma in deciding to create a new public pension fund. Creating a fund and investing in global assets was likely to earn a higher rate of return than the cost of public debt." (PensionReforms notes that things have changed a bit since this 2008 report.)<BR><BR>The report looks at the schemes' governance structures and investment management processes. In summary, the report approves of arms-length arrangements that leave the schemes themselves to decide where the money should be invested.<BR><BR>"All four funds started with the romantic idea of operating as 'managers of managers' and focusing on external passive management but their strategies have progressively evolved to embrace internal active management and significant investments in alternative asset classes. The paper draws lessons for other countries that wish to modernize their public pension funds."<BR><BR>PensionReforms notes the report's explanation as to whether public debt held by the more 'independent' public schemes makes those securities 'real' or 'notional'. PensionReforms thinks the distinction is unnecessary. There is in substance little difference between an unfunded PAYG system and, say, the US Social Security system that has a so-called 'Trust Fund'. Whether or not the public scheme can sell the public securities is also not a distinction of significance. A scheme that has all its assets (or any of them) invested in debt issued by the government itself has created a money-go-round that offers little additional security to the pension scheme's beneficiaries (compared with a simple PAYG 'promise'). Such securities are akin to the 'implicit debt' calculations preferred by some commentators - see <A href="http://www.pensionreforms.com/Preview.aspx?105">here</A> for example - but they are of no real substance.<BR><BR>PensionReforms notes another issue with public schemes that the report did not cover. All governments have public debt (outside any consideration of the pension scheme itself). Even if the public pension scheme buys 'real' investments at arms-length (such as shares, corporate bonds or property) then the scheme is effectively 100% leveraged when looking at the government's balance sheet as a whole in a 'total accounting context'. Rather than putting public money into the pension scheme, the government has the option of reducing debt. So, when the public scheme's investment returns are examined, it is only the excess returns over the government's costs of debt that count (what PensionReforms calls the 'hurdle rate'). To the extent that the public pension scheme misses the 'hurdle rate', the presence of the scheme means that the government's net worth has been diminished by the scheme's presence.<BR><BR>The most recent annual returns illustrate the risks the four governments have run with public money. For 2008, the losses were: Ireland -30.4% New Zealand -26.2% Norway about -24% (global part -23.3%; domestic part -25.1%) and Canada -18.6%. It is relatively easy to reduce the significance of these as the returns that might be expected in exceptional times; also to point to the 2009 recovery as evidence that things are returning to normal. Adding the costs of leverage to these returns should, however, give pause for thought.<BR><BR>Whether pension systems are public or private; pre-funded (wholly or partly) or PAYG is less important than the strength of the economy that has the obligation to convert future pension claims to consumption (the ultimate purpose of any retirement income system). PensionReforms is unconvinced that the four public schemes profiled in the report have added any significant security to the pension promises made by the governments involved. On the other hand, they may have diminished the ability of governments of the day to spend budget surpluses that have since turned out to be transitory. That being the case, it now seems time to draw down on the investments rather than raise new debt. (File size 268 KB; 68 pp) 364http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2008/05/12/000158349_20080512143923/Rendered/PDF/wps4499.pdfUpgrading the investment policy framework of public pension funds363US individuals are very 'mobile' with respect to their incomes. Over the 10 years to 2005, about half from the bottom income quintile moved to a higher one: broadly unchanged over the preceding 10 years. Care is needed when income analyses are made.2010-01-27T00:00:002007<STRONG>PensionReforms' summary and comments<BR></STRONG>When studies try to guess where individuals will be in future years with regard to incomes, savings and retirement income replacement rates, assumptions usually 'start from here' and maintain 'current' differences. This takes today's 'snapshot' and suggests it will look similar in the future. The real world is much is less tidy.<BR><BR>"This study examines income mobility over the period from 1996 through 2005 using data from a large sample of individual income tax returns for these two years. The panel uses a large sample of approximately 96,700 tax returns with 169,300 primary and secondary (i.e., spouses on joint returns) taxpayers who filed for tax years 1996 and 2005."<BR><BR>The rates of income mobility in the decade to 2005 were striking; and not much different to the mobility rates in the preceding decade.<BR><BR>"The key findings of this 2007 study include:<BR>". There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period with roughly half of taxpayers who began in the bottom quintile moving up to a higher income group within 10 years.<BR>". About 55 percent of taxpayers moved to a different income quintile within 10 years.<BR>". Among those with the very highest incomes in 1996 - the top 1/100 of 1 percent - only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period.<BR>". The degree of mobility among income groups is unchanged from the prior decade (1987 through 1996).<BR>". Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation."<BR><BR>Naturally enough, the gains over the period were not evenly distributed though most incomes increased in real terms:<BR>"The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups."<BR><BR>As the report notes "U.S. Census data, for example, show that the share of household income of the top 20 percent of households increased from 44.1 percent in 1980 to 50.4 percent by 2005, with the share of the bottom 20 percent decreasing from 4.2 percent to 3.4 percent." That may well have been the case but the report notes that they almost certainly aren't the same people at each of the points over that 25 year period.<BR><BR>PensionReforms acknowledges that there are different ways to present data and that distribution of incomes is just as important as mobility if we want to understand how society treats different groups. But it does mean we need to take great care when we analyse whether people are saving enough for retirement on the assumption that the current relationships of incomes earned by workers today remain static.<BR><BR>Also, international comparisons of retirement income replacement rates are, potentially, similarly vulnerable. Such analyses require considerable caveats, not just because of the issues surrounding income mobility. (File size 141 KB; 22 pp) 363<BR>http://www.ustreas.gov/offices/tax-policy/library/incomemobilitystudy03-08revise.pdfIncome Mobility In The U.S. From 1996 To 2005362The UK Pensions Regulator has surveyed pension scheme governance issues for the fourth consecutive year. Schemes themselves report that they are mostly in good order. It might be nice to find out whether that is in fact so.2010-01-20T00:00:002009<STRONG>PensionReforms' summary and comments</STRONG><BR>Since the 2008 global economic crisis, all connected with the management and supervision of private pension schemes have become more interested in governance issues. In fact, the UK Pensions Regulator has been surveying pension schemes for the last few years and has recently published the results of its fourth annual survey. In general, things in the UK seem to be in reasonably good order - at least that's what the schemes themselves report to their regulator (as well they might).<BR><BR>The 2009 survey covers "... trust-based defined contribution (DC), defined benefit (DB) and hybrid schemes with 12 or more members." The survey was in two waves and was carried out by an independent research firm. The first wave (early in 2009) involved direct interviews with 544 trustees; the second (in September/October) directly interviewed 251 trustees. The schemes were chosen to reflect the make-up of all schemes by type and membership.<BR><BR>"The key aim of the governance survey is to assist the regulator in determining the most effective ways of helping trustees to achieve a common objective of improved scheme governance" as required by the Pensions Act 2004.<BR><BR>The key findings were:<BR>"<STRONG>i) Larger schemes</STRONG> tend to be associated with higher levels of governance activity."<BR><BR><STRONG>ii) Understanding of the clearance process</STRONG> remains low. From the Pensions Regulator's web site: "'Clearance' is the term used to describe the voluntary process of obtaining a clearance statement from the regulator. A clearance statement gives assurance that, based on the information provided, the regulator will not use its anti-avoidance powers to issue to the applicants either contribution notices or financial support directions in relation to a defined benefit occupational pension scheme and a particular event."<BR><BR>"<STRONG>iii) The Trustee toolkit</STRONG> is now a key source of knowledge for both existing and new trustees"<BR><BR>"<STRONG>iv) Schemes are increasingly confident</STRONG> that they have processes in place to manage conflicts of interest."<BR><BR>"<STRONG>v) Economic uncertainty</STRONG> has had an impact on scheme governance."<BR><BR>"Amongst DB schemes there has been a significant increase in the proportion of schemes with a sub-committee responsible for reviewing the sponsoring employer's business plans. Amongst medium and smaller DC schemes there has been a fall in those saying that the board regularly reviews investment strategy: this might be as a result of day-to-day pressure on these businesses and the uncertainty within the investment markets.<BR><BR>"<STRONG>vi) Most schemes have a risk register</STRONG> in place but fewer are confident that they have adequate internal controls." <BR><BR>"<STRONG>vii) There has been limited use</STRONG> of the regulator's communications guidance to date." <BR><BR>"<STRONG>viii) Where offered, the use of default schemes</STRONG> remains high, with nearly two-thirds of members invested in such a fund." <BR><BR>This is only of direct relevance to Defined Contribution schemes and the report explains this as follows:<BR>"The high use of the default fund either reflects a fund that suits the majority of members' investment needs and attitude towards risk or perhaps a situation where members are unwilling or unable to make an investment decision."<BR><BR>PensionReforms suspects that the "unwilling or unable" explanation is likely to be the answer. The result is also affected by the fact that about one third of schemes offer only one option. Also, that only about half were able to answer the question and the report observed that those answering "believe that over 60% of their scheme members are in the default fund." It would be interesting to find out why the trustees appeared not to know what the position was.<BR><BR>"<STRONG>ix) Use of the regulator's guidance</STRONG> on communication varies significantly by scheme size.<BR>Two thirds of large schemes have used or considered the guidance issued by the regulator compared to two fifths (42%) of small schemes. The key reasons for not using the guidance are either a lack of awareness or a lack of time on the trustees' part. The fact that only a third of schemes have assessed their member communications in the last year, and only a quarter of schemes would go so far as to say their board communicates very effectively, suggests that more work needs to be done by the regulator to address this issue."<BR><BR>PensionReforms thinks the report illustrates the extent to which the UK regulator gets involved in the daily lives of trustees. It would be interesting to see, first if the schemes' trustees actually do what they say they do. It would be natural for them to report the best possible explanation of whether they have done what they were supposed to have done. The only way to discover the full story would be to see directly how they operate.<BR><BR>Next, it would be interesting to assess the costs of this kind or regulatory supervision and whether taxpayers (as potential guarantors for failures that call on the Pension Protection Fund), employers (as underwriters of Defined Benefit schemes) or members receive fair value for this. PensionReforms suspects that a few high profile cases that crystallised the financial consequences of breaching fiduciary duties might be just as effective. In PensionReforms' experience, trust law, as explained by the English Law of Equity, is reasonably clear on the detail of what trustees can, should or should not do. (File size 2.6 MB; 50 pp) 362<BR>http://www.thepensionsregulator.gov.uk/pdf/governance-survey-report2009.pdfOccupational pension scheme governance - A report on the 2009 scheme governance survey361Europe's accountancy standard setters don't like the IASB's proposals for pension reporting. Among other things, the IASB thinks the employer's financial accounts should try to guess whether the employer might be able to afford future contributions. Europe demurs.2010-01-20T00:00:002009<STRONG>PensionReforms' summary and comments<BR></STRONG>The International Accounting Standards Board (IASB) issued proposed changes to the way that an employer's accounts report pension obligations. PensionReforms has already looked at the OECD's response to the 2008 proposals - see <A href="http://www.pensionreforms.com/Preview.aspx?225">here</A>. The UK's Accounting Standards Board (ASB) has also been looking at this issue on behalf of Europe's 'Pro-active Accounting Activities in Europe' a partnership between the European Financial Reporting Advisory Group and other European standard setters. This report follows a "major consultation exercise" by the ASB on a preliminary Discussion Paper (DP). The ASB doesn't much like the IASB's proposals either.<BR><BR>Looking across markets, both national and international, the rules that govern how companies' accounts are presented and how contingent obligations, like pension promises are valued should be similar so there is an undoubted need for reporting standards. Shareholders, lenders, regulators and employees all need good, comparable data here.<BR><BR>International Accounting Standard 19 (IAS 19) is the current standard, required of "exchange-listed companies in many parts of the world."<BR><BR>The IASB proposed a two-pronged approach to the reporting of pension obligations:<BR>- the pension vehicle's own liabilities should be shown in the employer's accounts on different bases;<BR>- the employer should also report its expected ability to meet the future contribution obligations to the pension vehicle.<BR><BR>The proposed requirements were to apply to both Defined Benefit schemes and to what the IASB proposed calling "contribution-based schemes". This new category is wider than what PensionReforms (and nearly everyone else) calls Defined Contribution schemes. That's because, inexplicably, they included "cash-balance plans and other hybrid-type plans, as well as career-average plans." PensionReforms would classify these as Defined Benefit.