COMPARISON ON CHINA, CHILE, CANADA AND THE U.S.

FIN434

SYDNEY DUDEK

YING WU

Retirement Security

Agenda

Introduction Chinese Employer Annuity Plan Chilean Pension SystemCanadian Pension PlanQuestionnaire

Motives for Comparison

The problem of U.S. retirement benefit system

What we can learn from other countries?

China Employer Annuity Plan

Retirement Benefits in China

Retirement Ages

U.S. China Trend

Male 67 60 60

Female 67 55 60

Outlook

Background: Employer Annuity Plan (DC Plan)

Established in 1996 -As supplement to government pension -As an incentive to attract talents

Participants mostly from established companies or profitable

industries i.e. government-owned enterprises, utility, financial institutions, etc.

Statistics -Amount: $13.3 billion -Employer: 24,000 -Employee: 9,640,000

DC Plan: U.S vs. China

U.S. China

Voluntary Yes Yes

Eligibility Vesting schedule Full time employee

Matching Yes Yes

Investment Self-directed Not self-directed

Tax benefits Deduction Varies among provinces

Loan Yes No

Education Available Available but not enough

Early Withdrawal Available with certain circumstance

Available with certain circumstance

Rollover Yes Yes

Assets Allocation

Asset Allocation (Cont.)

Case: What happened to Professor Sinow’s DC plan with $100,000 balance?

Scenario 1In 2008, Chinese stock market down 70%, U.S.

stock market lost 30%, fixed income up 20%Calculation:

Scenario 2In 2009, Chinese stock market up 20%, U.S. Stock

market gained 20%, Fixed income down 10%Calculation:

Investment: Strengths and Weaknesses

Strengths: Less risks in economic downturn

Weaknesses: Less flexibility HRs have less expertise in investment Too much reliance on money mangers No risk preference for different employees, less

investment options

Challenges: the Development of DC Plan in China

Challenge from employer: Since economic recession -Less employers are willing to establish pension

plan -Existing employers will reduce pension

contribution (stop matching)

Challenge from employee:Not attractive for lack of flexibility

Factors Important for Future Performance

Incomplete protection from laws and regulationsLack of tax uniformityThe degree of benefits largely depend on the level

of position and the distinction of industryDiffers in geographic areasLimited investment returns without the flexibility of

capital marketTechnologyLess transparency

Chile Pension System

Chile Timeline

1924:PAY-AS-YOU-GO (PAYG)

1970’s:

Political turmoil:

Liberalization and privatization of economy (Chicago Boys)

1981:

Introduction of private individual retirement account

Currently: Pension Reform

Pay-as-you-go (PAYG)

Pay as you go social security system created in 1924

Health insurance and retirement incomeProblems:

High payroll taxes (20%) led to avoidance Unfair benefits Growing deficit Increase in the number of users Increase in the number of benefits provided

Individual Retirement Accounts Overview

Workers contribute 10% of monthly wages (max: $2,427)

Workers choose a pension fund management company (AFP)

Workers pick Fund A, B, C, D, or E to invest in

At retirement workers are offered a variety of ways to receive their account balance

Pension Fund Management Company (AFP)

Performance:1981-2007: 10% rate of return

2008: -22.8% rate of returnPrivate companyOnly function is to manage pensionsMust invest according to government regulationsContracts with insurance companies for survivor

and disability insuranceOffers 5 types of funds (A-E)

Funds vary by degree of risk Fund A is most risky (Up to 80% in equities)

Retirement

Retirement age: 65 for men and 60 for womenOptions for account balance at retirement

1) Purchase an annuity2) Programmed withdrawals3)Purchase a deferred annuity and receive programmed withdrawals until that annuity date4) Purchase an annuity with part of the balance and receive programmed withdrawals with remaining balance

Early Retirement/Withdrawals: Allowed if balance exceeds a minimum amount

Provide workers with a minimum rate of return set by government

Government’s Role

Provides reserves to workers if AFP’s performance falls below minimum level Then dissolves the AFP

