Understanding Pension Systems in the Modern World

1. Pension CrisisPaul R EarlFacultad de Ciencias BiológicasUniversidad Autónoma de Nuevo LeónSan Nicolás, NL 66451, Mexico

2. A pension is a series of payments paid to a worker or their survivors following retirement. A pension scheme is the set of financial, administrative, legal and social arrangements established for the purpose of providing pensions. Most important in financial terms is the provision of medical services and other benefits like leisure facilities, the provision of legal and financial services and so on. A pension scheme is simply a saving scheme with deferred compensation as the source of saving. Annuities resulting from disability insurance schemes or other are often referred to as pensions.

3. Variable annuities offer you access to investment options from wellknown fund families plus a fixed account. Pay no income taxes on your earnings until you make withdrawals. Choose guaranteed (2) lifetime income. When you start taking income from your annuity, you can choose options, including guaranteed income for life. No matter what happens in the market, your annuity provides you with death benefit options that may help protect your investment for your beneficiaries.

4. The demographic aspects of pension systems are much revealed by examining the actual number of pensioners by the actual number of workers (PWR), e. g., about ¼ in the US. In some European countries like Italy, the main feature can be a high proportion of elderly persons that by their votes can keep benefits high. What shall we do when we have more retired people than workers ! ? As mortality and fertility drop, and aging rises, the quality of life can also rise influenced by the generosity of the pension system. Will this system remain sustainable? In the developed countries, most of the gigantic job of protecting the elderly from poverty has been done. Longevity rises as the quality of life improved.

5. Confronting aging populationsWomen and immigrants can raise productivity to restructure the taxation program needed to support future pensions. Subsidizing child care would ease the difficulties of mixing work with childbearing. On the average, actual fertility in developed countries has a bit lower than desired family size, and reductions in the cost of childbearing will make it easier for women to combine a career with their preferred level of childbearing. Regardless, some of these 2 kinds of people—women and migrants--may not in any way need a college education yet have many job opportunities.

6. Let’s say it takes 25 years or less to graduate from university, and work is usually a 40-year trip. To reach 85 years adds on another 20 years. In this university, people retire at full salary after 30 years of service. If they are men something over 50, they may look for a new job, their wives not working. Single women will keep on working. Worldwide, retirement was forced at 65, but now many people are allowed to stay on. The minimum age of eligibility for public pensions is 60 years in Canada, France, Germany, Japan and the United Kingdom, 62 years in the United States, and 55 in Italy.

7. This lecture is based somewhat on “Population aging and the rising cost of public pensions,” by John Bongaarts of the Population Council www.popcouncil.org/pdfs/wp/185.pdf/. He studied 7 countries: Canada, France, Germany, Italy, Japan, the United Kingdom (UK) and the United States (US) for which comparable demographic and labor statistics were available. Most unfortunately, Bongaarts did not study Sweden. The economic and philosophic development of the quality of life and longevity themes from David Hume on are given on http://www.pitt.edu/~super1/lecture/ lec13401/index.htm

8. Overpopulation, competition, evolution, socialism and comfortable longevity like sustainability are all related themes involved with the resources needed for a cheerful life. See also Feldstein, M. & H. Siebert, Social Security Pension Reform in Europe. See also The Global Retirement Crisis by R. Jackson, 2001.http://www.csis.org/gai/global_retirement.pdfUS citizens should use Pension and Annuity Income, Publication 575 of the Internal Revenue Service.

9. Many company contract for retirement annuities such as Am Century Investment Management, Inc., Am Express Fund, Blue Chip Advantage Fund, Calvert Variable Series, Inc., Capital Resource Fund, Cash Management Fund Credit Suisse Asset Management, Fidelity Management & Research, Global Bond Fund, High Yield Bond Fund, International Fund, Managed Fund, New Dimensions Fund, etc.

10. LongevityLongevity is correlated with national economies rather than with medicine. Although medical control of life & death may be overrated, we all aim to improve the quality of life, and much activity is going on in this field, even to the questionaire level. Sweden, Japan and a few others that have the greatest longevity may also have the highest pension benefits. Nevertheless, improvement in the quality of life seems to be a reasonable goal for all ages and all nations. The small family lives better, whereas the large family may be starving and migrant. Industrialized is normal, whereas rural is simply terrible as poverty is.

11. Pension trendsTwo factors that affect the pension structure are 1/ people retiring early, and 2/ unemployment. The pensioner/worker ratio determines expendi-tures on public pensions. The politics of Germany, France and Italy has included a long history of strong unions and has greater pension benefits than other parts of the world. Where workers are covered by collective bargaining agreements, pensions and related insurance, and health care benefits are important items of negotiation between management and labor. This was especially true in the US and the UK and is also important in Japan, the Netherlands, Germany, Sweden and Switzerland. The other group with less benefits is US, UK & Canada.

13. Both Sweden and Japan will be discussed in sections further along in this lecture.Situations in other countries are more stringent. Recognizing that many employees are not equipped to make wellinformed retirement savings decisions, particularly with respect to finding asset, many employers have turned to various forms of financial education provision to help their employees meet the challenges of planning for an economically secure retirement.

14. Latin American pensionsIn Mexico, the current federal pension plan was started in 1997. However, savings are not popular as long as inflation is at destructive rates. The high cost of energy is another issue that might impede investments and savings.Seven Latin nations—Peru (1993), Argentina (1994), Colombia (1994), Uruguay (1996), Bolivia (1997), Mexico (1997), and El Salvador (1998)—have also privatized their pension systems along the lines of the successful Chilean model of 1981.