<BR><BR>"3.6 It was proposed in the [ASB's] DP that the measure of liabilities to pay pension benefits should be a current value amount of future cash outflows expected to settle the liability when it falls due. Where the measure is derived from discounting future cash outflows, it should reflect the expected cash outflows (that are required to settle the liability as defined in the DP) discounted at a current market discount rate to reflect the time value of money."<BR><BR>And that "discount rate" should, according to the ASB's DP, be based on "should be a risk-free rate."<BR><BR>Following the consultation on the DP, the ASB has clarified its position:<BR>"3.9 The preliminary views set out in the DP stated that risk arising from the size of the pension liability was very difficult to measure and it would be misleading to try and reflect the financial effect of such risk in a reported liability amount. It was therefore proposed that this risk should be addressed by disclosures regarding the assumptions that have been used to estimate the cash flows and the sensitivity of the liability to changes in those assumptions.<BR><BR>"3.10 The ASB acknowledges the concern of some respondents to the DP that clarification is required as to whether and, if so how, risk should be addressed in the cash flows used to measure the pension liability. As part of its redeliberations, the ASB has sought to clarify how risk should be taken into account. The clarification notes that the cash flows should incorporate, in an unbiased way, all available information about the amount timing and uncertainty of cash flows arising from contractual obligations. The expected The Financial Reporting of Pensions - Feedback and Redeliberations value of the cash flows should be used, where the expected value is the probability-weighted average of the cash flow."<BR><BR>Apparently, the IASB has had second thoughts about the idea of formally measuring the "credit risk" in relation to future contributions in the sponsoring employer's accounts:<BR>"The ASB ... supports the IASB in issuing a discussion paper addressing this topic. The ASB has recently responded to the IASB's discussion paper and noted it does not support the inclusion of own credit risk in the measurement of liabilities, unless on initial recognition the entity is party to an observable market transaction."<BR><BR>The ASB has also affirmed its original view on the appropriate discount rate:<BR>"In particular, on the measurement of liabilities, it has affirmed the view that the discount rate used should reflect the time value of money, and therefore should be a risk-free rate."<BR><BR>However, further work is seemingly needed with respect to the idea that "...the actual return on assets held to fund pension liabilities should be presented separately as financing income in the statement of comprehensive income."<BR><BR>PensionReforms hopes the IASB takes note of the European accounting bodies' views, as presented by the ASB. As PensionReforms has already stated, the current IASB19 is a virtually impenetrable code. PensionReforms would prefer a principles-based approach that everyone can understand, rather than the rules-based basis currently supported. The likely outcome of a revised IAS19 will be that more employers will get rid of any arrangement that requires the attention of IAS19. That will make life for accountants simpler and that's perhaps the main purpose of the proposed changes. However, that would, in PensionReforms' view, be a backward step. (File size 1.4 MB; 48 pp) 361http://www.frc.org.uk/images/uploaded/documents/Pensions%20Redeliberations%20Report.pdfThe Financial Reporting of Pensions - Feedback and Redeliberations360Well-run pension schemes require good record keeping. That should be particularly the case with government-run pension schemes: not so recently in Japan as the discovery of 50 million "floating" pension records attests.2010-01-20T00:00:002009<STRONG>PensionReforms' summary and comments</STRONG><BR>The Japanese government is heavily involved in the running of pension schemes at Tiers 1, 2 and 3 but most particularly at Tier 1 (basic pension) and Tier 2 (compulsory, employment related). There are already more than 35 million social security beneficiaries (about 30% of the total population) and that is increasing. It seems that the government does not have a clear idea of who all these beneficiaries are. The negative publicity around this issue contributed eventually to a change of government in 2007.<BR><BR>"Japan has several schemes of social security pensions among different sectors of the population. The oldest scheme dates back to 1884 and has a history of more than 120 years. The newest one was established in 1961. Before January 1997, pension identification numbers were issued to each participant independently from each pension program on the regional basis. They used to be changed when the participant moved to other regions, to other companies or to other pension programs. They were also changed when the participant acquired a new family name after his/her marriage or divorce. This is mainly because there was no adding-up requirement of covered years among the different pension schemes. Many Japanese, thus, were likely to have two or more pension identification numbers before retirement. It is only in January 1997 that the unified pension identification number was introduced for all eligible persons in Japan."<BR><BR>When the unified system was introduced, the government discovered there were 300 million pension records but only 100 million eligible citizens. So the government wrote to them all, asking them to report all their pension record numbers. Initially, only 9.6% of them replied. Over the years, that position has improved (pensions are paid only when records are reconciled) but, after a decade, there were still 50 million pension records that are described as "floating" because they are unrelated to a new "unified pension identification number".<BR><BR>There are apparently five main reasons for the administrative gaps:<BR>- human error, including fraud;<BR>- an assumption by citizens that bureaucrats knew what they were doing (in other words, a reluctance to check data);<BR>- on conversion from paper to punch-card digital records, converting names in Chinese characters was difficult because of technology limitations;<BR>- the absence of an integrated tax and social security collection system allowed misreporting and fraud;<BR>- there was no overall monitoring organisation so no-one understood the scale of the problem. Allied with that was the internal potential loss of face by the government administrators.<BR><BR>More than half of the 50.95 million "floating" records related to people over age 60 and since the problem became public, some progress has been made on resolving the gaps. 20% have since been "identified", 32% had already died or, apparently, weren't entitled to a pension and provisional matches have been made for another 15% (but only half of those have replied to a letter requesting confirmation).<BR><BR>Of the remainder, the authorities think they know who another 11% relate to and have still to investigate a further 23%. That means "almost 17 million pension records remain unidentified."<BR><BR>"From April 2009, the SIA [Social Insurance Agency] began to send out social security pension statements ("orange letter") to all program participants annually. The statement includes pension information on the unified personal identification number, the insuree's name, the pronunciation of the name, gender, birth date and year, date of enrollment and/or leaving the program, the identification of the company where the participant worked/works, all records of monthly salaries and semi-annual bonuses he/she received, records of contributions and expected amounts of monthly pension benefits. The SIA strongly expects that upon receiving this statement, the participants will actively make responses, which will enable the Agency to integrate the pending pension records and to correct remaining errors in the SIA pension data base."<BR><BR>PensionReforms suggests the SIA is probably optimistic. Perhaps the Japanese are more inclined to check this information more carefully than their Western counterparts (with whom PensionReforms is more familiar) but, faced with that welter of technical data, the recipients are more likely to file their "orange letters". And there are still 17 million unidentified records. However, the suggested regular reporting to contributors will improve the quality of information held over time.<BR><BR>From 2010, a specialist Japan Pension Agency will be responsible for collecting and handling pension contributions. <BR><BR>As the report concludes: "The trustworthy government with its competent and neat implementation is. the basis for any pension system." (File size 84 KB; 11 pp) 360<BR>http://wwwdocs.fce.unsw.edu.au/fce/Research/ResearchMicrosites/CPS/2009/papers/Takayama.pdfPension Record-keeping Problems in Japan359In Chile, the 'more work-friendly' compulsory Tier 2 scheme seems to have reversed the decline in labour force participation rates at older ages. That is apparently because a compulsory scheme rewards work and is actuarially fairer. Perhaps, but participation may well have increased anyway.2010-01-12T00:00:002009<STRONG>PensionReforms' summary and comments</STRONG><BR>There is one very significant way of reducing pension costs to taxpayers - increase the State Pension Age. Not only does this directly reduce costs (each year of increase, reduces the lifetime cost of a pension by about 5%) but it also encourages/forces older people to work longer. That contributes to the country's economic output and potentially makes the pensions that state does pay even more affordable.<BR><BR>In many countries, older people are tending to work more anyway either from necessity or because they want to. With improving mortality and morbidity statistics, a natural increase in 'retirement' as opposed to 'pension' ages might be expected. The state can encourage that through its pension and work-related public policies.<BR><BR>The report suggests that a compulsory Tier 2 scheme has its own impact on retirement ages. Delaying the retirement age has a direct impact on Tier 2 pension entitlements so that employees can see an immediate impact on pensions that is less visible in a Defined Benefit environment that prevails with most Tier 1 state pensions and also with Tier 2 and Tier 3 Defined Benefit schemes.<BR><BR>"Pre-reform Chile looked like many European countries today-with early and declining age of pension and withdrawal from the labor force. These incentives, constraints and trends were sharply reversed in 1981, when a new pension system with pro-work incentives and constraints was adopted."<BR><BR>The report suggests there are five possible ways that Chile's pension arrangements will contribute to a change in the behaviour of older workers:<BR>"We hypothesize that participation rates of older workers will increase due to: 1) Greater incentives for pensioners to continue working because the new system eliminates restrictions that existed previously and exempts pensioners from the pension payroll tax; 2) Greater actuarial fairness, which may lead to postponed pensioning and higher participation rates of non-pensioners on a voluntary basis because of the smaller implicit tax; 3) Tighter early pension preconditions, which constrain more individuals to remain non-pensioners and to continue working because of liquidity constraints; 4) Tighter eligibility conditions for the [Minimum Pension Guarantee], which induce low earners to work longer; and (5) new treatment of survivors' benefits, which allowed recipients to also keep their own-benefit and thereby induce widows and women more broadly to work longer."<BR><BR>The report then tests these hypotheses by looking at ".a retrospective sample of new and old system affiliates" ['members'] under both the old and the new systems.<BR><BR>"Our results are consistent with these hypotheses. We estimate an increase of 10 percentage points or 15% in the participation rates of older men, and 20 percentage points or 55% in participation rates of older women, who are new-system members."<BR><BR>The new rules implemented in 2004 make it more possible for people to both work and receive a Tier 2 pension. This has helped the new system's impact on participation rates:<BR>"Pensioners experience the largest impact; the effect on nonpensioners is also significant, but much smaller. This suggests that the removal of work restrictions and exemption from the pension payroll tax is a more potent incentive than the move toward actuarial fairness."<BR><BR>As the report notes, "[a]ctuarial fairness is difficult concept for workers to understand and calculate."<BR><BR>Other rule changes that have made early retirement more difficult have also contributed to the change in patterns. Changes in survivor benefits have also helped:<BR>"Particularly noteworthy is the huge (140%) increase in work propensities by new-system recipients of survivors' benefits, as the 100% implicit tax that many of them previously faced on own-pension has now been eliminated."<BR><BR>The report acknowledges that wider influences might also be at work, such as changes in the economy. But, based on the Chilean example, the authors suggest that other countries might draw some lessons from the report's findings:<BR>"They suggest that, regardless of other features of the system, the labor supply of older individuals can be increased substantially by 1) raising the reward that older individuals receive for working, for example by exempting them from the pension payroll tax; 2) raising the earliest allowable age for pensioning or doing so automatically and gradually by tying pension age to life expectancy; and 3) financing survivors' benefits in a way that makes it feasible for women who have worked and contributed to keep their own-pensions as well."<BR><BR>PensionReforms agrees that a country's pension policies have a direct impact on the retirement patterns of its workers. Citizens do tend to respond in predictable ways to the work/retirement 'signals' sent by the system. Individuals will often make mistakes about the financially optimal retirement age but whole populations of older people are likely to respond rationally. However, PensionReforms cautions readers from drawing the conclusion that a compulsory Tier 2 scheme, such as Chile pioneered, is a necessary part of those policies. Other countries (such as New Zealand) without a compulsory Tier 2 scheme are experiencing large increases in working rates amongst older employees. In New Zealand in 2006, 23.9% of all males and 11.6% of all women over age 65 participated in the workforce (up from 9% and 3% respectively in 1993): see <A href="http://www.pensionreforms.com/Preview.aspx?179">here</A>.