International Pension Plans

Finance 43411:30am Section

November 29, 2007Lauren RardinKristina Sewell

Introduction

Old-age pensions– Australia– Italy– Sweden– United Kingdom

Source of potential options for U.S.

Australia-Introduction

Two types of old-age pensions– Traditional social security pension– Mandatory occupational pension

Australia-Occupational Pension

Workers age 17 and over Similar to U.S. 401(k) plans

– Employers contribute 9% of basic wage, subject to A$2,750 limit per qtr. (US$1,978)

– Employees may choose to make tax-deductible contributions

Deductible amount is subject to maximum, but contribution amount is unlimited

Australia-Occupational Pension

Eligibility– Minimum of 55 years old– Permanently retired

Benefit paid– Lump sum equal to contributions plus interest– Taxes and administrative fees deducted

Australia-SS Pension

Funded solely by the government Paid out of the general revenue

Eligibility– Men age 65, Women age 62.5

Qualifying age for women increasing to 65 by 2013

Deferment– Up to 5 years, receive bonus

Australia-SS Pension

Benefit paid– Single person: equivalent of US$8,683/year– Couple: equivalent of US$14,500/year– Bonus for deferment paid as lump sum– Benefits adjusted by price index in March and

September

Italy-Introduction

Similar to US SS program Very complicated due to reforms

Italy-Funding

Employee and Employer contribute– Employee: 8.89% of gross earnings– Employer: 23.81% of gross payroll

No contributions for low paying jobs No cap on earnings that must be paid on, except for

employees entering workforce after 1995

Italy-Eligibility

Category 1– New entrants to workforce after 1995– Workers age 57 with 5 years of contributions

Category 2– Workers with less than 18 years of contributions– Men age 65 and women age 60 with 20 years of

contributions Category 3

– Workers with a minimum of 18 years of contributions by December 1995

– Men age 65 and women age 60 with 15 years of contributions

Italy-Benefit Paid

Category 1– Accrued benefit is multiplied by actuarial coefficient, based on age,

to determine the benefit paid– Retirees forfeit 50-100% of benefit over the minimum wage if they

re-enter the workforce

Category 2– Benefit from contributions after December 1995 calculated

according to Category 1– Benefit from contributions before 1996 based on a percentage of

averaged earnings from last 5-10 years and multiplied by years of contributions

– Earnings are adjusted for inflation

Italy-Benefit Paid Cont.

Category 3– Calculated the same as the contributions before

1996, in Category 2– Given the category requirements, these retirees

will have no contributions that fall into Category 1– Benefit paid is not subject to reduction/penalty

due to re-employment– Benefit paid is adjusted by the cost of living index

Sweden - Introduction

Two part system– Notional Defined Contribution Plan– Premium Pension (Mandatory Individual Accounts)

18.5% payroll tax, US$40,000 ceiling– 16% for Notional Plan– 2.5% for Premium Pension

Guaranteed Pension – retirees age 65+ who receive little or zero earnings related

pension income All pension benefits are taxed a normal earnings rate

Sweden - Notional Plan

Pay-as-you-go system Hybrid Plan

– Hypothetical account balance for each participant– Benefit based on tax contributed, not years

worked– Hypothetical account balance does not reflect

actual funds saved by the government– Similar to cash balance plan

Sweden – Notional Plan

Eligible to receive benefits at age 61 Account balance paid out as an annuity

– Paid over remaining year of participant’s life– Unisex average life expectancy– Benefits adjusted based on wage index– Annual benefit for future retirees will decrease as

life expectancy increases

Sweden - Premium Pension

1995 – Government began collecting money for the future individual accounts– Money held in interest bearing government

account 1998 – Swedish Parliament passed legislation to

implement mandatory individual accounts Premium Pension Agency

– Established to administer the Premium Pension system

Sweden - Premium Pension

Eligible to receive benefits at age 61– Mandatory annuity– PPA is sole provider of annuities– No mandatory withdrawal

