AT 751 Group Presentation 11/19/2014
Pension Plan--A Comparison of China and Chile
Yifan ZhaoLu ZhangYun WanNatalia Easton
AT 751 Group Presentation 11/19/2014
Types of Pension Plan
Pay-As-You-Go
Defined Contribution (DC) Most common now in US [401(k) & 403(b)], China and
Chile
Defined Benefit (DB) Unit benefit per year of service Less common
“Hybrid” plans
AT 751 Group Presentation 11/19/2014
Key Characteristics
Pay-as-you-go is highly sensible to deficits due to demographic changes, business cycles, fiscal irresponsibility
DC does not guarantee any level of pension. If the worker does not save enough, his pension will be low. DC are sensible to the quality of the labor market (more labor
market restrictions make people less productive and that lower the future pensions)
The employee bears the investment risk.
Examples: Europe, US, China and Chile fall in some place in between these two systems.
AT 751 Group Presentation 11/19/2014
Key Characteristics
DB pension plan promises to pay you a certain amount of retirement income for life. Predetermined by a formula based on the employee's
earnings history, tenure of service and age
Examples: Some governmental and public entities
AT 751 Group Presentation 11/19/2014
How to evaluate?
Main IndicatorsEfficiency
The replacement rate How much is your pension compared to your average
wage (generally accepted: 70% or more )
Sustainability will the system incur in deficit today or in the future
AT 751 Group Presentation 11/19/2014
Non-Governmental
• Life Expectancy• Retirement Age• Hybrid System
AT 751 Group Presentation 11/19/2014
China’s System – Calculation of Benefit
Must contribute >=15 years
Contribution(0.6 - 3) : Individual: 8% of salary base-> Personal Account Company: 20% of current employee’s salary base->
Pooled Fund
Benefit: Personal Account + Pooled Fund
AT 751 Group Presentation 11/19/2014
China’s System – Calculation of Benefit
Benefit = Personal Account + Pooled Fund
Personal Account (constant):= Amount in account when retired Number of months to receive the pension
Pooled Fund (varying):= (Avg Salary + Salary Base)/2 * N years contribute *1%
AT 751 Group Presentation 11/19/2014
Number of Months to Receive Pension
Age Months Age Months Age Months
40 233 51 190 61 132
41 230 52 185 62 125
42 226 53 180 63 117
43 223 54 175 64 109
44 220 55 170 65 101
45 216 56 164 66 93
46 212 57 158 67 84
47 208 58 152 68 75
48 204 59 145 69 65
49 199 60 139 70 56
50 195
AT 751 Group Presentation 11/19/2014
China’s System – Calculation of Benefit
A man joined the retirement plan at age 25 and retired at age 60. His average salary is 8000/m. The average salary in his province last year is 3500/m. What’s the benefit for him per month this year (assume: i=0)?
Solution:Personal Account = Amount in account when retired Number of months to receive the pension
= (60 - 25)*12 * 8000 * 0.08 = 1933.81 139 months
AT 751 Group Presentation 11/19/2014
China’s System – Calculation of Benefit
A man joined the retirement plan at age 25 and retired at age 60. His average salary is 8000/m. The average salary in his province last year is 3500/m. What’s the benefit for him per month this year (assume: i=0)?
Solution:Pooled Fund = (Avg Salary + Salary Base)/2 * N years contribute *1% = (3500+8000)/2 * (60 - 25) * 0.01 = 2012.5
AT 751 Group Presentation 11/19/2014
China’s System – Calculation of Benefit
A man joined the retirement plan at age 25 and retired at age 60. His average salary is 8000/m. The average salary in his province last year is 3500/m. What’s the benefit for him per month this year (assume: i=0)?
Solution:Total Benefit = Personal Account + Pooled Fund = 1933.81+ 2012.5 = 3946.31
AT 751 Group Presentation 11/19/2014
China’s System – Evaluation
Efficiency: Replacement Rate
Average Pension/m 1516.68 Average Salary/m 3537.67 (Yr 2011)
ILO suggests a replacement rate greater than 55%.Government’s target replacement rate was 58.5%.