<BR><BR>The report's conclusions, more narrowly drawn, are this - if a country has lots of rules about when employees can start to receive their pension and a clear work/retirement 'divide' then relaxing those rules (including paying pensioners more to work) will see a improvement in participation rates. Reducing entitlements under the new system will also help. Extending this, perhaps, to its logical conclusion, if the country had no, or minimal rules, people would retire when it best suited their needs and financial capacity to survive in retirement. And, in PensionReforms' view, the total impact of all those individual decisions is more likely to be in the country's overall economic interests than a prescriptive regime driven from the centre. <BR><BR>Given the favourable outcome of the Chilean changes covered in the report, local regulators should now think about other ways of making the Tier 2 regime even more flexible - perhaps to the extent of making it voluntary? PensionReforms notes that this will then solve the other problem with Chile's 'compulsory' regime - its participation rate (only 78% of eligible employees; 22% of the self-employed for whom participation is voluntary but which constitute a significant proportion of the work force: see <A href="http://www.pensionreforms.com/Preview.aspx?328">here</A>. Those are the highest participation rates in South America. (File size 266 KB; 57 pp) 359<BR>http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp202.pdfSocial Security Rules and Labor Force Participation of Older Workers: Evidence from Chile358There is no shortage of cheerleaders for Australia's compulsory Tier 2 retirement saving scheme. The global economic crisis seems not to have weakened the case for compulsion but it would be nice if that conclusion were based on sound data and solid logic. Not so here.2009-12-22T00:00:002009<STRONG>PensionReforms' summary and comments<BR></STRONG>It's not often that PensionReforms comes across a report that is as poorly founded as this one. The Australian superannuation industry commissioned it and has got the report it paid for. There is so much wrong with the report's logic and economic underpinnings that PensionReforms has, after some internal debate, decided to run it as a 'negative exemplar' - what not to do. The report's conclusions have been widely cited by the press and commentators and that is another reason for running this abstract.<BR><BR>Australia's compulsory Tier 2, "Superannuation Guarantee" (SG) started in 1986 amongst union-based employees with full coverage for all Australian employees in force from 1992.<BR><BR>"This report outlines the evidence that superannuation continues to benefit Australians despite recent falls in the share market, and changes to legislation."<BR><BR>According to the report, the SG helps employees save for retirement; "...benefits the Australian economy because it drives economic growth through its impact on national savings and investment" and "...reduces the amount the Government needs to spend on the [Tier 1] Age Pension..." PensionReforms suggests that there is either little or no conclusive evidence cited to support any of this.<BR><BR>The report notes that the Age Pension is income- and asset-tested so a higher SG benefit can mean a lower Tier 1 pension. PensionReforms suggests this then leads to the second potential reason - if everyone has significant private provision, the 'pressure' to increase the Tier 1 pension might presumably be reduced in the future. But there is another problem associated with what's known locally as 'double-dipping' (not mentioned in the report). Australians who retire early can spend their SG benefit and still fall back on the Age Pension. The government intends eventually to align the so-called 'preservation age' and the State Pension Age but that is some way off. Inexplicably, the report thinks that financing early retirement is a positive contribution to Australia's retirement income regime.<BR><BR>The report reaches the unsurprising conclusion that retirees with superannuation savings (past or present) "...have a significantly higher gross weekly income than those without superannuation and so generally enjoy a higher standard of living." That also applies to some 'case study' families though, "holding all else constant" the report puts the differences down "...to the more favourable tax treatments and the government co-contribution." PensionReforms expected that result.<BR><BR>There is apparently some discussion in Australia as to whether the undoubtedly larger amounts of money in the SG schemes might be at the expense of other savings or higher debt. The decline in the macro 'household saving' data seems to have been unaffected by the introduction of compulsion. The report offers the following in support:<BR>"Empirical evidence indicates that the superannuation guarantee may have increased the household saving rate by up to 1.5-2 per cent of gross domestic product (GDP). That is, government policies encouraging superannuation have added to both household saving and wealth, albeit that they appear to have been 'swimming against the tide' of other strong factors reducing saving, and disposing people to incur debt."<BR><BR>Taking that as the starting point and "[u]sing a macroeconomic growth model that relates GDP to the amount of capital and labour in the economy, we estimate that without superannuation, investment would have been [AU]$14 billion, or 4.5 per cent lower than it actually was in 2008 ([AU]$312 billion) and capital stock would have been almost [AU]$144 billion less.<BR><BR>"Extrapolating from these capital and investment growth figures we estimate that without superannuation, GDP would have been an estimated 1.8 per cent lower in June 2008 than it actually was.... This is a difference of almost $20 billion. Without superannuation, GDP may have been only [AU]$1.06 trillion in 2008, as opposed to the actual figure of [AU]$1.08 trillion."<BR><BR>PensionReforms suggests that the report's justification for this is unfounded - more on this below. Regardless, the report ploughs on:<BR>"In terms of per capita differences, we estimate that in 2008 without superannuation, individuals would have been worse off by [AU]$928, or almost [AU]$2,400 per household..... As GDP per capita in 2008 was [AU]$50,586, this equates to a 1.8 per cent difference in per capita incomes. For 2009 we estimate a per capita difference of around [AU]$996, or around 1.9 per cent."<BR><BR>The report suggests that, over time, the difference will increase:<BR>"GDP with superannuation in 2020 is estimated to reach [AU]$1.7 trillion, based on current growth levels. Without superannuation it is likely GDP would fall short by 3.2 per cent, reaching only [AU]$1.6 trillion."<BR><BR>There are other apparent benefits of the Australian arrangements:<BR>
<P class=MsoNormal style="MARGIN: 0cm 0cm 0pt; TEXT-ALIGN: left; mso-layout-grid-align: none" align=left><SPAN style="mso-bidi-font-size: 12.0pt; mso-bidi-font-family: TimesNewRomanPSMT; mso-fareast-language: EN-GB"><FONT face=Garamond>. </FONT></SPAN><STRONG>The financial services industry</STRONG> is obviously better off. Superannuation now apparently accounts for 45% of the "finance and industry sector in Australia".<BR></P>
<P class=MsoNormal style="MARGIN: 0cm 0cm 0pt; TEXT-ALIGN: left; mso-layout-grid-align: none" align=left><SPAN style="mso-bidi-font-size: 12.0pt; mso-bidi-font-family: TimesNewRomanPSMT; mso-fareast-language: EN-GB"><FONT face=Garamond>. </FONT></SPAN><STRONG>The proportion of Australian listed shares</STRONG> held by superannuation schemes has grown "from 8.5 per cent in 1998 to 16.5 per cent in 2007". A year later, that has seemingly grown to 23%.<BR></P>
<P class=MsoNormal style="MARGIN: 0cm 0cm 0pt; TEXT-ALIGN: left; mso-layout-grid-align: none" align=left><SPAN style="mso-bidi-font-size: 12.0pt; mso-bidi-font-family: TimesNewRomanPSMT; mso-fareast-language: EN-GB"><FONT face=Garamond>. </FONT></SPAN>Superannuation has a growing proportion of<STRONG> 'venture capital'</STRONG> - currently "...55 per cent of the total of funds committed toward venture capital and later stage private equity... as at 30 June 2008."<BR></P>
<P class=MsoNormal style="MARGIN: 0cm 0cm 0pt; TEXT-ALIGN: left; mso-layout-grid-align: none" align=left><SPAN style="mso-bidi-font-size: 12.0pt; mso-bidi-font-family: TimesNewRomanPSMT; mso-fareast-language: EN-GB"><FONT face=Garamond>. </FONT></SPAN><STRONG>Retirees are paid benefits</STRONG> of about $40 billion a year and that apparently stimulates the local economy. PensionReforms doesn't understand why the retirees are picked out for this special mention.<BR><BR>The report acknowledges that the tax breaks are regressive (favour higher earners), but:<BR>"These arguments, however, ignore the significant contribution to taxation generated by the superannuation industry. This occurs in three key ways. Firstly, superannuation contributes directly to the tax base. Secondly, by generating economic activity superannuation increases tax revenue. Thirdly, superannuation eases the burden on the Government in terms of paying for the Age Pension. These three impacts - both direct and indirect - sum to just over $15 billion (2009-10)..." This includes the savings to taxpayers of the reduced Tier 1 Age Pension as a result of the means tests.<BR><BR>PensionReforms thinks this analysis also has little to support it. While the cited numbers may be a best guess, the analysis ignores the counter-factual. What would Australians have done had the employer's compulsory 9% contribution been extra pay? Putting aside the direct cost of the tax breaks (covered next), it's just possible that the return to taxpayers through income and expenditure taxes may actually have been higher than the modelled SG arrangements. And then there is the direct cost of the concessions that the report acknowledges:<BR>"It would however, be misleading to claim that superannuation contributes significantly to tax revenue without acknowledging the value of superannuation tax concessions, which in 2009-10 were worth nearly $25 billion .... Superannuation tax concessions obviously cost the Government a significant proportion of tax revenue."<BR><BR>According to the report, this high cost is justified because "... without the tax concession, few Australians would contribute to superannuation beyond the mandatory component..." <BR><BR>Yes but, PensionReforms wonders, even if it were possible to justify tax concessions for contributions in excess of the compulsory SG's 9% of pay (and that's quite a large ask), how can it possibly justify having tax concessions on the compulsory contributions that Australians can't avoid? If there were any justification for incentives, that might be to influence a change in behaviour. It might have been nice if the report had looked at what PensionReforms thinks would be an obvious improvement to the SG arrangements - getting rid of tax breaks.<BR><BR>Anyway, even if there were no reduction of other saving because of the compulsory scheme there is, as the report itself effectively acknowledges, no increase in net saving because the cost of the tax concessions (AU$25 billion as above) outweighs the estimated increase in household saving (around AU$20 billion). That sounds to PensionReforms like a money-go-round to not much effect.<BR><BR>The high cost of tax concessions is not their only problem - Australia amply illustrates their highly regressive nature, their complexity, inequity and also their apparent inability to increase saving; all not covered in the report. PensionReforms agrees that there may be higher levels of household saving in the presence of compulsion than in its absence. But the specific impact of tax incentives (as opposed to compulsion) on this was not separately analysed and, in PensionReforms' view, should have been.<BR><BR>Then there is what PensionReforms regards as the report's most serious shortcoming. It accepts as a given the link between saving, investment and growth; a link that is at least problematic and even possibly nonexistent. Higher savings may mean more investment and higher investment might mean more growth but not necessarily in either case. The case for these 'inevitable' linkages was demolished by Nicolas Barr in a 2000 report reviewed <A href="http://www.pensionreforms.com/Preview.aspx?41">here</A>. Barr also disposes of other policy underpinnings for Australia's compulsory regime.<BR><BR>The Allen Consulting report's analysis essentially assumes that, given a particular relationship between capital and labour (in Australia's case, the historical value, in relation to GDP is 40% capital and 60% labour), adding to capital will necessarily improve the total GDP. This is simplistic. Even if that were the past case, just adding capital might reduce the returns to all capital and/or reduce the returns to labour. Assuming otherwise seems brave and is unsubstantiated. It also ignores what happens in the real world. There are examples of countries with low savings accompanied by both high and low growth; also of countries with high levels of savings with both low and high growth. As Herbert Simon suggested 20 years ago (Herbert A. Simon "On parsimonious explanations of production relations", The Scandinavian Journal of Economics 81:4 (1979), pp. 459-474), "An examination of the evidence suggests instead that the observed good fit of these functions to data . are very likely all statistical artifacts." PensionReforms thinks that physical capital may, or may not, have anything to do with growth. PensionReforms concedes there is disagreement and a large literature on this but it would have been nice to see evidence of either in the report.<BR><BR>The report's key message is at best equivocal: "Superannuation <EM>can</EM> stimulate investment, which enables Australian companies to expand and drives economic growth." (page 35 - emphasis added). PensionReforms suggests that this is scarcely a resounding conclusion and is scant justification for the very large amounts of money that Australians send to financial service providers (and the high costs of keeping it there).<BR><BR>PensionReforms does, however, understand why the financial services industry is such an enthusiastic supporter of the Australia's Tier 2 scheme and why it paid for this report. (File size 1.22 MB; 59 pp) 357</P>http://www.superannuation.asn.au/Reports/default.aspxBetter living standards and a stronger economy: the role of superannuation in Australia357In 2004, the Australian government introduced new rules designed to improve the governance of superannuation schemes, including the compulsory Tier 2 schemes. Who were the winners? Financial service providers. And the likely losers? Members.2009-12-22T00:00:002007<STRONG>PensionReforms' summary and comments<BR></STRONG>One aspect of the Australian retirement income regime that PensionReforms thinks notable is the dearth of research reports offering critical comment on, particularly, the shape, size and outcomes of the compulsory Tier 2 regime. There is no shortage of cheerleaders. PensionReforms has recently commented on one - the new "Melbourne Mercer Global Pension Index" (see <A href="http://www.pensionreforms.com/Preview.aspx?353">here</A>) where, mainly because of compulsory private provision, Australia's overall regime was the top scorer of 11 countries measured.<BR><BR>However all is not well as this 2007 report on costs and on the 'rents' imposed on scheme members by the Australian financial services industry illustrates.