May continue to work and receive full or partial premium pension benefits

Benefits of Individual Accounts

Increase national savings Provide greater investment in economy Participants gain investment returns on

contributions Participants have greater flexibility in timing

of benefit payments

Concerns of Individual Accounts

Higher administrative costs– New agency

Choice of investment options– Default investment portfolio

Mass investment could drive down stock prices

Shortfall in payment of current benefits

United Kingdom - Introduction

National Insurance– Basic State Pension (BSP)

Flat benefit based on number of years worked– Second State Pension (S2P)

Accrue benefits based on earnings Option of “contracting out” – can choose to contribute to

private plan instead– Old Persons Pension

Age 80+ Receive less than 60% of full BSP

– Pension Credit Guarantees an minimum level of benefit

Currently undergoing major reforms

United Kingdom - Contributions

Employees – Contribute 11% of earnings between £97 and £645 per week

(approx. US$200.81 – US$1,335 per week)*– 1% of earnings above £645 (US$1,335) per week

Employers– Contribute 12.8% of EE earnings in excess of £97 per week

15% of total contributions goes to fund social medical care

Employees who choose to “contract out” of S2P– Employer and Employee pay lower payroll taxes

*Current GBP to USD exchange rate from www.xe.com

United Kingdom - Eligibility

Basic State Pension (BSP)– Full benefit = £84.35 per week (US$174.62)– Eligibility

Men – age 65 Women – age 60 (gradual increase to 65 between 2010 and 2020)

– Must contribute for 90% of years in working life to receive full benefit Men – typically 44 years Women – typically 39 years

– No early benefits– 10.4% increase in annual benefit for each year of deferral

Second State Pension (S2P)– Benefits derived from employee’s average earnings– Adjusted for price increases

United Kingdom - Reforms

Begin taking effect in 2010 Individual accounts for low to middle income

employees (2012) Fairer to women Overall more generous Reduce number of required years of contribution to

30 for men and women BSP will be indexed to earnings, not prices Retirement age will gradually increase to age 68 for

men and women between 2024 and 2046

Conclusion - Highlights

Australia– 100% funded by general tax revenue

Italy– Benefits based on earnings, age, and years contributed into

system Sweden

– Mandatory Individual Accounts– Reduce “pay-as-you-go” nature– Hybrid Plan

United Kingdom– Major Reforms to make plan MORE generous!– Individual accounts

Conclusion – United States

United States needs to act!– Increase taxes– Decrease benefits– Reallocate funds

U.S. should evaluate Social Security systems in other countries

Q&A

Questions?

References

"Australia Pension Plan PDF." Pension Rights Center. 2004. Pension Rights Center. 23 Oct. 2007 <http://www.ssa.gov/policy/docs/progdesc/ssptw/2004-2005/asia/australia.pdf>.

Department for Work and Pensions, (2007). Pensions Reform. Retrieved November 14, 2007, from DWP Web site: http://www.dwp.gov.uk/pensionsreform/

"Italy Pension Plan PDF." Pension Rights Center. 2004. Pension Rights Center. 23 Oct. 2007 <http://www.ssa.gov/policy/docs/progdesc/ssptw/2006-2007/europe/italy.pdf>.

Mitchell, Daniel J., Goran Normann (2000, June 29). Pension Reform in Sweden: Lessons for American Policymakers. Retrieved November 8, 2007, from The Heritage Foundation Web site: http://www.heritage.org/Research/SocialSecurity/bg1381es.cfm

“Sweden Pension Plan PDF.” Pension Rights Center. 2004. Pension Rights Center. Retrieved November 14, 2007, Web site: http://www.ssa.gov/policy/docs/progdesc/ssptw/2006-2007/europe/sweden.pdf

The Pension Service, Additional State Pension. Retrieved November 14, 2007, from The Pension Service Web site: http://www.thepensionservice.gov.uk/atoz/atozdetailed/addstatepen.asp#what

Turner, John (2003). Individual Accounts: Lessons from Sweden. Social Security Reform, Retrieved November 8, 2007, from http://assets.aarp.org/rgcenter/econ/ib60_swe_iap.pdf

“United Kingdom Pension Plan PDF.” Pension Rights Center. 2004. Pension Rights Center. Retrieved November 14, 2007, Web site: http://www.ssa.gov/policy/docs/progdesc/ssptw/2006-2007/europe/unitedkingdom.pdf