Topic 11: International Issues, Review Notes from reading 2005 5 pillars 0 Pillar non-contributory basic benefits financed

ced by the state, fiscal conditionspermitting 1st Pillar mandatory with contributions linked to earnings and objective ofreplacing some portion of lifetime pre-retirement income. 2nd Pillar - mandatory DC plan with independent investment mgt 3rd Pillar - voluntary taking many forms (e.g. individual savings; employersponsored; defined benefit or defined contribution) 4th Pillar - informal support (such as family), other formal social programs (suchas health care or housing), and other individual assets (such as home ownership andreverse mortgages). the primary criteria for evaluating pension systems like this are adequacy - to prevent old-age poverty robustness - can withstand shocks (from economic, demographic, political volatility) equitable - provides income redistribution from rich to poor sustainability - can be sustained in the foreseeable future predictability - subject to law and not discretion affordability - within the fin'l capacity and doesn't displace other economic or social priorities or have unsustainable fiscal consequences Q1: World Bank approach re-visited Outline the rationale behind the World Banks 3 pillars when Averting the Old Age Crisis was first published in 1994. How have the views of the World Bank evolved since that time? The study suggests that if govt develop 3 pillars it would better serve fin'l security for the old and

 promote economic growth Increase fiscal sustainability -- > by separating the redistributive function with the savings function, the public pillar and the size of the payroll tax needed to support it can be kept relatively small, thus many of the growth-inhibiting problems associated with a dominant public pillar risk diversification a public system is vulnerable to political risk, govt failure a mandatory system is vulnerable to market risk, economic risk Funded pensions enhance development of capital markets --> if you have a funded system, u can use those funds to invest & develop, leading to growth Balances redistribution, savings & income smoothing & insurance functions --> it's difficult to have 1 pillar in charge of a lot of goals. 3 separate pillars can focus better. Clear distinction btwn investment & income distributive Rationale for 2nd pillar 2nd pillar may increase saving Less labour market distortions thru incentives 2nd pillar shud be mandatory Ppl myopic Procrastinate Economies of scale - declining ave program costs Later, through experience+evaluations+criticism, World Bank encouraged multi-pillar approach to evolve from 3 to 5 pillars Social assistance Public pensions Occupational/personal pension plans (DB/DC) Occupational /personal pension plans (DB/DC) Other - informal support (family), social programs (eg healthcare), other indivi fin'l or non-fin'l assets What they did is if u have a DB, public pension works as well, no longer need to convert from DB etc

Q2: Parametric pension reforms in the developed world Why has it been so difficult to reform the long standing public PAYG pensions in many OECD countries? What progress has been made?
Have to read the paper problem in certain countries In developed country Eg African, Latin American, India Largely informal eg No tax file numbers Poor so hard to save up No developed capital market Need of a 4th pillar to allow for informal support arrangements Countries with traditional cultures

Reciprocity Some ppl accumulate wealth thru non fin'l assets Asians hold ppty Indians hold gold, bigger than US reserves In Aus, we can in response take home into consideration

Reforms are very difficult There's a lot of issues to solve first e.g. admin costs When payg to dc there's a double burden leading to inter-generational inequity current workers pay twice - once for their own funded pension, and once for the payg age pension to change from PAYG to prefunded private retirement saving involves investment choice and benefits choice this is difficult for the fin'l illiterate education and awareness which is expensive

Q3: Lessons from Australia Does Auss experience w/ ret savings policies provide lessons for ret income policies & reforms in other countries?
It's hard to give them lessons bc our history is different. E didn't change from payg But! We have mandatory system National savings increased Savings doesn't get reduced over time We have a target means tested system Allowed poverty alleviation without huge fiscal cost Multi pillars Benefits of diversification But we don't have ability to teach

Q4: Future policy reform in Aus What are the outstanding problems in Auss ret income policies? Can Aus learn anything from the rest of the world? Adequacy is SG enough? Tax We shud get eet most have a simpler system than ours. we can learn from other countries' tax systems

Efficiency ppl are now allowed to change funds but admin costs ^'d-->need to remove admin costs Investment strategy
Cooper review suggested moving from a 1 size fit all to a structure that depended on engagement Default v choice Life cycle (life based v risk based)

Retirement benefits a big problem UK - has a really big annuity market, annuity puzzle still exists but larger than Aus Ease consumer decision making by changing PDS to use designs that actually help reduce mistakes (currently regulation promote a type that is terrible) Behavioural finance lessons NZ - automatic helped savings increased contribution rate - but 15% not realistic. Although we can have 9% compulsory but 6% default voluntary opt out Efficiency to enhance competition