<BR><BR>The Australian Tier 2 scheme requires employers to pay at least 9% of employees' pay to an approved superannuation scheme, sometimes of the employees' choosing but usually of the employers' or unions' choosing. There is, ostensibly, a free market in that members can move from one approved scheme to another but that's not what happens; at least, not yet. The financial service providers seem to be profiting from the members' apparent unwillingness to find out what's really happening to their money. This apparent lack of interest seems also to extend to the member's choice of scheme provider and then of the investment strategy for their retirement saving (see <A href="http://www.pensionreforms.com/Preview.aspx?340">here</A>). More rules to 'correct' members' apparent 'mistakes' are apparently needed.<BR><BR>This report looks at the effects of another set of rules - the 2004 'Registrable Superannuation Entities (RSE) licensing regime. The intention of these regulations was ".to bring about improvements in terms of prudential control/safety mechanisms which, in turn, would ensure that the superannuation monies under investment increased significantly." Among other things, the regime required trustees to implement ".measures to improve fund governance such as the requirements for each fund to produce a formal risk management plan."<BR><BR>So, have the 2004 RSE rules worked? Probably not, according to the report because, apart from anything else, ".there was no attempt to identify and then address any existing fund member/consumer detriments." As a result the promoters of the superannuation schemes are the winners. The report bases its work on a survey of 90 superannuation scheme trustees and licensees.<BR><BR>"In terms of the actual outcomes or impacts of the RSE reforms,. there is no evidence to suggest that even these limited national interest objectives have been realised. Rather, the recent data collected from fund trustees, highlights that the combination of: increasing compliance costs; the "mass" fund exit; and the resultant transfer of funds worth billions to the more expensive retail fund sector, has left member funds, and, therefore, the overall savings pool, worse off, and to an extent of nearly $200 million per year." (Emphases in this and subsequent quotes are the author's)<BR><BR>And, as might be expected when there is so much money at stake, the scheme providers are apparently behaving in ways that might be more in their own, rather than in their customers' best interests - this includes significant donations to political parties:<BR>"In addition to compliance costs concerns, recent evidence has also highlighted that the remaining large funds within the industry are engaging in anti-trust behaviour. For example, there have been recent calls for the immediate review of the Eligible Rollover Fund sector in the occupational superannuation industry, following the RSE reforms, given that "some funds were engaged in predatory pricing" with estimated losses to fund members of over $100 million per year.. As a consequence of these outcomes, the "performance" and "social justice and equity" objectives of both governments have been subjected to negative pressures."<BR><BR>The report suggests that the RSE licensing requirements have forced employers and unions to fold their own 'stand-alone' schemes into more expensive retail schemes:<BR>".consistent with the principles and assumptions of the private interest framework, the fund managers appear to be the real "winners" under the RSE regime. That is, the licensing requirements have forced many of Australia's largest corporate and industry superannuation funds to exit the industry with member monies primarily being transferred to the retail sector (dominated by the life offices)."<BR><BR>The report suggests that this has resulted in a "financial windfall for the fund management sector which no longer has to face the threat of terminations, surrenders and forfeitures related to these occupational superannuation investments."<BR><BR>None of this, in PensionReforms' view, is very surprising. It is yet another example of the Law of Unintended Consequences. The government, in adopting the RSE licensing regime probably thought it was acting to improve the security of member's benefits. The report does acknowledge that there may be some positive effects (from "better risk management strategies being adopted" by schemes), but the new regime has, according to the report produced four negative effects:<BR>"<STRONG>1)</STRONG> member benefits associated with "closed" funds have been transferred to the master funds in the retail industry in spite of the fact that there is a priori evidence that retail/master funds have the highest expenses and lowest returns of all fund types; <BR>"<STRONG>2)</STRONG> the compliance costs associated with implementing the RSE reforms have been estimated at $50 million with ongoing costs estimated at a further $10 million per year; <BR>"<STRONG>3)</STRONG> the fact that the overall compliance costs of the two and half decades of regulatory reforms in the occupational superannuation industry is now approaching $200 million per year which is a direct reduction to fund member balances; and <BR>"<STRONG>4)</STRONG> in the absence of any anti-trust legislation, the remaining large firms in the industry have the ability to engage in predatory pricing activities which further "rip off" fund members." <BR><BR>Given the current framework of the Tier 2 scheme, the report suggests there is not a lot the government can do about these negative effects. It suits the financial services industry to have multiple, competing offerings that comply with the rules:<BR>"That is, the existing framework is the lobbied for outcome of the powerful fund management group who viewed single, government-controlled, national schemes as a "threat to their profitability", lobbying extensively against any earlier attempt to introduce such a national scheme.. Given that this framework is now delivering extremely high levels of returns on net premium income, assets and equity for the remaining firms (as a result, at least in part, of wealth transfers from fund members) there is little incentive to accept an alternate regime."<BR><BR>These findings lay the groundwork for an example of the industry-serving, laudatory report of the kind covered next by PensionReforms - see <A href="http://www.pensionreforms.com/Preview.aspx?357">here</A>. PensionReforms notes that the 2005 introduction of "fund choice" that lets members, with some exceptions, choose their own superannuation provider, seems not to have improved things because it is relatively difficult to change provider. The switch rate is a low 3-5% of members a year. Inertia rules and, based on the findings of this report, the financial services industry would probably prefer it to stay that way. (File size 239 KB; 34 pp) 357http://eprints.qut.edu.au/14189/1/14189.pdfThe $200 Million/Year Price Tag for Superannuation fund Governance: A Case Study of Member Fund Loss356Defined Benefit schemes in the Netherlands have pre-funding ratios that reflect the financial strength of the sponsoring employers. A higher level of risk in the employer's balance sheet tends to mean higher risk (lower coverage and/or more equities) in the scheme.2009-12-17T00:00:002007<STRONG>PensionReforms' summary and comments</STRONG><BR>In a Defined Benefit scheme, the people who run the sponsoring employer also tend to have considerable say in the appointment of the trustees who run the normally separate scheme. We might therefore expect that the scheme's investment strategy could reflect the employer's way of doing business.<BR><BR>So it turns out; at least it seemed to be the case in the ten years to 2005 in the Netherlands, based on this December 2007 report. Given that the employer is underwriting the balance of the cost of providing the benefits, this could be seen as a reasonable arrangement. The fact that, in the Netherlands, half of the pension scheme's board "represent" employees makes this a more interesting finding. <BR><BR>"This study presents empirical evidence on the influence of sponsoring companies on the funding and portfolio allocation decisions of their defined benefit pension funds. Several hypotheses taken from the theoretical literature are tested using a microdataset of around 550 Dutch company pension funds over the ten year period 1996-2005, combined with a microdataset on 100 of their sponsoring firms. The wide variation in funding levels over this period provides a natural experiment in the determinants of underfunding and portfolio composition.<BR><BR>The report describes four key findings:<BR>". Pension funds have lower cover ratios when their sponsoring companies have high leverage...<BR>". Pension funds have lower cover ratios when their return on assets is relatively low..<BR>". Pension funds have lower cover ratios and receive lower sponsor contributions when their sponsoring firm is small..<BR>". Defined benefit pension funds invest more in shares when their sponsoring companies have high leverage.."<BR><BR>The report notes that these findings accord generally with the literature on these topics. The facts do seem to conform to the theory.<BR><BR>The report suggests that regulatory authorities should pay attention to the corporate balance sheet as well as to the Defined Benefit scheme's own balance sheet and actuarial reviews.<BR><BR>"It is notable that such links apply consistently in the Netherlands despite the absence of pension benefit insurance that gives rise to moral hazard on the part of the sponsor vis-à-vis the insurer. Such patterns are likely to be even more marked when such insurance is present, as historically in the US and now in the UK also."<BR><BR>PensionReforms suggests that the report's findings are much as might be expected. In the end, the strength of a Defined Benefit scheme's promises depend not only on the economic strength of the sponsoring employer but also on the employer's willingness to take that risk on. The report's findings suggest to PensionReforms another very good reason for governments to avoid offering 'insurance' arrangements for Defined Benefit schemes, like the UK's Pension Protection Fund or the US Pension Benefit Guarantee Corporation. Given the employer's apparent, indirect capacity to influence the risk profile of the scheme's assets, this sounds like something governments should stay away from.<BR><BR>It would be interesting to re-visit the findings after the 2008 global economic crisis. (File size 842 KB; 36 pp) 356http://www.dnb.nl/dnb/home/file/Working%20Paper%20No%2E%20158_tcm47-167435.pdfPension fund finance and sponsoring companies: empirical evidence on theoretical hypotheses355Employees in the US seem irrational when contemplating 401(k) Tier 3 saving schemes. They do not seem to do what is clearly in their best interests. There are many reasons for this but financial literacy and trust (or a lack of those) seem important.2009-12-17T00:00:002007<STRONG>PensionReforms' summary and comments</STRONG><BR>401(k) schemes in the US seem such a great financial proposition. Not only do other taxpayers heavily subsidise the employee's retirement saving but also the employee often gets more pay by joining (employer subsidies). For those reasons, it is almost certainly the case that employees cannot match the return to the net amounts they put aside by their own direct savings. So why do so many employees pass up the opportunity of joining their employer's scheme or, having been auto-enrolled on taking up employment, want to pull out? Apparently, up to 20% of auto-enrollees withdraw.<BR><BR>This puzzle is the subject of much study in the field of behavioural economics. PensionReforms comments on 26 reports relating to behavioural economics generally, as listed at the 'Search & Options' tab <A href="http://www.pensionreforms.com/Sort.aspx">here</A> and by selecting 'Behavioural economics' as the 'Topic'). This 2007 report examines the conundrum by looking at experiences within three large employers. Two of them had auto-enrolment schemes; the third was voluntary. All three were similar in structure and administered by Vanguard, a major financial service provider.<BR><BR>A random sample of employees in each case (817 in total) was interviewed by phone. Based on a seven question quiz, 56% of the survey participants were found to be in the "high financial literacy" category. PensionReforms thinks this is probably higher than for all employees.<BR><BR>"Prior research on 401(k) savings has focused on the importance of neoclassical variables in explaining variation in employee saving behavior, or on behavioral biases such as procrastination as impediments to rational decision-making. This paper highlights the importance of two other factors - financial literacy and trust - in the 401(k) savings choice, and assesses their impact in both voluntary and automatic enrollment arrangements."<BR><BR>It seems almost axiomatic that, without a basic understanding of financial issues, employees might find it difficult to understand what they should do. So it turns out:<BR>"We find that financial literacy is a critical variable in explaining variations in 401(k) saving behavior, both in voluntary and automatic enrollment plans .."<BR><BR>Having been auto-enrolled, the issue of 'trust' seems to determine whether employees remain members.<BR><BR>"The marginal effects of both financial literacy and mistrust appear substantial, especially when compared with the responsiveness of 401(k) saving to income. Our results support both a rational information gap theory - that some participants are impeded by a lack of adequate financial information - and a behavioral bias theory - that others may be influenced by the psychological level of trust they have in institutions."<BR><BR>In PensionReforms' experience, the quality of the communication programme and the employer's commitment also play significant roles and it may be that these help to resolve the difficulties presented by a lack of financial literacy and the mistrust highlighted in the report. These aspects were not covered in the report but may help to explain the high proportion (34%) of non-members who thought they were members.<BR><BR>Attitudes to the need to save and then the need to do something about that appear inconsistent. On the one hand, employees say either that Social Security (the US Tier 2 state scheme) might not be there when they get to State Pension Age (or won't provide an adequate standard of living) but, on the other hand, they seem unable to start a saving programme to replace that 'missing' income.<BR><BR>"Our findings contribute to the previous literature on 401(k) participation behavior, and underscore the notion that 401(k) savings behavior is driven by a complex set of factors, including neoclassical employee and plan design variables, information or transaction cost problems such as financial literacy, and psychological or behavioral biases such as procrastination and mistrust. These findings highlight the importance of ongoing efforts at 401(k) education in the workplace. Increased employee education appears to enhance voluntary 401(k) saving, and it reduces quit rates in automatic enrollment plans. Our findings also suggest that trust plays a crucial role in influencing quit rates in automatic enrollment plans, and that employers confronting high quit rates in automatic enrollment plans may wish to consider efforts not only to improve financial literacy but to reduce employee mistrust of financial institutions, particularly among the lowest paid."