Pension Reforms

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Australia has looked at its retirement income system. Three “pillars”, supported by tax breaks are good but can be “improved”. The State Pension Age should go to 67 and the means test simplified. Australians need more, better information to help them make saving decisions. more

The OECD thinks that pension assets had fallen by about $US5.4 trillion (20%) by the end of 2008. It looks at how countries have reacted to this. Some changes are a good idea anyway but pension assets seem somehow special. Besides which, there is the other $21.6 trillion. more

The World Bank’s From Red to Gray looks at Eastern Europe’s rapid ageing. Chapter 2 is about the impact of demographic change on labour markets. In short, labour participation rates are generally too low, mainly from the early exit of older workers - not good news for them or for pensioners. more

International comparisons of pensions – public or private – are fraught with difficulties. The OECD has published a first Pensions at a Glance for the Asia/Pacific region. Necessary constraints in the comparison affect the robustness of the results. more

In Australia, financial incentives encourage men’s early retirement but not so much women’s. For them, health and family seem more important influences. The financial incentives strengthen after State Pension Age. Shifting that now might not be effective. more

The private Defined Benefit scheme is a threatened species. The global economic meltdown will not have improved its survival. In the UK, a more immediate threat is the 2012 arrival of Personal Accounts. DB schemes will change but how? more

The World Bank has studied the implications of Eastern Europe’s rapid ageing. Each chapter of the book is separately downloadable and will be separately reviewed. Chapter 1 examines the demographics – later chapters cover labour markets, savings, pensions, healthcare and education. more

In former times, having more children usually meant increased financial security in old age. That still seems to apply in less developed countries. Better pension systems and more developed capital markets have seemingly undermined this relationship in developed countries. But is this simply correlation rather than causation? more

It seems that too many Canadians are under-saving for retirement despite significant government involvement at Tiers 1, 2 and 3. The proposed answer is a “Canada Supplementary Pension Plan” modelled on the UK’s “Personal Accounts”. more

“Social investing” sounds like a good idea – that is, until we have to know precisely what it means. Even if we can know that, is it always a ‘good thing’? Not necessarily. Should matters be left to governments rather than trustees? Yes, certainly in the US. more

Here is what US 401(k) plans looked like in 2006, before the global economic meltdown. The median balance was $US66,650, about two-thirds of which was in shares (unchanged for about 11 years). The last two years’ events will have changed everything. more

Behavioural economics seems to offer guidance leading only to winners without losers but the mistakes of proxy decision-makers replace those of decision-makers. The further proxies are from the decisions, the larger those mistakes are likely to be. more

How well are US households saving for retirement? Mostly well enough according to a report that uses lifetime (rather than current) incomes as the measure. Only 25% of households (at the bottom end) are saving less than a model predicts they should. more

Samoa’s existing social security arrangements are reviewed in detail by the International Labour Organisation. A “sourcebook” gives data on all aspects of what happens now and policy options based on the ‘gaps’ identified. The universal Tier 1 pension gets a tick. more

In the US, younger and older consumers make mistakes about the use of financial services that mean they end up paying more than they need to. Financial sophistication tends to improve to middle age and then decline. more

Sri Lanka can afford a universal pension despite its relative poverty and undeveloped financial framework. The State Pension Age and annual pension are the key variables. The same logic applies to rich and poor countries alike. more

Behavioural economics may help to explain why people behave as they do. It may also help employers and suppliers frame employees’/consumers’ choices. Moving choice into the framing of public policy is another step. more

US Social Security delivers lower income earners higher benefits, relative to income. That’s the theory. In practice, many low earners receive low replacement rates. A flat dollar pension (plus a Tier 2 top-up) would more effectively direct protection where it is needed. more

All developed countries give concessionary tax treatment to retirement savings. In some cases, like Australia, the concessions’ cost is very large but at least Australia counts it - most don’t. Do the recipients of this middle class welfare need it? Might there be a better way of organising it? more

Some think that encouraging older workers to retire improves opportunities for the young. Not so – older retirements are unconnected with employment rates of the young. In fact it seems to be the other way round. More older workers seems to mean more opportunities for the young. more

In the US, micro-economic measures of wealth have diverged in recent years from macro-economic measures of saving. There seem to be signs of greater decumulation at older ages but ‘saving’ and wealth seem less connected now than they were. more

In Canada, the investment behaviour of Tier 3 schemes has changed over the 15 years to 2006 – more foreign investments and fewer local bonds; more trading gains on shares than dividends; increased investment in private equity and closer attention to corporate governance issues. more

Governments make rules, some of them very intricate, about the assets that retirement saving schemes can buy. The OECD summarises the rules in its member countries (and some others). The rules presumably try variously to protect the government, scheme managers and members. The ‘why?’ isn’t analysed. more

Retirement income systems should aim to eliminate poverty amongst the old. Amongst the rich countries, the OECD finds that poverty levels can be very high for those “of retirement age”. Poverty levels may not be correlated with the amount of a country’s “social spending”. The data need careful handling. more

Australia’s compulsory Tier 2 scheme is actuarially “fairer” than its PAYG Tier 1 pension. Making citizens pay for their own pensions reduces taxes on capital so should improve growth but recent tax changes might lower participation rates. Changes seem needed. more