Means-tested benefits (PASIS) Paid to disabled workers Paid to individuals over 65 who did not qualify for

any other type of pensionOffers guaranteed minimum pension (MPG)

Given to workers who have insufficient funds in their retirement account

Offered to workers with 20 years of contributions Offered to workers who choose to receive

programmed withdrawals but outlived their account balance

Reform Law 20.255

Initiative to educate workers about pensions Workers were investing in risky Fund A because

it earned the highest returnSet limits on administration fees charged by AFP’s

Increased competition amongst AFP’sGives women a bond at retirement for each childMandates coverage for a larger portion of self

employed employees Participation is voluntary for self-employed

Replaced means-tested benefits with Pension Basica Solidaria (BPS) Covers 40% of poorest individuals

Good

Fully funded pensionsSustainableReduced the burden of pensions on the

fiscal budgetHelped develop capital markets in the 80’sLow elderly poverty compared to general

populationServed as an example for social security

reform in ten Latin American countries

Negative Consequences

Expensive transition Deficit predicted to end in 2030

High administrative fees charged by AFP’s (13%)

Most self employed individuals do not participate (93%)

Workers do not understand how the system works

Only 64% on workers contribute on a monthly basis Leads to low account balances at retirement

Key Factors in Future Performance

Will administrative fees decrease?Will workers continue to have the ability to

contribute? Will unemployment increase with 2008 recession? Shift in employment trends towards contract based

work (Increasing the number of self employed)How will the AFP’s earn high rates of return?

1983-2004 unsustainable high rates of return

Canada Pension Plan

Canada’s Timeline

1927:

National Old Age Security Program

1966:

Canada Pension

Plan (CPP)

created

1997:

Major reform to

CCP

Currently:

Well funded

Canada Pension Plan Reform

Problems in the 90’sPay-as-you-go system revenues did not

cover liabilities Not sustainable

Projected bankruptcy Aging population, increased life expectancy,

and increase in benefits offeredReform:

-Slight reduction in benefits offered to retirees

-Contribution increased from 5.6% to 9.9% of wages

-Created CPP Investment Board to manage funds

Retirement in Canada

Three Pillars1) National Old Age Security Program

-similar to Social Security in the U.S.2) Private savings

-similar to an IRA account3) Canada Pension Plan

-mandatory defined pension plan

Canada Pension Plan

Earnings related benefit-hybrid of a fully funded system and pay-as-

you-go system-benefit depends on how long and how much

money contributed-benefit aims to replace 25% of previous

wagesDisability benefitsRetirement benefitsSurvivor benefits

Contributions to CPP

Who contributes?A: Every person over the age of 18 in Canada who earns a salary

How much is contributed?A: 9.9% of pensionable wages

-Split between employee and employer-Max employee 2009 contribution: $2,118.60-Self employed pay full 9.9%-Pensionable wages:

Maximum: $46,300Minimum: $3,500

Eligibility

Anyone who has made 1 contribution and is over the age of 65

Early Retirement: Age 60 with reduced benefit

Disability/Survivor***

CPP Investment Board

Highly innovative, unique private investment company

Only purpose is to invests funds of CPP-Goal: “Maximize returns without undue risk of loss”

Independent from government-contributions to the fund are kept completely separate from public treasury-government has absolutely no access to this fund-experience management reports to an independent board of directors

Board is accountable to the government

Highest level of transparency

CPP Investment Board

57.5% Equity27.8% Fixed Income14.7% Inflation-sensitive AssetsTOTAL ASSETS= $108.9 Billion

CPP Investment Board

• Return on investment– Has earned above average return rates– 2008 recession

• Current Rate (9.9%) will be sustainable for a projected 75 years old

• but future liabilities not completely covered

Questionnaire

Results:

The results of this questionnaire will be sent to Representative Timothy V. Johnson.

The results will provide congress with input from a students perspective.