The Fully-Funded Pension System
Definition of a fully-funded pension system
Successful Example of a Fully-Funded Pension System
Today’s savings are invested in various assets in order to pay future benefits.
Wisconsin
Risks and Feasibility
Solidarity
Advantages of the Fully-Funded Pension System
- No redistribution
- Assumption of no paternalism
- Moral hazard
- False sense of security
- Crowding out of individuals’ savings
- Money is still not “off budget”
- No respect to consumer sovereignty
- Capital stock can disappear
- Feasibility of introduction
- Indifferent to the demographic change
- No free rider problem
- Increase of the capital stock
- Potential for a positive effect on the increase of the retirement rate
http://budgeting.thenest.com/fully-funded-retirement-plan-30188.html
http://www.nber.org/papers/w6149.pdf?new_window=1
http://www.politifact.com/wisconsin/statements/2013/jan/06/scott-walker/walker-says-wisconsins-pension-system-only-one-cou/
The Unfunded
(Pay-As-You-Go)
Pension System
Case Study:
Denmark
Reforms
Three Pillars
“Retirement Reform” adopted by the Parliament in December 2011
High-complexity multi-pillar structure, which includes three pillars:
1. Public Pillar
Two Tiers – PAYG and Funded
2. Occupational retirement schemes
3. Voluntary retirement schemes.
First Pillar
Reform Action
- Increase of the Normal Retirement Age from 65 – 67 (and linking it to the life expectancy) and increasing of the Early retirement age (VERP) from 60 to 62
- Reduction of the years receiving VERP from 5 to 3
- Anticipatory pension – discontinued, but flexi-job maintained.
- Universal Coverage
- Mandatory
- Consists of 2 tires
Second Tier
Expected Effects
First Tier
(residence-based national pension)
- Consist of funded supplementary schemes with varying purposes
- Supplementary Labour Market Pension Fund (ATP) – financed through fixed contributions – 2/3 employer and 1/3 employee
- Deferred retirement (up to 75)
- Women and men receive the same coverage (dealing with the redistributive effect)
- Comprises flat-rated base amount connected to the length of residency and supplementary income-tested pension for the poor
- Normal retirement age 65 M/F
- Residency 3 years for Danish Citizen and 10 for non-Danish citizen (5 before retirement)
- Income-tested pension for the poor
- Early retirement trough anticipatory pensions and Partial Early Retirement
- The reform proposal is expected to increase the employment supply with approx. 5,000 persons in 2020 and 12,500 people in a long-term perspective. (National Social Report 2012 Denmark)
Reform
Redistribution
and Solidarity
Moral Hazard and Risks
Feasibility
- Changing demographics put pressure on the system
- Increased life expectancy created more costs for the pension system
Rate of Return:
- Wage Growth Effect
- Population Growth Effect
- Tax Growth Effect
Between Generations:
- Early Retirement
- Inability or unwillingness to pay the pension contributions
- First generation is the biggest winner
- "Free lunch at the beginning... but no dinner at the end"
- Legacy Debt
Within a Generation:
- Men to Women
- Higher Income to Lower Income
Outline
- Introduction
- The Unfunded Pension System
- The Fully-Funded Pension System
- Case Study: Denmark
- Conclusion
Introduction
Conclusion
- Why Pensions and Objectives
- How Pensions Work
- Aspects of a Pension System
- Risk
- Solidarity
- Moral Hazard
- Defined Benefit or Defined Contribution?
- Externalities and Distributional Consequences
- Inability of unfunded system to protect against all risks
- Impracticality of fully funded system
- Hybrid system proves to be more effective
Why Pensions?
How do Pensions work?
Objectives
- Mitigate against Longevity Risk
- Equalize Length of Working Life
- Protect dependents, widows, children
- Protect against Inflation
- Maintain income link with the working population
- Consumption Smoothing
- Paternalism
- Savings inadequacy
- Market Failures in the Annuities Market
- Financed by a tax on earnings
- Eligibility requirements
- Minimum retirement age to draw benefits
- Early retirement age, full benefits age, delayed retirement age
- Must have paid into system (worked and been taxed) for a certain number of years
- Benefits for spouses and dependents
Works Cited
Distributional Consequences
Aspects of a Pension System
Defined Benefit or Defined Contribution?
- Full defined contribution or some rate of return guarantee?
- Inter-generational
- Gender-based
- Income-based
- Risk
- Solidarity
- Moral Hazard
- http://www.mwpweb.eu/1/144/resources/publication_1459_1.pdf http://ec.europa.eu/social/BlobServlet?docId=7341&langId=en
- http://www.globalpensionindex.com/pdf/melbourne-mercer-global-pension-index-2012-report.pdf
- http://english.sm.dk/international/social_policy_in_denmark/NSR/Documents/National%20Social%20Report%20-%20Denmark.pdf
- http://www.mwpweb.eu/1/144/resources/publication_1459_1.pdf
- http://ec.europa.eu/social/BlobServlet?docId=7341&langId=en
- http://www.imrf.org/pubs/100_percent_funding_goal/100_funding_article.pdf
- http://siteresources.worldbank.org/SOCIALPROTECTION/Resources/SP-Discussion-papers/Pensions-DP/1213.pdf
- http://www.economist.com/blogs/easternapproaches/2010/11/hungarian_pensions
- http://www.oecd.org/daf/fin/private-pensions/50560110.pdf
- http://www.oecd.org/els/public-pensions/47712019.pdf
- http://www.imf.org/external/pubs/nft/op/147/
Pensions