<BR><BR>PensionReforms is not surprised at the report's findings. Non-participants tend to be drawn from those with lower financial literacy and lower incomes. In the latter regard, income might be a proxy for affordability. In other words, employees who don't join or who opt out might have to forgo the extra remuneration. 51% of respondents in the auto-enrolment and 37% in voluntary environment agreed this was the reason for not joining. There are probably others who were reluctant to reveal that. PensionReforms wonders why their employer might want to pay those less-well-paid employees less, in total, than their peers who joined.<BR><BR>PensionReforms notes that we don't know whether employees needed to save for retirement. In other words, perhaps they had no economic need to forgo pay today in exchange for a higher future amount. We could not know that without a full needs analysis being done for the 817 survey participants. (Report size 185 KB; 59 pp) 355<BR>http://crr.bc.edu/images/stories/Working_Papers/wp_2007-10.pdfLiteracy, Trust And 401(k) Savings Behavior354A new "Global Pension Index" grades different countries' retirement income systems - public and private - from "poor" to "first class and robust". Eleven countries are covered in the first pass. It is unclear what might be done with the results; perhaps 'Could do better if tried'?2009-12-10T00:00:002009<STRONG>PensionReforms' summary and comments<BR></STRONG>Regular PensionReforms' readers will have noticed that different countries organise their retirement income systems in very varied ways. The mixes between public and private; between compulsory, incentivised and voluntary; between personal and workplace-based arrangements; between pension and lump sum; between Defined Benefit and Defined Contribution are literally infinite.<BR><BR>This variety makes cross-country comparisons extremely difficult. In fact, PensionReforms thinks that international comparisons have very limited value and in many cases are actively misleading. Even if the country summaries are accurate, putting just two of them side-by-side is difficult. That does not seem to limit the multi-country comparisons available - see <A href="http://www.pensionreforms.com/Preview.aspx?299">here</A> for an example. The Melbourne Mercer Global Pension Index (MMGPI) tries to solve this by grading the components of each country's overall arrangements and comparing the single figure outcomes.<BR><BR>"There is no perfect [retirement income] system that can be applied universally around the world. Indeed, even comparing the diversity of retirement income systems is certain to be controversial as every system is different and has arisen from each country's particular economic, social, cultural, political and historical circumstances. However there are certain features and characteristics of retirement income systems that are likely to lead to improved benefits, an increased likelihood of future sustainability of the system, and a greater level of confidence and trust within the community."<BR><BR>The report suggests that the MMGPI allows an "objective" comparison and looks at eleven countries to show how the index works.<BR><BR>"The results show that no country's system has an index value above 80, which we consider represents an A-grade retirement income system. However, four countries have an index value between 65 and 80, which represents a B-grade system and - with some adjustments or improvements - these countries could be re-classified as A-grade systems."<BR><BR>The total score for a country under the Index derives from three major components:<BR>§ 40% for <STRONG>adequacy</STRONG> - with the following elements: benefit levels, savings, tax support, benefit design; <BR>§ 35% for <STRONG>sustainability</STRONG> - coverage, assets/funding, demography, government debt, labour force;<BR>§ 25% for <STRONG>integrity</STRONG> - with a focus on the private sector system: prudential regulation, governance, risk protection, communication.<BR><BR>"The overall index value for each country represents the weighted average of the three sub-indices." Countries that score an E (below 35 points) seemingly have:<BR>"A poor system that may be in the early stages of development or a non-existent system."<BR><BR>According to the MMGPI, the eleven measured countries scored (from top to bottom):<BR>Netherlands (76.1); Australia (74.0); Sweden (73.5); Canada (73.2); UK (63.9); US (59.8); Chile (59.6); Singapore (57.0); China (48.0); Germany (48.2) and Japan (41.5).<BR><BR>So, what elements do the MMGPI's authors rank in each of the three major components?<BR><BR>The report uses the World Bank's major reports as a framework and, effectively a model against which the individual country's systems are measured. PensionReforms has difficulties with both the 1994 and 2005 versions of the World Bank's framework - see <A href="http://www.pensionreforms.com/Preview.aspx?7">here</A> and <A href="http://www.pensionreforms.com/Preview.aspx?1">here</A>. So, for PensionReforms, this isn't a great start. Anyway, the World Bank seems less confident now about the 'success' of its recommendations than it was in 1994 or 2005. See <A href="http://www.pensionreforms.com/Preview.aspx?322">here</A> for self-reflection and <A href="http://www.pensionreforms.com/Preview.aspx?52">here</A> for an internal critique. There is no indication in the MMGPI report of any such doubts.<BR><BR>Here are brief comments on each of the key measures:<BR><STRONG>. Adequacy:</STRONG> looks at what the World Bank now calls the "Level 0" minimum pension and net replacement rates over the whole retirement income system (public and private) for a median earner. That favours countries with compulsory Tier 2 schemes and ignores the less than glowing report cards on compulsion (see <A href="http://www.pensionreforms.com/Preview.aspx?157">here</A>, <A href="http://www.pensionreforms.com/Preview.aspx?232">here</A> and <A href="http://www.pensionreforms.com/Preview.aspx?328">here</A> for examples). PensionReforms has commented on the difficulties with net replacement projections <A href="http://www.pensionreforms.com/Preview.aspx?350">here</A>. Tax breaks for saving score despite their possible ineffectiveness (see <A href="http://www.pensionreforms.com/Preview.aspx?20">here</A> and <A href="http://www.pensionreforms.com/Preview.aspx?34">here</A> for example). A high earliest access age is also a 'positive'. Compulsory annuities help as do high household saving rates, never mind the difficulties of their measurement - see <A href="http://www.pensionreforms.com/Preview.aspx?85">here</A> for an example that illustrates some of these. Overall, a high score is given where countries force citizens to behave in particular ways; apparently, the less flexibility, the better.<BR><BR><STRONG>. Sustainability:</STRONG> this allows for the country's demographic profile, State Pension Age, participation rates at older ages, the scale of private pension assets, the coverage of private pensions and the "sharing of mandatory contributions between employers and employees." The level of government debt also plays a role. Again, as with the "adequacy" measure, countries with compulsory Tier 2 schemes have a head start.<BR><BR><STRONG>. Integrity:</STRONG> This focuses on the private retirement income system as "most countries are relying on the private system to play an increasingly important role in the provision of retirement income..." So the community has to have confidence that the private sector pension providers will deliver:<BR>"This sub-index therefore considers the role of prudential regulation, the required governance, the level of protection available to members from a range of risks and the level of communication required to be provided to members."<BR><BR>PensionReforms has a number of major issues with the MMGPI. Despite its stated intention to be as "objective as possible", it's no accident that the four countries all scoring more than 70 points have virtually compulsory private (or semi-private) retirement saving schemes. The measurements that matter all focus extensively on the pension system (private and public) as though it were operating in a vacuum. In fact, both public and private provision (of all kinds; not just in formal retirement income systems) are claims on tomorrow's economy. That, more than any other single factor, will determine the sustainability of any pension commitment. The MMGPI gives no weight to this crucial driver though does include some proxies, such as debt levels of countries.<BR><BR>There is also no weight given in the measures as to whether the current system is actually achieving its objectives. The OECD's recent report on poverty amongst the over age 65s in the mid 2000s (reviewed <A href="http://www.pensionreforms.com/Preview.aspx?289">here</A>) highlights the proportions of the population over age 65 and not working who are in 'poverty'. Of the eleven countries covered in the report, the OECD's report scored eight of them (the MMGPI ranking is in brackets):<BR>- Netherlands: 2% (76.1)<BR>- Australia : 32% (74.0)<BR>- Sweden: 7% (73.5)<BR>- Canada: 10% (73.2)<BR>- UK 12% (63.9)<BR>- US 34% (59.8)<BR>- Germany 9% (48.2)<BR>- Japan 3% (41.5)<BR><BR>Chile, Singapore and China were not measured in the OECD's report.<BR><BR>If the MMGPI offers a meaningful measure (and PensionReforms suggests that it does not), only the Netherlands and, possibly, Sweden might be happy about the combined measures.<BR><BR>Even if the MMGPI were a robust indication, it is unclear to PensionReforms what a country might do with the results. Perhaps they may be of value to the political opposition in a country. <BR><BR>In summary, PensionReforms thinks the MMGPI does not measure up to the authors' assessment that this is an "exciting" development in the international classification and measurement of pension systems. (File size 1.51 MB; 64 pp) 354<BR>http://www.mercer.com/referencecontent.htm?idContent=1359260Melbourne Mercer Global Pension Index353When employers want out of Defined Benefit schemes, they may want to get rid of past, as well as future promises. So-called "solvent buyouts" are more common in the UK than the US. So what does the UK experience look like? So far, so good.2009-12-10T00:00:002009<STRONG>PensionReforms' summary and comments</STRONG><BR>When an employer wants to stop a Defined Benefit scheme, it can usually call a halt to the accrual of benefits in respect of future service. That may require compensation in the shape of an alternative Defined Contribution scheme or even, perhaps a change in pay.<BR><BR>There is then the problem of the past. Those accrued entitlements are normally a formal promise either directly to employees by the employer or indirectly, where the employer more typically promises to pay the balance of the cost of those promises made by a separate Defined Benefit scheme.<BR><BR>"Pension buy-outs" in the United Kingdom used to be reserved for insolvent employers where the employer would no longer be around to meet the balance of the Defined Benefit scheme's promises. That changed with the introduction of the Pension Protection Fund (PPF) in 2004. This institution is a bit like the US Pension Benefit Guarantee Corporation (PBGC).<BR><BR>"The newly established PPF took over from insurance companies the task of assuming pensions' assets and obligations when a sponsor failed without enough money to fund 100% of the liability."<BR><BR>The UK industry expected that the arrival of the PPF would mean the end of private buyout providers - seemingly not: "... the UK buyout market, rather than shrinking or even disappearing, surged. Compared to the £1-2 billion in annual transactional volume that marked the pre-Pensions Act era, the UK market was £8 billion in 2008."<BR><BR>The report aims to understand why this happened and whether there might be lessons in the UK's experience for the US. The authors talked on a confidential basis to "key stakeholders and decision-makers" in New York, Washington and London, gathering "...observations that underpin this paper's analysis...."<BR><BR>"First, this paper showed that solvent firms, driven by the added burdens created by the 2004 Pensions Act and new accounting rules in 2005, became increasingly interested in offloading their liability. Seeing this as a potential gold rush, new mono-line insurance companies designed exclusively for buyouts flooded the market with supply. Consequently, the price of buyouts came down dramatically, making plan sponsors all the more interested in getting rid of the liability."<BR><BR>The UK buy-out market is divided between the "insured" (where life insurance companies 'purchase' the schemes' DB obligations) and the "non-insured" where the obligations are passed, for a fee, to an institution that is not an insurance company. Apparently, the latter caused controversy as the buyers of the obligations were outside the regulatory controls under which the DB scheme's operated (unlike the insured variety). The main reason for the initial popularity of the non-insured variety seems to have been speed; they could be organised quickly once the sponsoring employer had made the decision.<BR><BR>The controversy caused trustees to avoid the non-insured market in 2008 but the possibility remains.<BR><BR>"The paper found the outlook for solvent buyouts to be mixed. Beyond the few transactions in 2007, the non-insured buyout market appears to be stillborn. However, the experimentation and innovation within the buyout market has continued apace, allowing for ongoing growth in insured buyouts. Indeed, phased buyouts, bulk transfers, partial-buyouts and especially buy-ins are all bespoke insured buyouts available to plan sponsors that help to circumvent the original insured limitations that led to the non-insured experiments. As such, while current market conditions are not favorable, the long-term prospects for insured buyouts are quite good. The increasing burden of the DB pension plan for plan sponsors seems to assure this market's ongoing vibrancy."<BR><BR>DB schemes have become more difficult to manage on a number of fronts (more burdensome reporting requirements, cost, investment returns) so the experience in the US of reducing numbers (see <A href="http://www.pensionreforms.com/Preview.aspx?339">here</A>) is reflected in the UK. <BR><BR>"In a sense, the rise of solvent buyouts is a direct response to the increasingly burdensome nature of DB pensions. So while US policymakers perceive buyouts to be a threat to the sustainability of DB pensions, these transactions are perhaps better viewed as an outgrowth of this larger problem."<BR><BR>The UK authorities seemingly see the solvent buyout market as a natural phenomenon whereas the US has a different view:<BR>"In the US, policymakers remain wedded to the idea that DB pensions are salvageable, which narrows their appreciation of the utility of buyouts. However, the future prospects of plan sponsors with legacy DB liabilities are today tied to the health of their pension plan: a volatile, risky and costly obligation managed by individuals external to the firm. Viewed in this light, it is possible to see why solvent buyouts have become so popular in the UK and why US interest in such a market is on the rise." <BR><BR>PensionReforms was struck by one observation about the differences between the two countries:<BR>"Finally, there are clear cultural differences between the two countries, such as the rules-driven approach in the UK and the legalistic approach in the US. As such, drawing implications for the US from the UK experience is difficult."