Common Factors Affecting Retirement IncomeDolf Dunn
People have two very distinct investment periods in their lives, Accumulation and Distribution. Brokers are paid in the accumulation phase, not so much in the distribution phase. Fee-based Financial Planners, like myself, are paid along the way to give our clients great advice in both phases of their lives. Distribution phase is the more difficult of the two to get right. If you do not do proper planning, one risks running out of money before your last breathe. Not to be entrusted to amateurs. I can help, please give me a call.
Allianz International Pensions previously created the Pension Sustainability Index (PSI) following the pressure on public pension systems due to aging demographics and deteriorating government finances. The PSI combines the various characteristics of pension systems with the factors that influence them to help track and evaluate policy changes
made in different countries around the world.
Common Factors Affecting Retirement IncomeDolf Dunn
People have two very distinct investment periods in their lives, Accumulation and Distribution. Brokers are paid in the accumulation phase, not so much in the distribution phase. Fee-based Financial Planners, like myself, are paid along the way to give our clients great advice in both phases of their lives. Distribution phase is the more difficult of the two to get right. If you do not do proper planning, one risks running out of money before your last breathe. Not to be entrusted to amateurs. I can help, please give me a call.
Allianz International Pensions previously created the Pension Sustainability Index (PSI) following the pressure on public pension systems due to aging demographics and deteriorating government finances. The PSI combines the various characteristics of pension systems with the factors that influence them to help track and evaluate policy changes
made in different countries around the world.
Income Replacement and Data Analytics: Retirement Planning for the FutureCognizant
While governments and financial institutions work to achieve long-term stability, the unstable economic landscape threatens to significantly reduce the working population's retirement income and assets. The Income Replacement Ratio (IRR), supported by data analytics, is becoming an important factor in structuring future retirement products and helping more plan participants achieve their retirement goals.
This slide deck outlines the models CBO uses to assess the budgetary effects of alternative economic scenarios such as those presented in CBO’s Current View of the Economy in 2023 and 2024 and the Budgetary Implications (November 2022).
Starzenie się społeczeństwa w Polsce jest faktem i system ubezpieczeń społecznych musiał w związku z tym zostać zreformowany. W 1999 roku system emerytalny zdefiniowanego świadczenia został zmieniony na system zdefiniowanej składki - czy w tej sytuacji podniesienie wieku emerytalnego wciąż jest konieczne?
Political (In)Stability of Pension System ReformsGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Is the retirement age increase in Poland still necessary given the 1999 reform of the pension system? EmerytGRAPE analysis with the use of OLG model answers this question.
CONGRESS OF THE UNITED STATESCONGRESSIONAL BUDGET OFFICEAlleneMcclendon878
CONGRESS OF THE UNITED STATES
CONGRESSIONAL BUDGET OFFICE
CBO
Social Security
Policy Options
JULY 2010
Pub. No. 4140
A
S T U D Y
CBO
Social Security Policy Options
July 2010
The Congress of the United States O Congressional Budget Office
CBO
Notes
Unless otherwise noted, all years are calendar years.
Numbers in the text and tables may not add up to totals because of rounding.
Preface
Social Security is the federal government’s largest single program, and as the
U.S. population grows older in the coming decades, its cost is projected to increase more
rapidly than its revenues. As a result, under current law, resources dedicated to the program
will become insufficient to pay full benefits in 2039, the Congressional Budget Office (CBO)
projects. Long-run sustainability for the program could be attained through various
combinations of raising taxes and cutting benefits; such changes would also affect the
Social Security taxes paid and the benefits received by various groups of people. This CBO
study examines a variety of approaches to changing Social Security, updating an earlier work,
Menu of Social Security Options, which CBO published in May 2005. In keeping with CBO’s
mandate to provide objective, impartial analysis, the current study makes no
recommendations.
The study was written by Noah Meyerson, Charles Pineles-Mark, and Michael Simpson of
CBO’s Health and Human Resources Division, under the direction of Joyce Manchester and
Bruce Vavrichek. Research assistance was provided by Philip Armour, Sarah Axeen, and
L. Daniel Muldoon. James Baumgardner, Sheila Dacey, Benjamin Page, David Rafferty,
Jonathan Schwabish, and Julie Topoleski provided helpful comments on earlier drafts.
Andrew Biggs of the American Enterprise Institute and Paul Van de Water of the Center for
Budget and Policy Priorities also provided useful comments. (The assistance of external
reviewers implies no responsibility for the final product, which rests solely with CBO.)
Kate Kelly edited the manuscript, and Leah Mazade and Sherry Snyder proofread it.
Maureen Costantino took the cover photograph and designed the cover, and Jeanine Rees
prepared the study for publication. Jonathan Schwabish provided help with graphics.
