PENSIONS AND SOCIAL SECURITY IN AMERICA

Transcription

1 PENSIONS AND SOCIAL SECURITY IN AMERICA Comparative International Pension Systems CLS Course SS5 Fall 2015 November 4, 2015 BERNARD HANDEL, JD, CPA, CEBS, DHL

2 BERNARD HANDEL JD, CEBS, DHL Bernard Handel, retired CPA and Attorney, served as President and CEO of the Handel Group, an actuarial and consulting firm, for over 40 years, He served on many professional committees and boards, wrote four published books and hundreds of articles and lectured nationally on employee benefit issues. His government service included the presidency of the Hudson Valley Health Systems Agency, fourteen years tenure on the NY State Hospital Review and Planning Council, and chair of the Dutchess County Empire Zone Human Resources Committee. His community participation includes chair and life trustee of Vassar Brothers Hospital Medical Center, chair of the Dutchess Community College Foundation, past Rotary Club president, a founding director of the World Affairs Council, and service as board member and officer of many nonprofit organizations. With his wife Shirley, he is a trustee and director of the Handel Foundation which has established endowed professor chairs at several colleges and distributed substantial sums annually to charitable organizations. His biography has been included in Who s Who In America for over 40 years.

3 EVALUATING INTERNATIONAL PENSION SYTEMS Quality of worldwide plans varies greatlyhow evaluate? Melbourne Mercer Global Pension Index is Gold Standard Includes about 55% of world population All Advanced industrial nations Perhaps slightly too generous for Australia and US?

4 Melbourne Mercer Global Pension Index Index is composite of Weighted Average of Three Sub-Indices Adequacy of Benefits Integrity of Plans Sustainability of Plans Adequacy Sub-Index - 40% Coverage of poor and median income earners Efficacy of system National household savings and home ownership Integrity Sub-index - 25% Governance, communication, costs, regulation Protection of Plans Quality and Scope of Private Sector Plans Sustainability Sub-index - 35% Level of coverage of private plans Level of pension assets compared with GDP and liabilities Demographic projections

5 PENSION SYSTEMS RANKED BY MELBOURNE MERCER INDEX Indices Affected By Increasing Worldwide Pressures Rising Life Expectancies and improved health Governmental Debt Uncertain economic condition and inflation Shift toward Defined Contribution Plans

6 RANKING OF NATIONAL PENSION SYSTEMS Ranking is controversial Variance in Social, Cultural, Political, Historical Circumstances Based on 2014 RANKINGS See Table in following slides

7 RELATIONSHIP OF RETIREMENT PLAN EFFICACY TO QUALITY OF LIFE Place of Birth and Residence Key to Quality Factors in Measuring Quality of Life GDP per Capita, Life Expectancy at birth, Family life, Divorce rates, political freedom, job security, climate, personal, physical security, crime, terrorism, homicide rates, gender equality, community life, corruption rate in government Retirement and Tax Policy Tax Policy -- personal and business Retirement Financing Policy (self-fund and/or privatization) Defer -- Kick the can Generational self-pay Pay as you Go

8 COMPARISON OF RANKINGS PENSION SYSTEMS TO QUALITY OF LIFE Country Pension Ranking Quality of life Ranking Denmark 1 5 Netherlands 2 8 Australia 3 2 Switzerland 4 1 Sweden 5 4 Canada 6 9 Singapore 7 21 Chile 8 23 United Kingdom 9 27 Germany Quality based on 2013 The Economist where to be born Index

9 COMPARISON OF RANKINGS PENSION SYSTEMS TO QUALITY OF LIFE Country Pension Ranking Quality of life Ranking USA = tie Poland France Brazil Mexico China Japan South Korea India Indonesia Note Countries with High QL Rankings, but not in top 20 Pension Ranking (Norway 3, Italy 6, New Zealand 7, Honk Kong 10, Finland 11,Ireland 12, Israel 20 and Russia 72)

10 REVIEW OF NATIONAL PLANS Common Characteristics of Best National Plans Generally, Three Pillar based Basic Occupational Employer Pension Individual Savings and Personal Assets) 1. Basic State Plan (In US Social Security ) Funded by Employee-Employer Contributions or general Tax Revenues Benefit based on reported earnings and service, or years of residence In some countries, supported by Supplemental Benefits for persons with small pensions or special needs Basic pensions might be means tested

11 REVIEW OF NATIONAL PLANS 2. Occupational Employer Sponsored Plan Voluntary by Employer, Negotiated, Mandatory in some countries Industry-wide plans Generally DB in past, tending to DC 3. Personal Savings and Assets 4. A Fourth Pillar in Some Countriesvoluntary or mandatory employer defined contribution plans