<BR><BR>That seems to PensionReforms to be more of a similarity than a difference. <BR><BR>From the unattributed quotes in the report from Washington's lawmakers, it seems that US authorities want to make it as difficult as possible for employers to get rid of their DB obligations. But they can't really have it both ways. If compliance issues are making the sponsors' lives difficult regulators must not be surprised at sponsors' reactions. Trying to limit solvent buyouts seems, to PensionReforms like shutting the stable door after the horse has bolted; that's if we want to encourage the continuation of DB schemes. PensionReforms is unconvinced about that as a desirable public policy objective. (File size 333KB; 40 pp) 353http://crr.bc.edu/images/stories/Working_Papers/wp_2009-19.pdfPension Buyouts: What Can We Learn From the UK Experience?352In 1998, Taiwanese employees of listed employers had about half their portfolios in their employer's shares. A 2007 report questions the investment rationale of that exposure and offers potential lessons for advocates of privatising social security arrangements.2009-12-07T00:00:002007<STRONG>PensionReforms' summary and comments<BR></STRONG>This 2007 report looks at the investment strategies of a sample of employees who worked for employers that are listed on the Taiwan Stock Exchange (TSE).<BR><BR>"We utilize comprehensive data from Taiwan to show that employees of TSE-listed companies invest about one half of their portfolios in their employers' stocks."<BR><BR>Specifically, that is 47% of their share portfolios (rather than their total portfolios). Taiwanese apparently tend to have more of their household assets invested in shares (24% in 1998) than in bank deposits (12%). PensionReforms notes that this may have changed since. 1998 now seems a long time ago and it will be interesting to understand what might be different today.<BR><BR>Employees who invest in the shares of their employer magnify the risks associated with their employer's failure. Not only is there an occupational risk (loss of job) but there is also an investment risk. The report also identifies a return risk:<BR>"The economic cost of [investing in employer shares] is considerable. Investors on average give up 4.89 percent of raw returns per annum by holding their employers' shares, equal to 39.74 percent of their 1998 salary income."<BR><BR>There seems to be no direct reason for the employees' willingness to take on the additional risk and, as well, give up investment returns:<BR>"Such allegiance to employer stocks cannot be attributed to executive option compensation, [Employee Share Ownership Plans], sponsoring policies by employers to own company stocks, plan designs, or private information. Instead, behavioral biases, such as availability and salience heuristics, inertia, over-confidence, and over-extrapolation are possible reasons behind the phenomenon."<BR><BR>PensionReforms notes that the apparent over-investment in employer shares is less significant because the employees' "portfolios" are a relatively small proportion of total assets (about one quarter).<BR><BR>The data used in the report come from tax filings that are matched to listed employers. For the measured year (1998), there were very few formal share-purchase schemes or share option schemes run by employers so the employer share investments were direct holdings. So, what the data show is only direct investments in the employers' shares compared with other direct investments. Indirect investments (such as pension scheme holdings - apparently uncommon in 1998) or even the entitlement to the Tier 1 pension would not be covered.<BR><BR>The report brands the apparent preference for the employer's shares as "severe under-diversification" and "sub-optimal". It then suggests that this apparently natural preference could undermine moves to privatise state pension arrangements.<BR><BR>"Any attempt to 'privatize' social security must be based on very careful consideration of individual behavioral biases and potential mistakes. Unnecessarily risky investments can result in a loss of security after retirement and impose consequential problems to financial markets and social stability. The lessons from Taiwan clearly stress the need to provide well-diversified alternatives for individuals to invest for their retirement, given their behavioral biases and failure to diversify in their autonomous accounts."<BR><BR>The report concludes with a call for further work on why employees seem to be so inclined before we can discuss ".the best way to help investors avoid the bias." Apparently, the employees' "welfare" should be the main aim of such research.<BR><BR>And then there is the seemingly inevitable need to protect employees against themselves. <BR><BR>"Finally, future research should come up with specific mechanisms that can limit employee's enthusiasm for their employers' stocks. It is worth emphasizing that employees hardly have any information advantage on their employers compared to other investors and investing in other vehicles such as mutual funds should be advocated."<BR><BR>PensionReforms notes that privatising public pensions is seen inherently as a good thing. But seemingly, there can be too much of a good thing. The report cites with approval others' characterisation of the potential downside of savers' making inappropriate decisions as "higher risks and grave consequences". But isn't that the point of markets? The more relevant public policy question here is whether governments should be directly involved in devolving responsibility for a base level of income support and, instead, exposing citizens to those risks? Individual levels of risk should be for individuals, not governments, to decide. (File size 152 KB; 50 pp) 352<BR>http://crr.bc.edu/images/stories/Working_Papers/wp_2007-24.pdfThe Cost of owning Employer Stocks: Lessons from Taiwan351Australia's retirement income system will produce post-retirement replacement rates of 80% plus for home-owning, low income earners. Middle and high earners will be less well off as will those who do not own their homes. Time for them to do more. Really?2009-12-07T00:00:002008<STRONG>PensionReforms' summary and comments</STRONG><BR>Australia has an income- and asset-tested Age Pension at Tier 1 plus compulsory private provision at Tier 2 (the so-called Superannuation Guarantee or SG). Generous tax breaks apply at Tier 2 and Tier 3. They cost about the same as the total amount spent on Tier 1(see <A href="http://www.pensionreforms.com/Preview.aspx?280">here</A>).<BR><BR>The report updates earlier work from 2001 and 2004 by the National Centre for Social and Economic Modeling (NATSEM) and allows for changes to the regulatory regime (the so-called "simplified superannuation") that started on 1 July 2007. These significantly improved the tax subsidies to retirement savings.<BR><BR>It models "..the adequacy of current and alternative superannuation arrangements and choices by looking at the relativities between a household's discretionary income and the costs of a modest but adequate (MBA) standard of living."<BR><BR>For the model, 12 "..selected hypothetical lifetime cases (comprising four family and three income groups) are used, taking into consideration labour force activity, demographics, earnings growth, superannuation accumulation choices, social security, taxation, and housing costs."<BR><BR>For the 12 cases, the report produces ".three measures of income adequacy: a pre-retirement living standards index, a post-retirement living standards index, and the change in living standards (replacement rate)."<BR><BR>PensionReforms notes that these types of projections are very dependent on the assumptions that underpin the calculations and so it is here - and acknowledged by the report. Apart from other things, it ".makes reasonable assumptions about the "most likely" superannuation and lifestyle choices."<BR><BR>Australia's retirement income environment passes the first test - all 12 family types exceed the "modest but adequate" (MBA) living standard in retirement. According to the report, this demonstrates the value of the SG and shows that families will be better off than had they relied on just the income- and asset-tested Tier 1. The changes introduced in 2007 apparently 'improved' things in this regard.<BR><BR>PensionReforms wonders about that conclusion as the counter-factual appears to depend on the families' doing nothing else about retirement saving, in the absence of the SG. That seems a bit of a stretch. Regardless, the news looks good for the lower-paid:<BR>"While low income earners can expect replacement rates of around 80 per cent to almost full replacement, middle income earners will experience falls in living standards of 20 per cent to over 30 per cent and high income earners will be up to 43 per cent worse off in retirement."<BR><BR>Owning a debt-free home by retirement makes a material difference to these numbers because, on average, those who are expected to be renters in retirement will be 17% worse off than home-owners:<BR>"Single renters across all income groups will be faced with a standard of living in retirement only equivalent to the MBA standard."<BR><BR>The report suggests that contributing more to the SG than the minimum 9% employer's SG contribution will, unsurprisingly, improve the replacement rates. But that will, also unsurprisingly, reduce pre-retirement living standards.<BR><BR>"As a comparison, increasing the SG amount to 12 per cent or 15 per cent has a similar impact on living standards in retirement to making 3 per cent or 6 per cent salary sacrifice contributions but without any reduction in pre-retirement living standards."<BR><BR>PensionReforms thinks this is a fairly extraordinary conclusion. It's as though the amount paid by the employer comes from nowhere and has no impact on the other remuneration of employees. But then, if everything is measured in terms of pre-retirement taxable pay (as is the case in the report) then the employer's contribution does seem like a costless (to the employee) increase in remuneration - a seeming "free good". Tax implications aside, that clearly cannot be the case.<BR><BR>"As a guide, to maintain the same level of income in retirement as was enjoyed before retirement, an individual will need to contribute the equivalent of 15 per cent of their after tax income each year of their working life."<BR><BR>The Australian system of public, semi-public (the SG) and private provision tends to encourage males, at least, to retire early (see <A href="http://www.pensionreforms.com/Preview.aspx?296">here</A>). Based on the report's methodology, that will have a significant impact on post-retirement replacement rates:<BR>"Retiring at age 60 will see retirement living standards around 20 per cent lower, on average, than for those retiring at age 65, while retiring at age 55 will see retirement living standards around 35 per cent lower."<BR><BR>PensionReforms wonders about the utility of projections like these. The first reason is that they attempt to deal with a raft of assumptions. Here is the report's own description:<BR>"The model calculates discretionary income over a lifetime by developing a set of income profiles from sample data, and applying provisions for likely circumstances of earnings growth, labour force participation, taxation, housing costs, superannuation, family composition, and so forth. The model tracks the measure of discretionary income relative to a modest but adequate cost of living standard for the hypothetical lifetimes from age 25 years [in 2007] to death."<BR><BR>Here are some of the 'qualifiers' - there is no unemployment over the lifetimes; all current conditions stay unchanged in real terms and half the eventual benefit is used to buy an annuity. And then there are the guesses about future investment returns, inflation and state pensions.<BR><BR>"Adequacy" is measured by comparing just superannuation assets (including the Age Pension) in terms of disposable income at retirement - what the report calls "discretionary income" - that is then compared "with an average measure of different needs over people's lifetimes." In other words, this has nothing to do with what the retired actually spend their money on. It's as though needs are frozen at retirement and in relation to disposable income at that fixed date.<BR><BR>There needs to be some sort of sense test applied to the overall conclusions. The reason the lowest paid are relatively best off ("replacement rates of around 80 per cent to almost full replacement") is the impact of the flat Tier 1 pension. There is no surprise therefore that, as the post-retirement income and asset tests bite, the total retirement incomes of slightly more highly paid households (the "middle income" earners) reduce, relative to pre-retirement pay. But should public policy be concerned that replacement rates for this group are 70-80% of pre-retirement incomes? PensionReforms suggests not. Neither should the expected replacement rates of "high income earners" (at 57%) be any concern; they have the resources to look after themselves and already profit generously from regressive tax concessions.<BR><BR>Given the significance to retirement living standards of debt-free housing that the report identifies, PensionReforms wonders whether the "renters" in the lowest paid group might not be better off using the employer's contributions to buy a home while they are working, rather than worry about saving in a retirement savings scheme. File size 922 KB; 60 pp) 351<BR>http://www.cpaaustralia.com.au/cps/rde/xbcr/SID-3F57FECB-433D9604/cpa/super_right_balance.pdfSuperannuation - the right balance?350Annuities should be a popular investment choice for retirees because they can reduce uncertainty. But, in a voluntary environment, they aren't. Perhaps that's because of the way potential purchasers are asked. Perhaps not.2009-11-26T00:00:002008<STRONG>PensionReforms' summary and comments<BR></STRONG>Life annuities are a good way to run down (decumulate) retirement assets in an orderly way. They also let the annuitant buy 'insurance' against unexpectedly low investment returns and unexpectedly long life. That all means relative certainty of income from retirement until death. Where a 'continuation option' is available, the annuitant can also arrange for that protection to be built into the survivor's annuity.<BR><BR>Often, the tax-favoured nature of pension saving arrangements during the accumulation period means that the retirement benefit must be used to buy an annuity. In the usual EET environment, the tax system collects partial recompense during retirement for the concessions allowed on capital contributions and investment income while saving.<BR><BR>Where annuities are a voluntary option, they aren't very popular. That seems to be the case internationally (see <A href="http://www.pensionreforms.com/Preview.aspx?142">here</A> and <A href="http://www.pensionreforms.com/Preview.aspx?156">here</A>). Part of the reason is on the supply side and is connected with the risks that annuity providers run over the long periods involved in annuities (including expenses). The uncertainties must be priced into the product and that makes them look relatively bad value. Another part is due to the absence in many jurisdictions of appropriate investments to underpin the annuity. <BR><BR>On the demand side, there is also the loss of flexibility that prospective purchasers face in parting with what are usually large sums of money. Most savers might prefer to control the investment strategy, even if they are unskilled. There is also the bequest motive that might influence a retiree to want control of a lump sum. Anyway, annuities are not particularly easy things to understand.