"Better Safe than Sorry" - Individual Risk-free Pension Schemes in the European Union - Macroeconomic Benefits, the Mobile Working Citizen's Perspective and Why Nots

Variations between the diverse pension systems in the member states of the European Union hamper labour market mobility, across country borders but also within the countries of the European Union. From a macroeconomic perspective, and in the light of demographic pressure, this paper argues that allowing individual instead of collective pension building would greatly improve labour market flexibility and thus enhance the functioning of the monetary union. I argue that working citizens would benefit, for three reasons, from pension saving in a risk-free savings account. First, citizens would have a clear picture of the accumulation of their own pension savings throughout their working life. Second, they would pay hardly any extra costs and, third, once retired they would not be subject to the whims of government or other pension fund managers. This paper investigates the feasibility of individual pension building under various parameter settings by calculating the pension saved during a working life and the pension dis-saved after retirement. The findings show that there are no reasons why the European Union and individual member states should not allow individual risk-free pension savings accounts. This would have macroeconomic benefits and provide a solid pension provision that can enhance mobility, instead of engaging workers in different mandatory collective pension schemes that exist around in the European Union

Retirement expectations, pension reforms and their impact on private wealth accumulation

We estimate the effect of pension reforms on households' expectations of retirement outcomes and private wealth accumulation decisions exploiting a decade of intense Italian pension reforms as a source of exogenous variation in expected pension wealth. The Survey of Household Income and Wealth, a large random sample of the Italian population, elicits expectations of the age at which workers expect to retire and of the ratio of pension benefits to pre-retirement income between 1989 and 2002. We find that workers have revised expectations in the direction suggested by the reform and that there is substantial offset between private wealth and perceived pension wealth, particularly by workers that are better informed about their pension wealth. Klassifikation: E21, H5

Veterans’ Benefits: Pension Benefit Programs

[Excerpt] The Department of Veterans Affairs (VA) administers pension programs for certain low-income veterans and their surviving spouses and dependent children. This report discusses the Improved Disability Pension, which makes payments to certain low-income veterans, and the Improved Death Pension, which makes payments to certain low-income surviving spouses and dependent children of deceased veterans. To qualify for either program, individuals must have become eligible for payments on or after January 1, 1979. Both pension programs were created by P.L. 95-588, the Veterans and Survivors Pension Improvement Act of 1978. In addition, this report discusses a special pension program for Medal of Honor recipients. This report does not discuss several other pension programs that are administered by the VA, such as the Old Law Disability Pension and the Section 306 Disability Pension, which make payments to low-income veterans, and the Old Law Death Pension and the Section 306 Death Pension, which make payments to low-income surviving spouses and dependent children of veterans; these programs apply only to veterans and their survivors who became entitled to such benefits before 1979. This report also does not discuss pension programs for veterans of specific periods of war before World War I, such as the Civil War, the Indian Wars, and the Spanish-American War. Finally, this report does not address the military retirement system. For information on that system, see CRS Report RL34751, Military Retirement: Background and Recent Developments, by Kristy N. Kamarck

Pension Reform in Japan

This paper aims to establish guidelines for public pension reform in Japan, using a numerical simulation approach. The paper introduces the example of a minimum guaranteed pension in the Swedish pension system and compares this with the basic pension in Japan’s public pension system, with regard to methods of income redistribution through a public pension scheme. Simulation results show that the switch from the basic pension to the guaranteed pension does not always generate favorable results. If we consider a public pension program with the same scale as the current Japanese program, the highest level of social welfare is attained when a public pension system consists of only a basic pension and is financed by a consumption tax.Public pension reform; Swedish pension system; Minimum guaranteed pension; Basic pension; Life-cycle general equilibrium simulation model

The ageing population and the associated challenges of the Slovenian pension system

The article presents an analysis of welfare effects in Slovenia, an analysis of supplementary pension insurance in Slovenia and an analysis of effects of the pension fund deficit on sustainability of Slovenian public finances. Stress was layed upon varying the parameters of the current Slovenian pension system and introducing mandatory supplementary pension insurance in Slovenia. It has been established that while young generations and new generations will lose from the pension reform, even complete implementation of the reform might not be sufficient to compensate unfavourable demographic developments. The volume of supplementary pension saving is insufficient at present in Slovenia to compensate the deterioration of rights from the first pension pillar. Not only is the participation in the (voluntary) second pillar insufficient, but especially the premia are too low. The level of expected deficit of the PAYG-financed state pension fund seems to be worrying, though higher activity level among the elderly would subsequently increase the volume of contributions to the first pension pillar, thus also reducing the state pension fund deficit.general equilibrium models; PAYG; pension system; supplementary pension saving; sustainability of public finances; Slovenia; welfare analysis

