The Payout Stage in Chile and Singapore--and implications for older women

1. The Payout Stage in Chile and Singapore--and implications for older women by Estelle James

2. Why do pension plans have different effects on men and women? • Women have lower lifetime earnings than men, therefore smaller retirement savings • work less • earn lower wage rates • Women live longer than men • Therefore need more retirement income, not less • longevity insurance, price indexation more important • Are younger than, likely to outlive husbands, therefore survivors’ insurance important (cost of living of individual 70% cost for couple) • Most very old people are women and very old women are often pockets of poverty

3. The accumulation stage in Chile and Singapore • Chile— • 10% net contribution + 3% for survivors’ & disability insurance+admin fee • Can’t take out until retirement • Real rate of return 1982-2002—10% • Singapore: • 30-40% contribution rate • But can take out for housing—most do, leaves less for retirement • Is survivors & disability insurance provided during accumulation? • Real rate of return about 1.5%

4. Balance at retirement similar in two countries and balance/wage ratio much higher in Chile • Despite lower contribution rate and lower wage • Because no withdrawal for housing, higher rate of return (would hold even if rate were cut in half in Chile) • Average accumulation similar to Minimum Sum • But this buys larger pension/wage (replacement rate) in Chile because wage much lower • This is especially important for women

5. Age of retirement • Chile: • 65 for men, 60 for women • Early retirement possible if have 50% replacement rate (ratio of pension/wage) • 60% retire early, so we know their RR>50% • Singapore: • 62 but must put minimum sum aside at 55 • Very few retirees have 50% replacement rate • Probably retirement age is too low in both countries, especially for women, as longevity increases

6. Payout choices limited in both countries • Chile: • Annuity or programmed withdrawal • Lump sum not allowed unless RR>70% • 2/3 have chosen to annuitize (marketing, tied to ER) • Singapore: • Annuity, CPF or bank for Minimum Sum • Lump sum allowed for rest • Very few annuitize • Conditions for lump sum much easier in Singapore, RR of remainder much less than 70%. Retirees and their spouses may run out of money before they die—especially women

7. Annuities market • Chile: • 2/3 retirees annuitize—aggressive marketing by insurance companies, favored by regulations • Participating annuities not allowed--misinformation • Indexed pensions required—protects long-lived by shifting benefits from young old to very old; indexed investment instruments needed • Annuities pay MWR=>100%, govt interest rate (MWR = EPV of lifetime payouts/initial premium) • Singapore: • Little annuitization, indexation not required or available, little marketing (small accumulations) • Most annuities are participating—do workers trust? • Annuities paid MWR>100% in 1999 but less now • Longevity and inflation insurance especially important for women; weak in Singapore

8. Protection for wives and widows • Chile: • Survivors benefits required during work stage • Married men must purchase joint pension (joint annuity or joint PW) when they retire--financed by lower pension for husband, not by state • Widows can keep their own pension in addition to widow’s benefit (in many countries they must choose) • Widows maintain previous hh standard of living • Married women biggest gainers from pension reform • Singapore: individual annuity; survivors benefits? Does wife get first claim on return of capital?

9. Other annuity issues re gender • Gender-specific tables used in both countries—unisex tables used in Europe and US employment plans--controversial. But this matters less when joint annuity is used • Divorced women • Divorce still not common in either country but increasing in Singapore; just became legal in Chile • Are account balances split upon divorce? What about survivors’ benefits and joint annuity? Remains to be determined Chile • Partner rights in non-married couples?

10. Income floor • Chile: • MPG sets floor on pension and survivors’ benefits—for workers who have contributed at least 20 years and their survivors • Ad hoc indexation to wages—25% average wage • Financed by general treasury • Mainly protects low earning women & widows • Social assistance protects non-contributing women • Singapore: • No MPG; means-tested benefits?

11. Conclusion • Chile: • has oriented its program toward retirement pensions and protection for survivors, so high accumulation • competition brings high rate of return and RR, makes annuitization popular • indexed pension protects long-lived, survivors’ benefit & joint annuity protects widows, MPG protects low earners—policy choices • This provides high protection for older women • Singapore • many purposes, mainly housing, so low accumulation • non-competitive, lower rate of return and RR, annuitization not used much (why?) • no indexation, survivors’ benefits, joint annuity, MPG • will leave very old women and widows, who outlive voluntary savings, in difficult financial condition