COMPARISON ON CHINA, CHILE, CANADA AND THE U.S. FIN434  SYDNEY DUDEK YING WU Retirement Security
Agenda <ul><li>Introduction  </li></ul><ul><li>Chinese Employer Annuity Plan  </li></ul><ul><li>Chilean Pension System </l...
Motives for Comparison <ul><li>The problem of U.S. retirement benefit system </li></ul><ul><li>What we can learn from othe...
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) <ul><li>Established in 1996 </li></ul><ul><li>-As supplement to government pen...
DC Plan: U.S vs. China U.S.  China Voluntary Yes Yes Eligibility Vesting schedule Full time employee Matching Yes Yes Inve...
Assets Allocation
Asset Allocation (Cont.) <ul><li>Case: What happened to Professor Sinow’s DC plan with $100,000 balance? </li></ul><ul><li...
Investment: Strengths and Weaknesses  <ul><li>Strengths: </li></ul><ul><li>Less risks in economic downturn </li></ul><ul><...
Challenges: the Development of DC Plan in China <ul><li>Challenge from employer:  </li></ul><ul><li>Since economic recessi...
Factors Important for Future Performance <ul><li>Incomplete protection from laws and regulations </li></ul><ul><li>Lack of...
Chile Pension System
Chile Timeline 1924: PAY-AS-YOU-GO (PAYG) 1970’s: Political turmoil: Liberalization and privatization of economy (Chicago ...
Pay-as-you-go (PAYG) <ul><li>Pay as you go social security system created in 1924  </li></ul><ul><li>Health insurance and ...
Individual Retirement Accounts Overview <ul><li>Workers contribute 10% of monthly wages (max: $2,427) </li></ul><ul><li>Wo...
Pension Fund Management Company (AFP) <ul><li>Performance: </li></ul><ul><li>1981-2007: 10% rate of return </li></ul><ul><...
Retirement <ul><li>Retirement age: 65 for men and 60 for women </li></ul><ul><li>Options for account balance at retirement...
Government’s Role <ul><li>Provides reserves to workers if AFP’s performance falls below minimum level  </li></ul><ul><ul><...
Reform Law 20.255 <ul><li>Initiative to educate workers about pensions </li></ul><ul><ul><li>Workers were investing in ris...
Good <ul><li>Fully funded pensions </li></ul><ul><li>Sustainable </li></ul><ul><li>Reduced the burden of pensions on the f...
Negative Consequences <ul><li>Expensive transition </li></ul><ul><ul><li>Deficit predicted to end in 2030 </li></ul></ul><...
Key Factors in Future Performance <ul><li>Will administrative fees decrease? </li></ul><ul><li>Will workers continue to ha...
Canada Pension Plan
Canada’s Timeline 1927: National Old Age Security Program 1966: Canada Pension Plan (CPP) created 1997: Major reform to CC...
Canada Pension Plan Reform <ul><li>Problems in the 90’s </li></ul><ul><li>Pay-as-you-go system revenues did not cover liab...
Retirement in Canada <ul><li>Three Pillars </li></ul><ul><li>1)  National Old Age Security Program </li></ul><ul><li>-simi...
Canada Pension Plan <ul><li>Earnings related benefit </li></ul><ul><li>-hybrid of a fully funded system and pay-as-you-go ...
Contributions to CPP  <ul><li>Who contributes? </li></ul><ul><li>A: Every person over the age of 18 in Canada who earns a ...
Eligibility <ul><li>Anyone who has made 1 contribution and is over the age of 65 </li></ul><ul><li>Early Retirement: Age 6...
CPP Investment Board <ul><li>Highly innovative, unique private investment company </li></ul><ul><li>Only purpose is to inv...
CPP Investment Board <ul><li>57.5% Equity </li></ul><ul><li>27.8% Fixed Income </li></ul><ul><li>14.7% Inflation-sensitive...
CPP Investment Board <ul><li>Return on investment </li></ul><ul><ul><li>Has earned above average return rates </li></ul></...
Questionnaire <ul><li>Results: </li></ul><ul><li>The results of this questionnaire will be sent to Representative Timothy ...
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COMPARISON ON CHINA, CHILE, CANADA AND THE U.S.

