comparison on china, chile, canada and the u.s
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TRANSCRIPT
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COMPARISON ON CHINA, CHILE, CANADA AND THE U.S.
FIN434
SYDNEY DUDEK
YING WU
Retirement Security
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Agenda
Introduction Chinese Employer Annuity Plan Chilean Pension SystemCanadian Pension PlanQuestionnaire
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Motives for Comparison
The problem of U.S. retirement benefit system
What we can learn from other countries?
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China Employer Annuity Plan
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Retirement Benefits in China
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Retirement Ages
U.S. China Trend
Male 67 60 60
Female 67 55 60
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Outlook
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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
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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
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Assets Allocation
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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:
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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
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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
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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
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Chile Pension System
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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Canada Pension Plan
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Canada’s Timeline
1927:
National Old Age Security Program
1966:
Canada Pension
Plan (CPP)
created
1997:
Major reform to
CCP
Currently:
Well funded
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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
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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
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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
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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
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Eligibility
Anyone who has made 1 contribution and is over the age of 65
Early Retirement: Age 60 with reduced benefit
Disability/Survivor***
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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
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CPP Investment Board
57.5% Equity27.8% Fixed Income14.7% Inflation-sensitive AssetsTOTAL ASSETS= $108.9 Billion
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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
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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.