Monte Ruffin produced the initial printed copies, Linda Schimmel coordinated the print
distribution, and Simone Thomas prepared the electronic version for CBO’s Web site
(www.cbo.gov).
Douglas W. Elmendorf
Director
July 2010
CBO
www.cbo.gov
http://www.cbo.gov/doc.cfm?index=6377
MaureenC
Doug Elmendorf
Contents
Summary ix
Introduction 1
An Overview of Social Security 1
Social Security Projections 4
Assessing Options for Changing Social Security 7
Key Elements of Social Security 8
Scope of the Options 9
Effects of the Options on the System’s Finances 11
Effects of the Options on Payroll Taxes Paid and Benefits Received by
Various Groups 13
Effects of the Options on Work and Saving 15
Options That Wo ...
CBO uses its microsimulation tax model to simulate the effects of tax rules for a representative sample of tax filers in each year of the budget window. The model informs much of CBO’s analysis of the individual income and payroll tax system.
While continuing the World Bank’s commitment to help countries reach the education Millennium Development Goals (MDGs), the new Education Strategy 2020 focuses on the goal of Learning for All. Learning for All means giving all people equitable opportunities to acquire the knowledge and skills they need to have healthy and satisfying lives, to be good citizens, and to be productive
contributors to their countries’ economic development.
More Related Content
Similar to Bogomolova pension system analysis - basic concepts and identities
Income Replacement and Data Analytics: Retirement Planning for the FutureCognizant
While governments and financial institutions work to achieve long-term stability, the unstable economic landscape threatens to significantly reduce the working population's retirement income and assets. The Income Replacement Ratio (IRR), supported by data analytics, is becoming an important factor in structuring future retirement products and helping more plan participants achieve their retirement goals.
This slide deck outlines the models CBO uses to assess the budgetary effects of alternative economic scenarios such as those presented in CBO’s Current View of the Economy in 2023 and 2024 and the Budgetary Implications (November 2022).
Starzenie się społeczeństwa w Polsce jest faktem i system ubezpieczeń społecznych musiał w związku z tym zostać zreformowany. W 1999 roku system emerytalny zdefiniowanego świadczenia został zmieniony na system zdefiniowanej składki - czy w tej sytuacji podniesienie wieku emerytalnego wciąż jest konieczne?
Political (In)Stability of Pension System ReformsGRAPE
We analyze the political stability of welfare enhancing privatization of the social security. We consider an economy populated by overlapping generations, who vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces overall welfare, the distribution of benefits across cohorts along the transition path implies that some ways of “unprivatizing” social security are always politically favored
Is the retirement age increase in Poland still necessary given the 1999 reform of the pension system? EmerytGRAPE analysis with the use of OLG model answers this question.
CONGRESS OF THE UNITED STATESCONGRESSIONAL BUDGET OFFICEAlleneMcclendon878
CONGRESS OF THE UNITED STATES
CONGRESSIONAL BUDGET OFFICE
CBO
Social Security
Policy Options
JULY 2010
Pub. No. 4140
A
S T U D Y
CBO
Social Security Policy Options
July 2010
The Congress of the United States O Congressional Budget Office
CBO
Notes
Unless otherwise noted, all years are calendar years.
Numbers in the text and tables may not add up to totals because of rounding.
Preface
Social Security is the federal government’s largest single program, and as the
U.S. population grows older in the coming decades, its cost is projected to increase more
rapidly than its revenues. As a result, under current law, resources dedicated to the program
will become insufficient to pay full benefits in 2039, the Congressional Budget Office (CBO)
projects. Long-run sustainability for the program could be attained through various
combinations of raising taxes and cutting benefits; such changes would also affect the
Social Security taxes paid and the benefits received by various groups of people. This CBO
study examines a variety of approaches to changing Social Security, updating an earlier work,
Menu of Social Security Options, which CBO published in May 2005. In keeping with CBO’s
mandate to provide objective, impartial analysis, the current study makes no
recommendations.
The study was written by Noah Meyerson, Charles Pineles-Mark, and Michael Simpson of
CBO’s Health and Human Resources Division, under the direction of Joyce Manchester and
Bruce Vavrichek. Research assistance was provided by Philip Armour, Sarah Axeen, and
L. Daniel Muldoon. James Baumgardner, Sheila Dacey, Benjamin Page, David Rafferty,
Jonathan Schwabish, and Julie Topoleski provided helpful comments on earlier drafts.
Andrew Biggs of the American Enterprise Institute and Paul Van de Water of the Center for
Budget and Policy Priorities also provided useful comments. (The assistance of external
reviewers implies no responsibility for the final product, which rests solely with CBO.)
Kate Kelly edited the manuscript, and Leah Mazade and Sherry Snyder proofread it.