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  • 1970” workers must contribute up to 20% of wages Growing deficit because of inflation and poor management Unfair benefits: rich could retire as early as 40 while p
  • PBS-non contributing basic solidarity pension, will increase to 60% by 2012 Women&apos;s bond: equal to 18 monthly contributions
  • Government paid for the transition through increase in taxes, cutting expenses, sale of government owned firms, and debt instruments….allowed for smooth transition…. Developed capital markets by transferring money from savers to borrowers
  • COMPARISON ON CHINA, CHILE, CANADA AND THE U.S.

    1. 1. COMPARISON ON CHINA, CHILE, CANADA AND THE U.S. FIN434 SYDNEY DUDEK YING WU Retirement Security
    2. 2. Agenda <ul><li>Introduction </li></ul><ul><li>Chinese Employer Annuity Plan </li></ul><ul><li>Chilean Pension System </li></ul><ul><li>Canadian Pension Plan </li></ul><ul><li>Questionnaire </li></ul>
    3. 3. Motives for Comparison <ul><li>The problem of U.S. retirement benefit system </li></ul><ul><li>What we can learn from other countries? </li></ul>
    4. 4. China Employer Annuity Plan
    5. 5. Retirement Benefits in China
    6. 6. Retirement Ages U.S. China Trend Male 67 60 60 Female 67 55 60
    7. 7. Outlook
    8. 8. Background: Employer Annuity Plan (DC Plan) <ul><li>Established in 1996 </li></ul><ul><li>-As supplement to government pension </li></ul><ul><li>-As an incentive to attract talents </li></ul><ul><li>Participants </li></ul><ul><li>mostly from established companies or profitable industries i.e. government-owned enterprises, utility, financial institutions, etc. </li></ul><ul><li>Statistics </li></ul><ul><li>-Amount: $13.3 billion </li></ul><ul><li>-Employer: 24,000 </li></ul><ul><li>-Employee: 9,640,000 </li></ul>
    9. 9. 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
    10. 10. Assets Allocation
    11. 11. Asset Allocation (Cont.) <ul><li>Case: What happened to Professor Sinow’s DC plan with $100,000 balance? </li></ul><ul><li>Scenario 1 </li></ul><ul><li>In 2008, Chinese stock market down 70%, U.S. stock market lost 30%, fixed income up 20% </li></ul><ul><li>Calculation: </li></ul><ul><li>Scenario 2 </li></ul><ul><li>In 2009, Chinese stock market up 20%, U.S. Stock market gained 20%, Fixed income down 10% </li></ul><ul><li>Calculation: </li></ul>
    12. 12. Investment: Strengths and Weaknesses <ul><li>Strengths: </li></ul><ul><li>Less risks in economic downturn </li></ul><ul><li>Weaknesses: </li></ul><ul><li>Less flexibility </li></ul><ul><li>HRs have less expertise in investment </li></ul><ul><li>Too much reliance on money mangers </li></ul><ul><li>No risk preference for different employees, less investment options </li></ul>
    13. 13. Challenges: the Development of DC Plan in China <ul><li>Challenge from employer: </li></ul><ul><li>Since economic recession </li></ul><ul><li>-Less employers are willing to establish pension plan </li></ul><ul><li>-Existing employers will reduce pension contribution (stop matching) </li></ul><ul><li>Challenge from employee: </li></ul><ul><li>Not attractive for lack of flexibility </li></ul>
    14. 14. Factors Important for Future Performance <ul><li>Incomplete protection from laws and regulations </li></ul><ul><li>Lack of tax uniformity </li></ul><ul><li>The degree of benefits largely depend on the level of position and the distinction of industry </li></ul><ul><li>Differs in geographic areas </li></ul><ul><li>Limited investment returns without the flexibility of capital market </li></ul><ul><li>Technology </li></ul><ul><li>Less transparency </li></ul>
    15. 15. Chile Pension System
    16. 16. 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
    17. 17. Pay-as-you-go (PAYG) <ul><li>Pay as you go social security system created in 1924 </li></ul><ul><li>Health insurance and retirement income </li></ul><ul><li>Problems: </li></ul><ul><ul><li>High payroll taxes (20%) led to avoidance </li></ul></ul><ul><ul><li>Unfair benefits </li></ul></ul><ul><ul><li>Growing deficit </li></ul></ul><ul><ul><li>Increase in the number of users </li></ul></ul><ul><ul><li>Increase in the number of benefits provided </li></ul></ul>