12 INDIVIDUAL NATIONAL SYSTEMS # 1 DENMARK Basic Public Pension- funded by tax revenues-means tested with supplement for people with low pensions or needs Requires 40 years of residence and work for full pension, pro-rata for less total years Occupational Employer Sponsored Pension- Mandatory for employers In industry - wide plans (large majority) Voluntary Employer Sponsored Savings and DC Plans NRA , increasing to 67 by 2027-indexed Requires large contributions by employees, capped but large employer contributions Many Industry- wide plans, diminishing number of individual plans Governmental regulation - excellent Large use of Insurance Companies and banks to provide benefits Overwhelming majority of Employer Plans are DC

13 INDIVIDUAL NATIONAL SYSTEMS # 1 DENMARK (continued) Problems and Solutions: High cost of early retirement-now 5 years before NRA, changing to 3 years Indexing of retirement age, rise in life expectancy will raise years of work service requirement and NRA Economic Depression and Financial Results since 2008 have created some funding problems

14 THE NETHERLANDS # 2 By MMGPI, 1 by many others Features -- 90% of workers receive 70% of lifetime average pay on an indexed basis,, NRA rising to 65-67, much early retirement, very high employee 18% contributions, plus capped employer contributions Highly regulated-tight funding, each generation pays full cost of its pension program, no deferral of costs; pensions cut 2% after 2008 economic decline and contribution requirement increased Occupational Employer pension plans are voluntary but employers are stipulated to join industry-wide plans, still mainly DB. Employees contribute 4-8% of pay and employers pay balance of actuarially determined cost. Employers receive bonuses to hire elderly workers; and employees working after NRA receive a substantial increase in pension.

15 THE NETHERLANDS # 2 By MMGPI, 1 by many others Government requirement - $1.05 assets for $1 of estimated liability; low interest discount rate mandated to reflect highest possible liability. Conservative investment policies by banks, insurers under these conditions. The Dutch pension system is the model for the world. All envy it; few try to match or duplicate it. Problem: Older people and retirees objected to 2% reduction in benefits after 2008; younger workers want less regulated funding and investment practices and are willing to take investment risk. A battle of safety and caution versus the an affordable pension system with possible investment gain.

16 AUSTRALIA #3 Three Pillar System 1. Age Pension Public Plan-means tested, financed from tax revenues, NRA 65, supplement for needy with low pensions. 2. Mandatory Occupational Pension- DC plan Government matches Employee contributions up to predetermined cap. 3. Employees can make voluntary contributions to above plan and to insurer and bank operated plans. Well regulated by government

17 SWEDEN #4 Three elements: 1. Income Based Pension the State Plan. Financed by contributions by workers and employers. Retirement at 61 and later 2. Premium Pension- 2 ½% of 16% contributions to the State Plan are directed to individual investment accounts with choice by employees of 5 from 700 mutual funds, or a savings fund. 3. Guaranteed Pension--an additional means tested minimum pension for persons without pension eligibility and 40 years of Swedish residence. Tax supported. Occupational pensions - nationwide collective bargaining `mandates employer participation in industry plans which are switching from DB to DC. Funding: Primarily through insurance contracts.

18 SWITZERLAND #5 Three pillar system-each pays 1/3 of total pension 1. Old Age And Survivor Plan (AHV), partly subsidized by VAT revenue, covers all workers and all persons domiciled in Switzerland. Retirement age from age 61 to 67, full pension at 67, increases after age 67 for delayed retirement. 2. Occupational Pension (BVG) mandatory for employers, minimum benefits are required but most plans exceed requirements, Employers match required employee contributions which are large and vary by age. Self-employed may establish similar plans. Benefits are generally insured and paid as an annuity. Plans are well regulated and the government requires a guaranteed investment return of 2.75% currently. 3. Private Voluntary DC Plans are available in addition.

19 CANADA # 6 Tier 1 Old Age Security (OAS) Program- financed from tax revenues, means- tested flat pension paid to residents of Canada for 40 years, pro=rata for lesser years. A Guaranteed Income Supplement is paid to retirees without other income. Tier 2 - The Canada Pension Plan (CPP) a mandatory contributory social insurance program (Quebec has its own version), NRA 65 with big reductions for early retirement and big increases for delayed retirement ( Retirement at age 70 provides a pension 42% higher than at 65. Tier 3 - Private Voluntary Occupational Pensions. Plans must meet minimum standards and be registered with government. Most plans are DB, generally provide 2% per year of final average earnings in public sector, less in private sector, Many employers are switching to DC plans. Canada also has voluntary individual retirement plans available through banks, mutual funds and insurance companies. Canadian plans are well regulated and conservatively managed.

20 UNITED KINGDOM #7 Earnings related basic Plan - a flat rate pension based on 44 years of contributions, with an additional amount for low and moderate income earners. Will increase to a flat 140 pounds per week Occupational voluntary pensions - rapidly changing from DB to DC. Primarily insured. Industry-wide plans are rare in Britain. Financed by employer and employee contributions. Personal Pension Plans established by individuals. Employers may contribute to such plans which are DC. Stakeholder Pensions. Employers not providing an occupational pension plan are required to establish Stakeholder Plans but neither they or employees must contribute to such DC plans.