<BR><BR>The rest of the reason, according to this report, is the way in which the annuity sale/purchase is presented to the prospective buyer - how the proposition is "framed". It concludes that the apparent aversion to buying annuities is "not a fully rational phenomenon". The report used an online survey of 1,342 individuals carried out in December 2007 to test what really seemed to be happening.<BR><BR>"We hypothesize that framing matters for annuitization decisions: in a consumption frame, annuities are viewed as valuable insurance, whereas in an investment frame, the annuity is a risky asset because the payoff depends on an uncertain date of death."<BR><BR>The report thinks the insurance aspects referred to (against long life and low investment returns) should be emphasised:<BR>"Survey evidence is consistent with our hypothesis that framing matters: the vast majority of individuals prefer an annuity over alternative products when presented in a consumption frame, whereas the majority of individuals prefer non-annuitized products when presented in an investment frame. To the extent that the investment frame is the dominant frame for consumers making financial planning decisions for retirement, this finding may help to explain why so few individuals annuitize."<BR><BR>So why might this be the case? Why don't the sellers of annuities market their proposition with a focus on the protection elements of the transaction rather than the investment?<BR><BR>"We conjecture that the investment frame is the dominant frame in the market and in most younger customers' minds both because it is simpler, due to the focus on nearer-term and impersonal outcomes, and because little is lost by using this frame during the wealth accumulation stage of life."<BR><BR>Apparently, it may be difficult to change the retiree's perspective (from investment to insurance) for several possible reasons:<BR>".resources are required to incorporate additional personalized information and thus convert consumers to a more complex frame; a given firm may not capture the return from raising a customer's interest in particular products in the consumption frame because the converted customer can purchase from another lower-cost seller; the compensation of sales staff (e.g., through commissions) may be oriented to products most consonant with investment frame and the compensation system may involve sales people outside the direct control of a given firm; invoking the consumption frame may undermine demand for the firm's other non-life-contingent products."<BR><BR>The report concludes by suggesting that these possibilities need investigation.<BR><BR>PensionReforms is unconvinced. While the way an annuity product is presented must influence the way prospective buyers behave, we suspect this is likely to be at the margins when consumers are confronted with decisions about their own money (as opposed to the hypothetical situations used in the report's survey). PensionReforms thinks there seem to be more fundamental issues at the heart of this issue. It is undoubtedly the case that most have no real understanding of the relationship between the present value of an income stream and a lump sum so the education/information issue must be addressed. That will probably best come from the government - or a government agency.<BR><BR>Then there is the issue of institutional mistrust that will not have been improved since the report's survey was carried out in December 2007. That is particularly acute for annuities given the long time frames and the relative significance of a single decision at the start of retirement.<BR><BR>Governments have the capacity to help resolve some of the difficulties faced on the supply side of annuities. For example, governments might issue proper inflation-linked bonds because, even if private annuity providers could eliminate unexpected longevity improvements, unexpected inflation is also a risk that only governments can control. Asking them to help pay for that might help private annuity markets to be more efficient. Another possibility is the direct involvement of governments in selling properly priced annuities - governments have potential social objectives that might be resolved in different ways in this difficult part of pensions markets.<BR><BR>PensionReforms suspects that it's time for governments to get involved in helping to broker a resolution of the annuitisation 'puzzle'. They must lead the debate and perhaps, in PensionReform's view, even get directly involved in the outcomes. Governments simply cannot stand back and watch private markets (and consumers) try to cope with all the risks associated with annuities. Apart from anything else, the ultimate risks of long-term, high quality care at the end of a pensioner's life rest with society - that's if we care about looking after those who become unable to look after themselves, financially or physically. And every unintended bequest, while nice for beneficiaries, also signals a market or individual failure.<BR><BR>In summary, PensionReforms suspects that it probably doesn't really matter how the annuity option is framed. It's quite difficult to make a silk purse out of a sow's ear. (File size 72 KB; 11 pp) 350http://www.economics.harvard.edu/faculty/mullainathan/files/Brown_Kling_Mullainathan_Wrobel_AER_20070108.pdfWhy Don't People Insure Late Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle349In 2008, US 401(k) balances fell by an average 24.3%. Average balances increased over the five years to 2008 by 7.2% a year from both returns and contributions. The difference between the median ($US12,655) and the average ($US45,519) shows a skewed distribution.2009-11-26T00:00:002009<STRONG>PensionReforms' summary and comments<BR></STRONG>The EBRI produces a regular summary of statistics on Tier 3 schemes in the US. PensionReforms looked at the 2006 401(k) survey <A href="http://www.pensionreforms.com/Preview.aspx?278">here</A>. This latest report looks at the 2008 data. The survey covers 24 million members employed by 55,000 employers and covering $US1.1 trillion. It apparently "covered 48 percent of the universe of active 401(k) plan participants, 12 percent of plans, and 47 percent of 401(k) plan assets."<BR><BR>It does not include "Individual Retirement Account" data (IRAs). <BR><BR>The report looks at 401(k) balances, allowing for contributions so we cannot see the direct impact of investment returns and perhaps that's not particularly useful given that participants can usually choose their investment strategy.<BR><BR>Across all participants at the end of 2008, the average account balance was $US45,519 (up from $US37,323 in 1996) but the median balance was only $US12,655 (up from $US11,600 in 1996), indicating a considerable skew in balances. In fact, about three quarters of all participants had a balance in 2008 of less than the average amount of all participants. PensionReforms thinks that both the small median balance and the very small difference in nominal values over the 12 years to 2008 (+22% for the average and +9.1% for the median) seem quite remarkable.<BR><BR>However, as the report notes, members with at least five years' membership are probably more interesting:<BR>"Because 401(k) balances can fluctuate with market returns from year to year, meaningful analysis of 401(k) plans must examine how participants' accounts have performed over the long term. Looking at consistent participants in the EBRI/ICI 401(k) database over the five-year period from 2003 to 2008 (which included one of the worst bear markets for stocks since the Great Depression), the study found:<BR>. After rising in 2003 and for the next four consecutive years, the average 401(k) retirement account fell 24.3 percent in 2008.<BR><BR>. The average 401(k) account balance moved up and down with stock market performance, but over the entire five-year time period increased at an average annual growth rate of 7.2 percent, attaining $86,513 at year-end 2008.<BR><BR>. The median (mid-point) 401(k) account balance increased at an average annual growth rate of 11.4 percent over the 2003-2008 period to $43,700 at year-end 2008."<BR><BR>Despite the terrible returns from shares in 2008 (the S&P total return index, for example, fell 37% in the year), by the year-end, 56% on average of 401(k) participants' assets were invested in shares and 41% in fixed interest style investments.<BR><BR>"Across all age groups, more new or recent hires invested their 401(k) assets in balanced funds, including lifecycle funds. At year-end 2008, 36 percent of the account balances of recently hired participants in their 20s were invested in balanced funds, compared with 28 percent in 2007, and about 7 percent in 1998. At year-end 2008, almost 23 percent of the account balances of recently hired participants in their 20s were invested in lifecycle funds, compared with almost 19 percent at year-end 2007."<BR><BR>On average, only 9.7% of balances were in employer stock, down 1percentage point in the 12 months.<BR><BR>Members of 401(k) schemes can borrow money from the scheme:<BR>"In 2008, 18 percent of all 401(k) participants eligible for loans had a loan outstanding against their 401(k) account, the same percentage as at year-end 2007 and year-end 2006. Loans outstanding amounted to 16 percent of the remaining account balance, on average, at year-end 2008; this is similar to the year-end 2002 level." (File size 822 KB; 68 pp) 349<BR>http://www.ebri.org/pdf/briefspdf/EBRI_IB_10-2009_No335_K-Update.pdf401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008348In the US, reduced Defined Benefit coverage will affect the make-up of the baby boomers' retirement incomes. The highest earners will see the biggest falls, particularly younger boomers. From a public policy perspective, that's not necessarily a bad thing.2009-11-26T00:00:002009<STRONG>PensionReforms' summary and comments</STRONG><BR>In the US (and elsewhere) private Defined Benefit, Tier 3 retirement savings schemes are in decline. Defined Contribution schemes are taking their place. In part, that change seems to be driven by changes to the reporting standards for DB schemes in 2006 - see <A href="http://www.pensionreforms.com/Preview.aspx?52">here</A>. But there are other influences at work in the US because the same kind of thing is happening in other countries.<BR><BR>The report records that DB membership among private sector employers in the US fell from 38% of employees to 20% between 1980 and 2008. Over the same period, membership of Defined Contribution schemes (where that is the only scheme) increased from 8% to 31%. Some think that most private sector DB schemes in the US will be first frozen and then terminated.<BR><BR>"This paper uses the Model of Income in the Near Term ["MINT"] to simulate the impact of an accelerated transition from DB to DC pensions on the distribution of retirement income among boomers. A scenario in which employers freeze all remaining private sector DB plans and a third of all state and local plans over the next five years will on balance produce more losers than winners among boomers and reduce their average incomes at age 67."<BR><BR>In fact, the report says that "...the losers greatly outnumber the winners."<BR><BR>PensionReforms notes that this conclusion looks just at the benefits produced by the changed mix of Tier 3 schemes. That there will probably be more losers than winners means that the subsidies paid by employers to Tier 3 schemes may be less; alternatively, direct, immediate remuneration to employees is higher (or a mix of these). In the first case (lower subsidies), employers' profits might be higher and shareholders, perhaps, better off (or consumers if the employers' prices are lower as a consequence); in the second case (higher remuneration), whether employees are in fact worse off depends on what they do with the extra pay. In other words, it depends where public policy considerations 'rule off' the comparison.<BR><BR>Putting a specific estimate on the impact:<BR>"While most boomers will experience modest changes in income, an accelerated decline in DB coverage will reduce incomes by at least 5 percent for about 10 percent of last wave boomers."<BR><BR>The report suggests that, based on its modelling, the impact on eventual benefits will be distributed unevenly:<BR>"Income changes will be largest among higher-income boomers, who have the highest DB coverage rates and projected pension incomes. Furthermore, the numbers of winners and losers and net income changes are much greater for the last wave of boomers (born between 1961 and 1965) than for earlier boomers. Younger boomers are most likely to have their DB pensions frozen with relatively little job tenure and to lose their high accrual years for DB pension wealth, but also to have relatively more years to accumulate DC pension wealth before retirement."<BR><BR>PensionReforms notes that the impact on the younger baby boomers is a function of time to retirement and the increased probability of encountering a frozen DB scheme or no DB scheme at all. The impact on the more highly paid reflects the regressive nature of both the Defined Benefit promises themselves and the value of the tax concessions that go with them.<BR><BR>As the report notes, actual "[i]ndividual outcomes will depend on the magnitude of DB pension losses, participation and contribution rates in the new DC pension plans, and investment returns on retirement account assets."<BR><BR>PensionReforms thinks that, from a public policy perspective, the change from DB to DC is probably a positive move in the long term. It will mean more transparent remuneration arrangements that will be better understood by shareholders, regulators, tax collectors and the employees themselves. It will also reduce the tax breaks attributable to DB schemes that advantaged the higher paid and so were regressive. DC schemes are also regressive (the higher paid can better afford to join and collect the maximum subsidies available) but are likely to be less generous and more open about it. (File size 208 KB; 49 pp) 348http://crr.bc.edu/images/stories/Working_Papers/wp_2009_2.pdfThe Disappearing Defined Benefit Pension and its Potential Impact on the Retirement Incomes of Boomers347US baby boomers have had a big impact on the housing market. Once they start retiring and downsizing, there might be more houses for sale than buyers. That will affect different areas differently, depending on the number of local baby boomers.2009-11-23T00:00:002007<STRONG>PensionReforms' summary and comments<BR></STRONG>The baby boomers have affected all parts of the economy in most developed countries as they were born and then educated, partnered, bought homes, produced children, spent and saved. Now they are reaching retirement age, we must expect them to have an impact on the transition from work, on decumulation, healthcare and housing.<BR><BR>And that, it seems, will be the case for housing in the US. The report looks at what might happen to the housing markets in different states of the US as their residents decide to trade down to smaller houses and then move to their 'final' homes. Who will buy those houses?