    18. 18. Individual Retirement Accounts Overview <ul><li>Workers contribute 10% of monthly wages (max: $2,427) </li></ul><ul><li>Workers choose a pension fund management company (AFP) </li></ul><ul><li>Workers pick Fund A, B, C, D, or E to invest in </li></ul><ul><li>At retirement workers are offered a variety of ways to receive their account balance </li></ul>
    19. 19. Pension Fund Management Company (AFP) <ul><li>Performance: </li></ul><ul><li>1981-2007: 10% rate of return </li></ul><ul><li>2008: -22.8% rate of return </li></ul><ul><li>Private company </li></ul><ul><li>Only function is to manage pensions </li></ul><ul><li>Must invest according to government regulations </li></ul><ul><li>Contracts with insurance companies for survivor and disability insurance </li></ul><ul><li>Offers 5 types of funds (A-E) </li></ul><ul><ul><li>Funds vary by degree of risk </li></ul></ul><ul><ul><li>Fund A is most risky (Up to 80% in equities) </li></ul></ul>
    20. 20. Retirement <ul><li>Retirement age: 65 for men and 60 for women </li></ul><ul><li>Options for account balance at retirement </li></ul><ul><li>1) Purchase an annuity </li></ul><ul><li>2) Programmed withdrawals </li></ul><ul><li>3)Purchase a deferred annuity and receive programmed withdrawals until that annuity date </li></ul><ul><li>4) Purchase an annuity with part of the balance and receive programmed withdrawals with remaining balance </li></ul><ul><li>Early Retirement/Withdrawals: Allowed if balance exceeds a minimum amount </li></ul><ul><li>Provide workers with a minimum rate of return set by government </li></ul>
    21. 21. Government’s Role <ul><li>Provides reserves to workers if AFP’s performance falls below minimum level </li></ul><ul><ul><li>Then dissolves the AFP </li></ul></ul><ul><li>Means-tested benefits (PASIS) </li></ul><ul><ul><li>Paid to disabled workers </li></ul></ul><ul><ul><li>Paid to individuals over 65 who did not qualify for any other type of pension </li></ul></ul><ul><li>Offers guaranteed minimum pension (MPG) </li></ul><ul><ul><li>Given to workers who have insufficient funds in their retirement account </li></ul></ul><ul><ul><li>Offered to workers with 20 years of contributions </li></ul></ul><ul><ul><li>Offered to workers who choose to receive programmed withdrawals but outlived their account balance </li></ul></ul>
    22. 22. Reform Law 20.255 <ul><li>Initiative to educate workers about pensions </li></ul><ul><ul><li>Workers were investing in risky Fund A because it earned the highest return </li></ul></ul><ul><li>Set limits on administration fees charged by AFP’s </li></ul><ul><ul><li>Increased competition amongst AFP’s </li></ul></ul><ul><li>Gives women a bond at retirement for each child </li></ul><ul><li>Mandates coverage for a larger portion of self employed employees </li></ul><ul><ul><li>Participation is voluntary for self-employed </li></ul></ul><ul><li>Replaced means-tested benefits with Pension Basica Solidaria (BPS) </li></ul><ul><ul><li>Covers 40% of poorest individuals </li></ul></ul>
    23. 23. Good <ul><li>Fully funded pensions </li></ul><ul><li>Sustainable </li></ul><ul><li>Reduced the burden of pensions on the fiscal budget </li></ul><ul><li>Helped develop capital markets in the 80’s </li></ul><ul><li>Low elderly poverty compared to general population </li></ul><ul><li>Served as an example for social security reform in ten Latin American countries </li></ul>
    24. 24. Negative Consequences <ul><li>Expensive transition </li></ul><ul><ul><li>Deficit predicted to end in 2030 </li></ul></ul><ul><li>High administrative fees charged by AFP’s (13%) </li></ul><ul><li>Most self employed individuals do not participate (93%) </li></ul><ul><li>Workers do not understand how the system works </li></ul><ul><li>Only 64% on workers contribute on a monthly basis </li></ul><ul><ul><li>Leads to low account balances at retirement </li></ul></ul>