42.9% =
AT 751 Group Presentation 11/19/2014
China’s System – Evaluation
Sustainability: Pension Deficit?
Pension deficits would appear in 2030, and the accumulated shortfall would amount to 90% of China’s GDP by 2050. (CASS)
Pay-as-you-go System Aging Population: The proportion of population over 65 is projected to
grow to 24% by 2050. (UN Population Division)
AT 751 Group Presentation 11/19/2014
China’s System – Discussion
Raise Retirement Age Many have advised raising standard retirement ages
by five years for both women and men. MHRSS means to raise the retirement age and will
definitely introduce the plan before 2020.
Increase Return Rate of Pension Fund Bank and government bond -> Other investment
Adjust Civil Servant’s Retirement Plan Increase contribution or decrease benefit
AT 751 Group Presentation 11/19/2014
The Chilean Privatized DC System
Each worker contributes to his own pension by a mandatory saving of 10% of his monthly wage Survivors benefits Tax deductible and unseizable Voluntary contributions up to USD 75,000 (annual) free of
taxesThe contribution management and the annuities
are entirely provided by private institutions 6 AFP and annuity providers companies (Life Ins.)
Each person decides his optimal portfolio mix AFP invests in every asset around the world (5 funds)
Source: Superintendence of Pensions, Chile; Superintendence of Securities and Insurance, Chile; Inland Tax Service, Chile
AT 751 Group Presentation 11/19/2014
Chile achieves higher replacement rates than developed countries…
Source: OECD (2012), OECD Pensions Outlook 2012, OECD Publishing.
AT 751 Group Presentation 11/19/2014
… with no government contribution to its pension system
Source: OECD (2013), Pensions at a Glance 2013: OECD and G20 Indicators, OECD Publishing.
AT 751 Group Presentation 11/19/2014
How the Chilean system works?
A •(100/0)
B
E •(0/100)
C
D
AFP
+10%+10%
65 / 60
PENSION MARKET
AFP Life Ins.Comp.
Fixed/Level Whole Life
Annuity
-Guaranteed period -Deferred period
Varying Annuity
(PR)
- Recalculated each year
Source: Superintendence of Pensions, Chile; Superintendence of Securities and Insurance, Chile.
AT 751 Group Presentation 11/19/2014
Example: Fixed/Level Whole Life Annuity
Suppose a man going to retire now who works and make nonstop monthly contributions from age 25 to age 65. Suppose he has no family group and he want to buy a whole life annuity without any guaranteed or deferred period:
Monthly Interest Rate 0.22%Monthly Pension (USD) 524.83
PENSION MARKET
USD 524.83 = 68.60%USD 765.07
Replacement RateUSDAverage Monthly Wage 765.07Monthly Contribution (10%) 76.51Monthly Return Rate 0.34%Acc. Value at age 65 92,767.80
Source: SCOMP
The Chilean Pension System is privately run with no government involvement 6 AFP and insurance co.
The system achieves high replacement rates for those who contribute as planned Failing to contribute as
planned results in low pensions
Thanks, Mr. Piñera!
José Piñera (Phd in Economics, Harvard;BU Assistant Professor, 1974)
Summary: Chilean DC System
AT 751 Group Presentation 11/19/2014
Bibliography
Superintendence of Pensions, Chile Superintendence of Securities and Insurance, Chile Inland Tax Service, Chile The System and Pensions Level in Chile: Proposals for their Improvements, K.
Schmidt-Hebbel Social Security, Nolan et al. UN Population Division ILO (International Labor Organization) CASS (Chinese Academy of Social Sciences) MHRSS (Ministry of Human Resources and Social Security) Paying for the Gray – The Economist Why Time is Running Out on China’s Social Security System – Yueran Zhang,
TeaLeafNation http://hi.people.com.cn/n/2014/0311/c231190-20748018.htm OECD (2012), OECD Pensions Outlook 2012, OECD Publishing. OECD (2013), Pensions at a Glance 2013: OECD and G20 Indicators, OECD
Publishing. McGill D M, Brown K N, Haley J J, Fundamentals of private pensions(2009)
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