<BR><BR>"We propose a method for estimating average annual age-specific buying and selling rates, weighting these by population projections to identify states whose growing proportions of seniors may cause an excess of home selling sooner than others. We also analyze the likely supplier responses to diminished demand, and recommend strategies for local planners."<BR><BR>Because most (85%) of house sales involve existing houses, the baby boomers wanting to sell down may outnumber the numbers of potential buyers. Other things held the same, that should turn the long boom in house prices over the last four decades into an equivalent downturn. In the 1990s, age groups under age 60-64 across the whole US were net buyers (more houses were bought than sold). At the later ages, and particularly at the oldest ages (80+) sellers outnumbered buyers by an increasing margin. "On average, 8.8% of persons 80 and older sold homes each year. Those patterns vary across different US states and even within states.<BR><BR>"With proper foresight, planners could mitigate what otherwise could be significant consequences of these projections."<BR><BR>Changing patterns of ownership "...could signal the end of the post-war era for planning, and reverse several longstanding trends, leading decline to exceed gentrification, demand for low-density housing to diminish, and new emphasis on compact development. Such developments call planners to undertake new activities, including actively marketing to retain elderly residents and cultivating new immigrant residents to replace them." <BR><BR>This assumes, of course that patterns of yesterday are repeated tomorrow. That is unlikely to happen as all the players (buyers, sellers, builders, planners) adapt to changing conditions. As the report notes, "In sum, supply will be dominated by the actions of aging homeowners who have little ability to postpone decisions, and homebuilders who cut back as little as possible." PensionReforms notes that the former are likely to be more important than the latter. Although the baby boomers' home equity may, as the report suggests decline that does not necessarily mean "shrinking retirement savings" as the report suggests. If the baby boomer doesn't need to move, the home's value is actually unimportant to the home owner. If there is a need to move, as long as that is within the same market, the replacement home is also likely to be cheaper. Either of those will be more important to the baby boomer's heirs, rather than to the baby boomer.<BR><BR>However, if the baby boomer has to move to a more expensive location or to more expensive accommodation, like sheltered housing, then the falling equity might be important. If the retired baby boomer has borrowed though, that is a different story as net equity can be caught between falling asset values and fixed debt. PensionReforms suggests that there may be more recent information on this now than at the date of the report (December 2007).<BR><BR>It seems to PensionReforms that the markets are probably better able to resolve imbalances in supply and demand than planners. However, the housing world is likely to look a bit different once all the baby boomers have retired. (File size 718 KB; 18 pp) 347<BR>http://www.informaworld.com/smpp/content~content=a789053981~db=all~order=pubdateAging Baby Boomers and the Generational Housing Bubble: Foresight and Mitigation of an Epic Transition346The US Social Security Administration collects information about the aged (65+). The latest (2006 data) looks at all types of income. Median real income has risen over the years - marital status and age are significant qualifiers. Poverty levels have grown slightly in five years.2009-11-23T00:00:002009<P><STRONG>PensionReforms' summary and comments</STRONG><BR>The Social Security Administration in the US is responsible, amongst other things, for looking after government-supplied incomes and benefits to the old. The report gathers data about households led by someone over age 65. This was last done in 2004 and PensionReforms looked at that version <A href="http://www.pensionreforms.com/Preview.aspx?60">here</A>.<BR><BR>There were 27.4 million 'economic units' covered in 2006, up from 26.9 million in the 2004 report. Of these, 11.3 million were couples (41%) and 16.1 million were 'single units' (59%).</P>
<P>Unsurprisingly, "[a]ged units 65 to 69 are the most likely to be married couples (51.7%), while aged units 80 or older are most likely to be nonmarried women (57.8%). The younger age groups also have a greater proportion of minorities than the older cohorts."<BR><BR>"The median income for units aged 65 or older is [US]$23,194, but there are wide differences within the total group. Approximately 15% have an income of under $10,000, and roughly 20% have an income of $50,000 or more." And, the median income falls with age, mainly attributable to the "disproportionate number of nonmarried women in older age groups."<BR><BR>Married couples have a median income nearly 2½ times that of the nonmarried with "white aged units" receiving more than "...Asian aged units by almost one-half and that of black aged units by almost three-fourths."<BR><BR>Over the 44 years to 2006, the real (inflation adjusted) increase in median incomes was 99.6% for married couples and 111.2% for singles. Over a shorter period (39 years to 2006), the "white units" income increased 114.8% while blacks increased 77.5%.<BR><BR>"Nearly 9 out of 10 aged units receive Social Security benefits. Asset income is the next most common source of income, received by more than half of the aged. Two-fifths receive retirement benefits other than Social Security, and nearly one-quarter have earnings. Public assistance and veterans' benefits are each received by less than 4%. Noncash benefits, including food stamps and housing and energy assistance, are received by over 9%."<BR><BR>"In 2006, 89.3% of married couples and 87.9% of nonmarried persons aged 65 or older received Social Security benefits. Social Security was the major source of income (providing at least 50% of total income) for 52% of aged beneficiary couples and 71.8% of aged nonmarried beneficiaries. It was 90% or more of income for 20.4% of aged beneficiary couples and 40.8% of aged nonmarried beneficiaries."<BR><BR>Work-related income is, as expected, associated with the youngest age groups (46.2%) than with the oldest (6.4%).<BR><BR>"In 1962, 69% of units aged 65 or older received Social Security benefits; in 2006, 89% of them did. Most of that increase occurred in the 1960s. Receipt of other pension income, which more than doubled from 1962 to 1992, has decreased slightly since then. The proportion of aged units with asset income, which had been about two-thirds since 1980, has dropped since 1990 and leveled off since 2000. The proportion with earnings has declined since 1971 and has been between 20% and 25% since 1980. The proportion receiving public assistance has also declined and is now about a third of its 1962 level."<BR><BR>The report also looked at the major types of income received:<BR>"Aggregate income for the aged population comes largely from four sources. Social Security accounts for 36.7%, earnings for 27.8%, pensions for 17.9%, and asset income for 14.9%. Only 2.7% comes from other sources."<BR><BR>"The median family income for persons aged 65 or older is $31,744, but there are wide differences within the total group. Approximately 8.2% have family income of under $10,000, and roughly 30.3% have family income of $50,000 or more."<BR><BR>"Median family total income is highest for the youngest cohorts. In addition, in all age groups, women have lower median family total income than men, from $37,000 for woman aged 65 to 69 to $21,600 for women aged 80 or older."<BR><BR>"Median family income of men is nearly one-third higher than it is for women. Asians have the highest median family income, followed by whites, Hispanics, and blacks."<BR><BR>"Social Security was the predominant source of family income for one-fifth of elderly men in beneficiary families and over one-quarter of elderly women in beneficiary families. Social Security accounted for less than half of family income for half of the elderly men in beneficiary families and 42.6% of elderly women in beneficiary families."<BR><BR>"The variations in family income by sex, marital status, and race are reflected in the poverty rates for those subgroups of the aged. Nonmarried persons, blacks, and Hispanics have the highest poverty rates, ranging from 15.6% to 22.7%. An additional 9.8% to 10.3% of nonmarried persons, blacks, and Hispanics have incomes between the poverty line and 125% of the poverty line (the near poor)."<BR><BR>"In keeping with the lower family income of older age groups, those groups generally have higher rates of poverty and near poverty (income between the poverty line and 125% of the poverty line)."<BR><BR>PensionReforms notes that there are not many surprises in these findings. Poverty levels amongst those seemingly worst placed to do anything about it should be a concern - the unmarried, the older and what, in the US are called the "minorities". Since the 2004 report, these have worsened slightly. (File size 940 KB; 36 pp) 346</P>http://www.socialsecurity.gov/policy/docs/chartbooks/income_aged/2006/iac06.pdfIncome of the Aged Chartbook, 2006345When state pensions are based on retirees' work/income experiences, as is the case in the US, we must expect the value of those pensions to vary by working life differences. So it turns out. Whether that should be so is another issue.2009-11-12T00:00:002007<STRONG>PensionReforms' summary and comments</STRONG><BR>All developed countries give some form of state-provided pensions and they are usually a very important part of older people's retirement wealth. They are usually ignored when wealth statistics are gathered.<BR><BR>In the US, the main state-provided pension is at Tier 2. The Tier 1 SSI pension is modest and heavily income/asset tested. Only 11% of US pensioners receive any Tier 1 pension. The Tier 2 pension ("Social Security") is a Defined Benefit pension payable from, currently 65 years 10 months (increasing to 67 by 2027. The formula is based on career average, revalued earnings to a ceiling and also on contribution years. An actuarially reduced pension is available from age 62. The maximum annual pension in 2007 was $US25,392 plus a dependant's allowance of 50% to the wife or husband. Allowances for other dependants are also possible. The maximum annual pension in 2007, including dependants' allowances, was $US44,436 a year.<BR><BR>The pension is tax-free for most. Its significance can be gauged by the proportions of household income that Social Security represents: for two-thirds of households in 2004, this 2007 report states it represented at least half their income; for 34% of households, it represented at least 90% of income (that proportion increases to 50% for black/Hispanic households).<BR><BR>The report looks at the value of Social Security entitlements for a cohort of those turning age 61 (one year away from the earliest entitlement age of 62) over the period 1993-2007.<BR><BR>"It examines the distribution of benefits among (1) several race-ethnic subgroups that include non-Hispanic whites, non-Hispanic blacks, Asians, and Hispanics, (2) the native-born and the foreign-born, (3) worker, spouse, and survivor beneficiaries, and (4) the disabled and nondisabled. Our choices of subgroups are driven by the longstanding interest by policymakers in many of these subgroups as well by the need to address the conflicting or missing empirical evidence with regard to these subgroups."<BR><BR>The report looks at the value of Social Security pensions and how that related to pre-retirement income (the "replacement rate"):<BR>"We rely primarily on actual earnings history data in computing streams of benefits. T he use of observed earnings histories allows us to capture the large variation in these histories, unlike methods that estimate earnings histories on the basis of a single earnings equation."<BR><BR>The results of the analyses are scarcely surprising:<BR>"Some of our results have been reported in the literature. For example, we report that among race ethnic subgroups, because of their higher indexed taxable earnings, whites receive the highest amounts of Social Security wealth and annualized payouts. Taxable earnings replacement rates are the lowest for whites and higher for minority race-ethnic subgroups, because of the progressivity of the Social Security benefit formula. Immigrants of all race-ethnic subgroups receive lower average Social Security wealth and annualized payouts than the native-born primarily because of their lower indexed taxable earnings. <BR><BR>The contingent entitlements for survivors also affect the results:<BR>"When we look at persons by longest-held benefit type, survivor beneficiaries receive the highest amounts of Social Security wealth, because of their much longer lives. In contrast, because of their markedly shorter lives, the disabled, as defined in our paper, receive considerably less in median amounts of Social Security wealth than do the nondisabled."<BR><BR>Other findings included the following:<BR>- "Hispanics have very slow growth in Social Security wealth compared with that of the other race-ethnic subgroups. A key underlying variable is the growth in earnings. Median indexed taxable earnings increases are considerably smaller for Hispanics than for the other three race-ethnic subgroups."<BR><BR>- "For immigrants, the taxable earnings replacement rate is not a very good measure of how effective Social Security is in replacing average career earnings; this is especially so for Asians who have the highest average age of entry into the United States. Age of entry into the country is an important variable. Immigrants who enter before age 23 have benefits similar to those of the native-born."<BR><BR>- "When we consider benefit types, we find that the small subgroup of male spouse-beneficiaries receive substantially lower Social Security wealth than any other male or female benefit-type subgroup. Female survivor beneficiaries, on the other hand, receive significantly higher wealth amounts than any of the seven other benefit-type subgroups. <BR><BR>- ".compared with the other race-ethnic subgroups, a larger share of black beneficiaries receives disability and/or survivor benefits."<BR><BR>Given Social Security's linkages with pay and contribution periods, all this is much as might be expected - the distributional differences of households of working age are echoed in retirement. But PensionReforms wonders whether any of this should be so. It seems appropriate to question whether the state should pay higher pensions to those who, for whatever reason, have worked longer or who have received higher pay. The seemingly obvious answer is that they (and their employers) have paid more. However, perhaps that should also be questioned. One trouble with the US Social Security system is that, if it aims to prevent poverty amongst the old, it seems not to be working. According to the OECD (see <A href="http://www.pensionreforms.com/Preview.aspx?289">here</A>) 34% of 'non-working' households headed by someone of retirement age are in poverty. (File size 252 KB; 71 pp) 345http://www.socialsecurity.gov/policy/docs/workingpapers/wp109.pdfSocial Security as a Retirement Resource for Near-Retirees, by Race and Ethnicity, Nativity, Benefit Type, and Disability Status