Singapore’s Central Provident Fund is one of the largest, oldest compulsory Tier 2 schemes. Until 1993, nearly all the invested money was lent to the government on favourable terms. Now, savers can choose to put the money into unit trusts that cost more than they should. more

Australia is one of the few countries to count the cost of tax incentives for retirement saving. It’s now 20% of all tax revenue and totals 92% of the total amount spent on the Tier 1 “Age Pension”. The concession is very regressive and almost demands reform. more

Risk-based supervision of pension schemes is the rule in a limited number of countries. The challenges faced by four countries (South Africa, Kenya, Croatia, Germany and the UK) offer lessons to others. more

Chile’s 1981 pension reform created individual accounts for its compulsory Tier 2. A 2008 reform increases the generosity of Tier 1 pensions, but was the reform useful or necessary? Probably both. more

Vanuatu is another of the five Pacific micro-states looked at by the ILO from a social security perspective. It is probably the poorest with either no or low levels of formal social protection. It faces large challenges with few options. more

When financial service providers design saving schemes, it should not be surprising if higher cost options predominate among choices made available to savers. So it seems with US 401(k) schemes. As well, savers might not know what’s good for them. more

Much discussion about pension reform is based on analytical errors, tunnel vision, inadequate use of models and improper analysis of economic principles. Many claims for reform simply won’t be realised. There is no single, catch-all solution – a ‘first best’ approach doesn’t and won’t work. more

Projections made in the US to 2040 seem to indicate a greater disparity in total retirement wealth (public and private provision together) than in the early 2000s. Not much real change at the bottom but a lot at the top, due mainly to rising 401(k) wealth.
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In Italy, it seems that the previously falling birth rate was caused by high pensions. Now, those who have lower expected pensions have higher fertility. Children seem to be seen again as “old-age security” for those who can’t save ‘enough’. Is this causation or correlation? more

Most savers for retirement choose (or are required to use) pooled saving products. Legalistic disclosure regimes impose real barriers to understanding, especially on fees. A six-country review shows they are rarely clear, mostly complex and often misleading. Pity the poor saver. more

The US is endlessly fascinated about when its Social Security system for Tier 2 pensions will run out of money. The government now says it will happen in 2049. One of the problems with these numbers is that they won’t happen. Social Security ‘contributions’ are just another tax. Tax changes; benefits change. more

The restructuring of state-owned enterprises in China in the late 1990s saw sharp declines in the employment of urban residents. Early retirement and the exit of older workers (mainly women) were the main contributors. Generous early retirement pensions encouraged the downsizing. It seems they might now be returning. more

In Latin America, where Tier 2 DC schemes are supposedly taking the retirement saving risks private, governments don’t let members make the investment decisions. What will probably be one of the saver’s largest assets can’t reflect their preferences. more

Over the last 25 years, the focus of US retirement saving has shifted from Defined Benefit to Defined Contribution schemes. Before the global economic crisis, total pension wealth (including Social Security) was projected to double over 40 years and the increase will affect DC schemes most. more

A cross-country comparison of the health status and expectancies of older Europeans showed more variation in health than mortality. A healthy old age should be desirable in itself but becomes an important objective if we want older people to work longer. more

Poorer people in the US may behave in the same idiosyncratic way as richer. The trouble is that the poorer have less room to move. Their ‘mistakes’ seem to matter more so ‘aggressive’ marketing tactics may do them greater harm. What might this mean for public policy? more

US savers who can choose their investment strategy in their 401(k) plans seemingly make some serious mistakes that cost them real money. A study of nearly 3 million accounts puts the cost (lost returns) at between 0.6% and 3.5% a year. But that was before the 2008/09 meltdown. more

An unusual circumstance allowed a Tanzanian experiment on the impact of a low level, income-tested pension in an HIV and AIDS-affected community. The value of the difference the small regular amount made to the recipients seemed to significantly exceed its cost. more

Recent pension reforms in Austria have reduced benefits so that by 2050, pensions will cost ‘only’ 12.2% of GDP. Modelling suggests that Austria’s GDP will be boosted both by encouraging the older to work longer and by reducing the tax burden – but not by enough. more

In theory, people decide rationally how much to save based on individual trade-offs between immediate and deferred consumption. However, the way the decision is presented (“framing”) seems to affect the decisions of US savers. Perhaps so. more

A ‘fallacy of composition’ says that what’s good for one person isn’t necessary good for a group. So it is with saving: that’s because $1,000 saved is $1,000 not spent. Saving might raise the saver’s wealth but not necessarily the country’s. Spending may be more important than saving. more

World share markets lost $US30 trillion in a year – that’s about half their value. Savers around the world have been punished heavily. How did it start? US housing, mortgage finance, rating agencies along with poor regulation and information all share the blame. Lessons must be learned. more

If governments regulate pension providers, telling them about their responsibilities and how they might implement those more effectively seems sensible. So it turns out – but an international study shows not many regulators are required to educate providers. more

In the US, the rules governing pre-funding levels in Defined Benefit schemes changed in 2006. After the events of 2008, surpluses may not be the issue they once were but, given the tougher rules, is the tax treatment of ‘reversions’ to employers fair? Probably not. more