    25. 25. Key Factors in Future Performance <ul><li>Will administrative fees decrease? </li></ul><ul><li>Will workers continue to have the ability to contribute? </li></ul><ul><ul><li>Will unemployment increase with 2008 recession? </li></ul></ul><ul><ul><li>Shift in employment trends towards contract based work (Increasing the number of self employed) </li></ul></ul><ul><li>How will the AFP’s earn high rates of return? </li></ul><ul><ul><li>1983-2004 unsustainable high rates of return </li></ul></ul>
    26. 26. Canada Pension Plan
    27. 27. Canada’s Timeline 1927: National Old Age Security Program 1966: Canada Pension Plan (CPP) created 1997: Major reform to CCP Currently: Well funded
    28. 28. Canada Pension Plan Reform <ul><li>Problems in the 90’s </li></ul><ul><li>Pay-as-you-go system revenues did not cover liabilities </li></ul><ul><ul><li>Not sustainable </li></ul></ul><ul><li>Projected bankruptcy </li></ul><ul><ul><li>Aging population, increased life expectancy, and increase in benefits offered </li></ul></ul>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
    29. 29. Retirement in Canada <ul><li>Three Pillars </li></ul><ul><li>1) National Old Age Security Program </li></ul><ul><li>-similar to Social Security in the U.S. </li></ul><ul><li>2) Private savings </li></ul><ul><li>-similar to an IRA account </li></ul><ul><li>3) Canada Pension Plan </li></ul><ul><li>-mandatory defined pension plan </li></ul>
    30. 30. Canada Pension Plan <ul><li>Earnings related benefit </li></ul><ul><li>-hybrid of a fully funded system and pay-as-you-go system </li></ul><ul><li>-benefit depends on how long and how much money contributed </li></ul><ul><li>-benefit aims to replace 25% of previous wages </li></ul><ul><li>Disability benefits </li></ul><ul><li>Retirement benefits </li></ul><ul><li>Survivor benefits </li></ul>
    31. 31. Contributions to CPP <ul><li>Who contributes? </li></ul><ul><li>A: Every person over the age of 18 in Canada who earns a salary </li></ul><ul><li>How much is contributed? </li></ul><ul><ul><li>A: 9.9% of pensionable wages </li></ul></ul><ul><ul><li>-Split between employee and employer </li></ul></ul><ul><ul><li>-Max employee 2009 contribution: $2,118.60 </li></ul></ul><ul><ul><li>-Self employed pay full 9.9% </li></ul></ul><ul><ul><li>-Pensionable wages: </li></ul></ul><ul><ul><li>Maximum: $46,300 </li></ul></ul><ul><ul><li>Minimum: $3,500 </li></ul></ul>
    32. 32. Eligibility <ul><li>Anyone who has made 1 contribution and is over the age of 65 </li></ul><ul><li>Early Retirement: Age 60 with reduced benefit </li></ul><ul><li>Disability/Survivor*** </li></ul>
    33. 33. CPP Investment Board <ul><li>Highly innovative, unique private investment company </li></ul><ul><li>Only purpose is to invests funds of CPP </li></ul><ul><li>-Goal: “Maximize returns without undue risk of loss” </li></ul><ul><li>Independent from government </li></ul><ul><li>-contributions to the fund are kept completely separate from public treasury </li></ul><ul><li>-government has absolutely no access to this fund </li></ul><ul><li>-experience management reports to an independent board of directors </li></ul><ul><li>Board is accountable to the government </li></ul><ul><li>Highest level of transparency </li></ul>
    34. 34. CPP Investment Board <ul><li>57.5% Equity </li></ul><ul><li>27.8% Fixed Income </li></ul><ul><li>14.7% Inflation-sensitive Assets </li></ul><ul><li>TOTAL ASSETS= $108.9 Billion </li></ul>
    35. 35. CPP Investment Board <ul><li>Return on investment </li></ul><ul><ul><li>Has earned above average return rates </li></ul></ul><ul><ul><li>2008 recession </li></ul></ul><ul><li>Current Rate (9.9%) will be sustainable for a projected 75 years old </li></ul><ul><li>but future liabilities not completely covered </li></ul>
    36. 36. Questionnaire <ul><li>Results: </li></ul><ul><li>The results of this questionnaire will be sent to Representative Timothy V. Johnson. </li></ul><ul><li>The results will provide congress with input from a students perspective. </li></ul>

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