Maureen Costantino took the cover photograph and designed the cover, and Jeanine Rees
prepared the study for publication. Jonathan Schwabish provided help with graphics.
Monte Ruffin produced the initial printed copies, Linda Schimmel coordinated the print
distribution, and Simone Thomas prepared the electronic version for CBO’s Web site
(www.cbo.gov).
Douglas W. Elmendorf
Director
July 2010
CBO
www.cbo.gov
http://www.cbo.gov/doc.cfm?index=6377
MaureenC
Doug Elmendorf
Contents
Summary ix
Introduction 1
An Overview of Social Security 1
Social Security Projections 4
Assessing Options for Changing Social Security 7
Key Elements of Social Security 8
Scope of the Options 9
Effects of the Options on the System’s Finances 11
Effects of the Options on Payroll Taxes Paid and Benefits Received by
Various Groups 13
Effects of the Options on Work and Saving 15
Options That Wo ...
CBO uses its microsimulation tax model to simulate the effects of tax rules for a representative sample of tax filers in each year of the budget window. The model informs much of CBO’s analysis of the individual income and payroll tax system.
While continuing the World Bank’s commitment to help countries reach the education Millennium Development Goals (MDGs), the new Education Strategy 2020 focuses on the goal of Learning for All. Learning for All means giving all people equitable opportunities to acquire the knowledge and skills they need to have healthy and satisfying lives, to be good citizens, and to be productive
contributors to their countries’ economic development.
The World Bank invited attendees of Women Deliver 2013 to join a conversation about using Results-Based Financing (RBF) approaches to improve access to health services and health outcomes for mothers, newborns and children in developing countries. The Health Results Innovation Trust Fund (HRITF) presented promising data that is starting to come in from its portfolio of RBF programs.
2. 2
Outline
General framework for quantitative analysis of
pension systems
Key factors: demographic, economic, pension
system design
Simple economics of PAYG DB schemes
Simple economics of Funded DC schemes
4. 4
Main groups of factors
Demographic environment
Economic environment
Pension system design
5. 5
Demographic factors
Population, age/gender composition working
age and old age population , old age dependency
ratio
Fertility (total fertility rate, replacement level)
Mortality rates life expectancy, life expectancy
at retirement
Disability prevalence rates
Migration flows, age and gender composition
World-wide trend – population aging
decreasing fertility, increasing life expectancy
6. 6
Economic factors
Macroeconomic indicators
GDP
Inflation
Interest rates
Labor market indicators
Labor force participation rates
Unemployment rates
Informal sector
Wages, earning profile, income
distribution
7. 7
Pension system design
(system revenues)
Contributor coverage
Exemptions
Contribution rate
Covered wage (ceilings/floors, basic vs total
compensation)
8. 8
Pension system design
(system expenditures)
Beneficiary coverage
Eligibility criteria:
retirement age, early retirement
vesting period
qualifying conditions for disability and
survivorship benefits
Rules for benefit calculations
Indexation of post-retirement benefits
9. 9
PAYG Defined Benefit systems
Financing: workers contributions today are used to
pay pensioners today; in return, workers get a
promise that they will receive a pension tomorrow
paid for by workers tomorrow
Benefits: calculated based on a prescribed
(defined benefit) formula; normally linked to
individual’s wages, years of contributions, accrual
rate
10. 10
PAYG DB finances
Total expenditures: EXP = B*P
Total revenues: REV = C*E
Books are balanced when B*P = C*E
where:
C = average contribution
B = average benefit (pension)
P = number of pensioners
E = number of contributors
11. 11
PAYG DB finances (cont.)
Given that:
B = RR*W; C = W*CR; and DR = P/E
The pension fund balance equation can be presented
as: CR=RR*DR
where:
CR = contribution rate
RR = average replacement rate (relative pension level)
W = average wage
DR = system dependency rate (the inverse – support ratio)
12. 12
How to keep the system in balance?
Adjust contribution rate (CR)
Adjust average replacement rate (RR)
Adjust parameters/policy variables affecting the
dependency rate (DR)
Combination of the above
More direct control of CR and RR; less control
over DR
13. 13
Equilibrium contribution rate
If average replacement rate is fixed (target RR)
Contribution rate required to finance a given
average replacement rate is:
CR = RR*DR
So if the dependency rate grows the contribution
rate has to be increased in order to bring the
pension fund into balance
14. 14
Equilibrium replacement rate
If contribution rate is fixed
Another way to balance the system is through the
average replacement rate affordable
replacement rate is:
RR = CR/DR
So, if the dependency rate grows and the
contribution rate remains unchanged the average
replacement rate has to be reduced in order to
keep the system in balance
15. 15
Key determinants of average
replacement rate
Policy choices about target individual replacement
rate (individual pension/individual wage)
Benefit formula (entry pensions)
Policy choices about pension indexation method
(post-retirement pensions)
Economic factors: wages, wage growth rate
Behavior: contribution density years of
contributions at retirement
16. 16
Benefit formula: typical structure
Accrual rate per year of service
Min/max replacement rates, min/max pensions
Measure of income (reference wage, pensionable
earning measure)
- ceiling on pensionable wages
- averaging period
- valorization rules
Penalties for early retirement, increments for late
retirement
17. 17
Post-retirement pensions:
indexation methods
Price indexation: pensions move with the price
level; their real value remains unchanged
Wage indexation: pensions move with wages;
their relative value remains unchanged
Combination of price and wage indexation (e.g.