Self-selection and risk sharing in a modern world of life-long annuities

Communicating a pension product well is as important as optimising the financial value. In a recent study, we showed that up to 80% of the value of a pension lump sum could be lost if customer communication failed. In this paper, we extend the simple customer interaction of the earlier contribution to the more challenging lifetime annuity case. Using a simple mobile phone device, the pension customer can select the life-long optimal investment strategy within minutes. The financial risk trade-off is presented as a trade-off between the pension paid and the number of years the life-long annuity is guaranteed. The pension payment decreases when investment security increases. The necessary underlying mathematical financial hedging theory is included in the stud

Legal for Life: Why Canadians Need a Lifetime Retirement Saving Limit

Canadian tax rules allow accumulation of retirement savings in “tax assisted” plans, including defined-benefit (DB) pension plans, defined-contribution (DC) pension plans and RRSPs. These plans are intended primarily for workers with “middle class” incomes, who will not receive enough pension income from programs such as Old Age Security (OAS) and the Canada/Quebec Pension Plan (C/QPP). But more than 12 million Canadian workers do not participate in a DB pension. Many will need to save for retirement, and must do so in DC pension plans and RRSPs. In the current environment of low interest rates, an aging population, and increasing longevity, these workers have less time to save for retirement and must save more. But can they?Pension Papers, Canada, defined-benefit (DB) pension plans, defined-contribution (CD) pension plans, RRSPs

The Value and Risk of Defined Contribution Pension Schemes: International Evidence

Using data on historical returns on international financial assets, the paper simulates pension fund and pension replacement ratios, building up frequency distributions of these ratios for individuals saving in a defined contribution pension plan in different countries. These frequency distributions illustrate the risk in the pension replacement ratio faced by an individual who saves in a typical defined contribution pension scheme.Risks, Defined contribution pension schemes, pension replacement ratio.

Regulating private pension funds’ structure, performance and investments: cross-country evidence

A number of countries have introduced individual, privately managed defined-contribution accounts, where the value of the pension benefit will depend on accumulated contributions and investment returns. These schemes expose workers’ future pension benefits to a number of different risks. To try to mitigate these risks, reforming governments have often strictly regulated the pension fund management industry’s structure, performance, and asset allocation. Structural regulations often force workers to choose only one manager and one fund. So, workers are unable to diversify investments across funds, exposing them to aberrant behaviour by fund managers, and preventing portfolio adjustments according to the individual’s age, household characteristics, career profile and attitude to risk. Strict asset-allocation rules and relative performance criteria mean that pension funds often invest and perform almost identically, removing any substantive choice for workers over the allocation of their pension fund’s assets and the portfolio’s risk and returns. Concentration in the pension fund management industry is found to be higher in the new pension systems of Latin America and Eastern Europe than in most OECD countries. Concentration might be because the new pension markets are smaller than in countries with more established funded pension systems, but it could also be because of restrictions on industry structure. In Latin America, asset allocation and performance is nearly identical across pension funds. So-called ‘herding’ behaviour is almost a defining characteristics of these pension regimes. Again, this reflects, at least in part, asset allocation restrictions and strict performance regulation. There is also evidence that pension funds have often under-performed simple portfolios composed of market indices of stocks and bonds. All the rules imposed in the new systems of Latin American and Eastern Europe seem to be more stringent than in the OECD, with one exception: portfolio limits. Some OECD countries have a tighter investment regime than countries such as Argentina, Chile, Colombia, Peru and Poland. But OECD countries tend to have fewer barriers to entry and impose fewer constraints on performance than Latin American and Eastern European countries

Pension Wealth, Age-Wealth Profiles and the Distribution of Net Worth

This study estimates the magnitude of pension wealth and compares pension wealth to net worth for households in the 1983 Survey of Consumer Finance (SCF). The SCF is the first data set to provide detailed information on both household finances and pension characteristics. The pension information is provided by the employer, so that it is much more detailed and likely to be more accurate than the pension data used in previous studies. Pension wealth was estimated under two sets of assumptions. Under the projected earnings approach, mean pension wealth is $98,291, which represents 43 percent of mean net worth for households with pensions. Under the legal method of calculating pension wealth, mean pension wealth is$47,541, which represents 26 percent of mean net worth for households with pensions. Both estimates are much larger than those obtained in earlier studies. The study also examines how estimates of inequality in the wealth distribution change when pension wealth is added to household balance sheets. Using a variety of methods and assumptions, the distribution becomes more equal when the definition of wealth is expanded to include pension assets.