21 SIGNIFICANT COMMENTS ABOUT OTHER NATIONAL SYSTEMS CHILE #8 A fully funded system run by private sector pension plans, as reformed during the Pinochet regime in Strictly regulated to verify that all employers comply. Government guarantees payment of stipulated pension levels to participants, including employees of bankrupt companies, and minimum pensions. A surprisingly successful and model plan.

22 SIGNIFICANT COMMENTS ABOUT OTHER NATIONAL SYSTEMS GERMANY #12 A strong pay as you go system financed by employees, employers with a government subsidy. NRA rising to 67 by year Additional occupational pensions resulting from employeremployee negotiation - usually through insurance companies. FRANCE # 14 A public pillar plan financed on a pay as you go basis, plus a mandatory occupational pension system, and personal assets. The basic public plan is financed by tax revenues. Occupational plans are financed by employee and employer contributions. Employers can also establish voluntary savings plans for workers. Insurance companies are used for occupational plans.

23 CHINA # 15 Unique-there are separate pension systems for rural areas and urban areas. The basic pillar plan is divided between a pay as you go scheme and funded individual accounts. The occupational pension tier is voluntary. The basic plan is financed by employer contributions, supplemented by employee contributions. There is a National Social Security Fund which is in accumulation funding stage and does not currently provide benefits -- it is intended for future demographic growth and as a supplement to pension plans. All funds can be invested in various investment vehicles, including bonds, stocks, money market funds, etc. under strict regulation.

24 JAPAN # 17 A flat rate pension and mandatory occupational pension are the public pension pillar. Voluntary employer and employee schemes supplement those basic pensions. Due to the ageing of the population and increasing life expectancy, there is great concern with raising retirement ages and changing to DC plans. A serious challenge is the declining ratio of active workers to retirees.

25 INDIA # 18 A highly fragmented system. A basic plan with limited benefits and a mandatory occupational pension. Voluntary pension plans are available for the self-employed and workers in unorganized sectors. A New Pension System is being developed on a DC basis. The mandatory occupational plans are both DB and DC plans. Employers can opt out of government-administered programs if they establish their own plans with equivalent benefits. A huge problem of an ever growing population, a high percentage of young people and increasing life expectancy.

26 PRESENT AND FUTURE CHALLENGES FOR ALL PLANS Need to raise retirement age to reflect costs of increasing life expectancy. Enhance percentage of workers at older ages to delay retirement Encourage greater personal savings to reduce dependence on retirement plans, Increase number of people under occupational plans, including self-employed and contractors Eliminate or reduce withdrawals and terminations from plans to increase coverage Limit length of paid retirement by encouraging later retirement

27 PRESENT AND FUTURE CHALLENGES FOR ALL PLANS Raise the number of self-employed participating in the system Improve governance and regulation Improve guaranty of payment of pensions to retirees Improve coverage to raise percentage of residents covered by plans Raise benefits for lower income retirees by supplemental programs Overcome political opposition to some or all of these policies, and the economic problems world-wide which mitigate against reforms.

28 HOW US PENSION PLANS MIGHT ADOPT Social Security: SOME INTERNATIONAL IDEAS A means-tested minimum benefit and OAS supplement for retirees with low income and needs Allow homemakers and non workers to self-pay in to SS system Include all salaries ( above $118,500) as taxable for SS purposes and increase tax rate on excess by 1% for both employee and employer Gradually over 10 years raise early retirement age to 64 and NRA to 69 Allow employees to voluntarily pay additional contributions into SS to make up for periods of low income or unemployment Apportion a part of SS contributions into an individual account managed by selected mutual fund managers to improve SS benefits Require that in future all new employees including public workers be included in SS system, but allow present plans excluding them to integrate SS benefits

29 HOW US PENSION PLANS MIGHT ADOPT SOME INTERNATIONAL IDEAS Employer Sponsored Plans: Mandate that every employer with 10 or more employees sponsor a DC plan, even if entirely financed by employee voluntary contributions Allow employers to establish voluntary Roth plans for workers with periodic deductions from wages Establish a PBGC requirement for church and public and municipal DB plans Require that all public and church DB plans meet IRS funding rules, including discount rates, mortality, funding, etc.

30 The Handel Plan to Preserve Disability Benefits Under SS Eliminate disability benefits from SS Require every employer to acquire a long-term disability plan from an accredited insurance company (with a six month or one year waiting period before benefits commence and a requirement for total disability and inability to work at any occupation), cost to be financed by both workers and employers. A relatively low cost insurance product. Self- employed would acquire protection from a pooled insurance program sponsored by US ( like flood insurance) Chances of these concepts being adopted - pretty low now, but the future?

31 Thank you Questions?