COMPARISON ON CHINA, CHILE, CANADA AND THE U.S. FIN434 SYDNEY DUDEK YING WU Retirement Security

Agenda Introduction Chinese Employer Annuity Plan Chilean Pension System Canadian Pension Plan Questionnaire

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 Three Pillars Government Social Security Benefits Employer Sponsored Pension Plan (DB and DC) Personal savings, annuity and reverse mortgages

Retirement Ages U.S.ChinaTrend Male6760 Female675560

Outlook

Background: Employer Annuity Plan (DC Plan) Established in 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 VoluntaryYes EligibilityVesting scheduleFull time employee MatchingYes InvestmentSelf-directedNot self-directed Tax benefitsDeductionVaries among provinces LoanYesNo EducationAvailableAvailable but not enough Early WithdrawalAvailable with certain circumstance RolloverYes

Assets Allocation

Asset Allocation (Cont.) Case: What happened to Professor Sinow’s DC plan with $100,000 balance? Scenario 1 In 2008, Chinese stock market down 70%, U.S. stock market lost 30%, fixed income up 20% Calculation: Scenario 2 In 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 regulations Lack of tax uniformity The degree of benefits largely depend on the level of position and the distinction of industry Differs in geographic areas Limited investment returns without the flexibility of capital market Technology Less transparency

Chile Pension System

Chile Timeline 1924: PAY-AS-YOU- GO (PAYG) 1970’s: Political turmoil: Liberalization and privatization of economy (Chicago Boys) 1981: Introductio n 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 income Problems:  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: : 10% rate of return 2008: -22.8% rate of return Private company Only function is to manage pensions Must invest according to government regulations Contracts with insurance companies for survivor and disability insurance Offers 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 women Options for account balance at retirement 1) Purchase an annuity 2) Programmed withdrawals 3)Purchase a deferred annuity and receive programmed withdrawals until that annuity date 4) 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 pension Offers 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 Initiative to educate workers about pensions  Workers were investing in risky Fund A because it earned the highest return Set limits on administration fees charged by AFP’s  Increased competition amongst AFP’s Gives women a bond at retirement for each child Mandates 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 pensions Sustainable Reduced the burden of pensions on the fiscal budget Helped develop capital markets in the 80’s Low elderly poverty compared to general population Served 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?  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’s Pay-as-you-go system revenues did not cover liabilities  Not sustainable Projected bankruptcy  Aging population, increased life expectancy, and increase in benefits offered Reform: -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 Pillars 1) National Old Age Security Program -similar to Social Security in the U.S. 2) Private savings -similar to an IRA account 3) 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 wages Disability benefits Retirement benefits Survivor 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, Self employed pay full 9.9% -Pensionable wages: Maximum: $46,300 Minimum: $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% Equity 27.8% Fixed Income 14.7% Inflation-sensitive Assets TOTAL 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.