Pension Reforms

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Since 1 May 2009

In 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. more

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.

Mexico 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? more

A 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). more

Zanzibar 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. more

Public '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. more

The 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. more

In 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. more

Public 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. more

Europe'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. more

There 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. more

Employees 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. more

In 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. more

In 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. more

The 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. more

A 2001 report looks at the impact of Australia's compulsory Tier 2 retirement savings scheme on women. The results are predictable - lower pay and interrupted working lives mean lower expected private provision; also greater reliance on the income/asset-tested Tier 1 pension. more

Defined Benefit, Tier 3 schemes in the US were targeted in 2006 by new legislation that aimed to protect members and provide more transparent reporting. It seems the new law is the final straw that signals the demise of DB schemes. Not necessarily a bad thing. more

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.

Huge 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.

Financial 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. more

Surveys 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. more

Auto-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. more

In 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. more

The 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. more

Financial 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. more

US 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. more

Well-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. more

In 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. more

A 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'? more

Australia'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? more

In 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. more

When 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. more

The EU fund management industry needs to step up - better governance and fee disclosure are essential. Better regulation would help, recognising the special place that long term savings vehicles should apparently have. Everyone needs more financial education and better advice. more

In the UK, housing is 40% of households' wealth but 20% of those age 50+ have no housing assets. Some housing wealth might be accessed to help with retirement income but 'equity release' products have an image problem. DIY equity release might be more likely. more

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.

The 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. more

People 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? more

The 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. more

New 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. more

In 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. more

Relative 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. more

The 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. more

The 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. more

In 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. more

Defined 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. more

When 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. more

Annuities 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. more

US 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. more

The way households own assets, like shares and housing is unsurprisingly related to the way they are treated for tax. High marginal rates seem to shift assets from direct to indirect ownership. Inflation seems to decrease direct ownership where marginal rates are high and gains are taxed. more

Compulsory Tier 2 schemes (like Australia's) need thickets of regulations to make everyone do as they are told. Another thicket now seems needed to protect savers from their apparent lack of interest in outcomes. Do employers need to be forced to make choices for them? And so it goes on.... more