Swiss formula)
Other indexation rules (ad hoc, discretional, fixed
%, progressive indexation, etc.)
18. 18
How to affect finances through
system dependency rate?
If contribution rate and replacement rate are fixed:
DR = CR/RR
Dependency rate is not a policy variable, but some
policy choices can change it
19. 19
Key determinants of system
dependency rate: numerator
Number of pensioners (P)
Demographic factors (old age population,
mortality rates after retirement life
expectancy at retirement)
Policy choices in pension system (retirement
age, rules for early retirement, beneficiary
coverage rate, vesting period, eligibility criteria
for receiving disability pensions, survivors
benefits)
20. 20
Key determinants of system
dependency rate: denominator
Number of contributors (E)
Demographic factors (working age population,
fertility in the past, mortality, migration)
Economic factors (school-leaving age, labor
force participation, unemployment, size of the
informal sector)
Policy choices (contributor coverage,
retirement age, rules for early retirement, built-
in incentives (e.g. contribution rate), other)
21. 21
Retirement age
Average retirement age Normal retirement age
and early retirement arrangements
Quantitative analysis of various pension systems:
retirement age is the most effective policy variable
to adjust long run dependency rate
Changes in retirement age affect both the
numerator and denominator in DR=P/E
If life expectancy increases, retirement age has to
be adjusted to keep the system in balance in the
long run
22. 22
Policy choices: how much freedom?
Basic relationship (CR=RR*DR) To make a
PAYG DB financially sustainable, policy makers
can change only two of the three key parameters:
- contribution rate
- average replacement rate
- retirement age
Once two parameters are set, the third is
determined endogenously
Limits for setting exogenous parameters (e.g.
replacement rate – social and political,
contribution rate – economic, retirement age –
physical, social and political)
23. 23
Funded defined contribution systems
Financing: Contributions are put into individual’s
account Assets are accumulated and earn
interest Accumulated capital used to pay for
pensions
Benefits: Calculated based on accumulated capital
24. 24
Capital accumulated by the
year of retirement
AC = C1*(1+r)N + C2*(1+r)N-1 +…+ CN*(1+r)
where
AC = accumulated capital
Ct = CRt * Wt
N = number of working years
r = rate of return (here assumed to be constant)
Ct = contribution in year t, for t = 1, 2, …, N
CRt = contribution rate in year t, for t = 1, 2, …, N
Wt = worker’s wage in year t, for t = 1, 2, …, N
25. 25
Benefit payout: annuity
When worker retires, accumulated capital (AC) is
turned into pension which is set so that:
B0+ B1/(1+d) +… + BM/(1+d)M = AC
Initial benefit calculation: B0 =AC/AF
where
Bt = Bt -1 * indexation coefficient, t>0
M = number of retirement years
d = discount rate
AF = annuity factor
No bequest to survivors, longevity risk borne by
annuity provider
Variety of annuity products
26. 26
Annuity factor:
If a person of certain age and gender is promised a
benefit=$1, with specified indexation rules, how
much is such a promise worth in today’s dollars?
1+ ind1* surv1/(1+d)+(ind1* ind2 )* (surv1* surv2)/(1+d)2+…
where
indt = indexation coefficient in year t of retirement
survt = probability of surviving from year t-1 to t
d = discount rate
27. 27
Benefit payout:
programmed withdrawals
The account continues to earn interest while
pensioner withdraws funds
Benefit is recalculated each year:
Bt = RCt / LEt,a
where
RCt = remaining capital in year t
LEt,a = life expectancy at age a in year t
If dies early, the remaining balance is turned over
to survivors; if lives long, Bt may become very
low; longevity risk borne by individuals
Other payout forms (lump sums, required
minimum annuity, etc.)
28. 28
Main determinants of benefit levels
Contribution rate
Individual’s wages
Rate of return, rate of return-wage growth
gap
Passivity ratio (retirement years/working
years years of service, retirement age, life
expectancy)
Administrative costs
Annuity factors (life expectancy, indexation,
single vs joint, discount rate)