15. In Mexico, the substitution of an investment based private system of individual pension savings accounts for a government-run social security system are slowly transforming the Mexican economy. The public pension system for private-sector workers was established in 1944 (revised in 1997) and has since been managed by the Instituto Mexicano de Seguridad Social (IMSS). The IMSS also manages the national health care system and provides unemployment insurance and daycare services for private-sector workers.

16. US Social Security AdministrationSS formula redistributes benefits according to number of years worked. With less than 10 years of coverage, no benefits exist. Also, only the 35 highest years of earnings are counted towards the benefit computation. A person who works for 15 years at $30,000 gets as much in benefits as someone who works for 30 years at $15,000This formula is: Base Benefit = Final Average Monthly Salary x Years of Creditable Service x 0.016 (Formula Factor).

17. US MedicareIf you are retired and receiving SS benefits, the SSA will send you a Medicare enrollment packet approximately 6-8 weeks before the month of your 65th birthday. If you do not receive this packet shortly before your 65th birthday, contact SSA immediately.Your Medicare enrollment packet includes a red, white and blue Medicare card showing that you will be automatically enrolled in Part A (hospital insurance) and Part B (medical insurance). There is no cost for Medicare Part A; however, you pay a monthly premium for Medicare Part B—$66.60 per month in 2004—which, in most cases is automatically deducted from your monthly SS check.

18. Medicare generally pays 80 % of eligible charges and your state health plan coordinates to pay secondary. If you are a HealthSelect member, HealthSelect pays 70 % of the allowable charge for services not covered by Medicare such as routine physicals and medical care provided outside the US. You pay 30 % and in some cases the amount above the allowable charge. assignment may not charge more than 15 % above the Medicare-approved amount.

19. For more information, go to www.medicare.gov.The implication of early retirement is a growing number of economically inactive senior citizens with the corresponding increase in demand for many social services like health care. Will employers will be compelled to turn to foreign workers to meet their manpower needs. While an increase in skilled and talented foreign workers will enhance competitiveness, an increase in the number of unskilled foreign workers will create more social problems.

20. AnnuitiesIn theUS, you can buy the contract for your retirement annuity alone or with the help of the Internal Revenue Service (IRS) or your employer. Many annuitiesareof course available in the markets of the world.A qualified employee annuity is a retirement annuity purchased by an employer for an employee. A tax-sheltered annuity plan (in the US often referred to as a 403(b) plan or a tax-deferred annuity plan) is a retirement plan for certain tax-exempt organizations like public schools.

21. Pension questionsAn extremely useful list of questions given here is available from the US SSA. The questions come from an SS pamphlet for women. 1/ Does your employer have a pension plan? 2/ Do you know what type of plan it is? 3/ Are you included in the plan? Pension plans do not have to include every worker. Some jobs may be excluded from the plan and parttime workers may not be covered. 4/ Have you worked long enough to earn a pension?Generally, you must work five years under a plan to qualify for benefits. 5/ Do you know how much your pension will be?

22. For more information, contact these agencies in the US:Employee Benefits Security Administration, U.S. Department of Labor, Internet: http://www.dol.gov/ebsa/ and Pension Benefit Guaranty Corporation Internet: http://www.pbgc.govSocial Security and Medicare as answers to retirement and longevity do not seem to surpass the parallel situations in Sweden and Japan.

23. The Swedish systemThe 2 Internet numbers suggested arehttp://www.ppm.nu/tpp/infodocument/1:1;13;:http://www.ppm.nu/dbfiles/pdf/Din_ppension_ENG.pdfThe second number provides a 15-page PDF booklet on the 2000 system. The Swedish national pension consists of income pension, premium pension and guaranteed pension. Each year 18.5 % of the pension-based income is reserved to the national pension system, and 16 % of this sum is set aside for your income pension, which is adjusted upwards in step with the development of the Swedish economy. The remaining 2.5 % are reserved for your premium pension. You can invest this portion of your pension savings in funds.

24. Health care can be found uner the Ministry of Health and Social Affairs at http://www.sweden.gov.se/sb/d/2061See the International Forum on common access to health care services that “will give politicians, administrators and researchers from different countries an opportunity to exchange knowledge, experience and ideas for public health services provided according to need and on equal terms.” Try http://www.sweden.gov.se/sb/d/2950/ a/17124;jsessionid=ah4CQUeIYt69

25. Japan, health and longevityIn Japan in 1963, the Old-Age Welfare Law provided free medical care for those over 70, followed in 1982 by reforms of Health and Medical Services for the Aged. The Gold Plan of 1989 led to a large expansion of nursing beds and home help services.

26. Between 1950 and 1970, the Japanese population grew from 83-104 million. The median age in 1950 was 19 years. Between 1970 and 1995, the population increased to 125 million, and the median population age doubled to 38. From 1995 to 2020, the median age is projected to increase to 44, the total population, reducing slightly to about 123 million.Japan, with its compulsory universal social health insurance system, pays for health care through insurance premiums and taxes in different proportions, depending on which insurance scheme they belong to. Over 80% of health care providers are private. This system resembles pay-as-you-go.

27. What have we learnt about retirement ?The quality of life is measured by longevity which depends on the individual and national economy. Comfortable longevity is reflected by adequate pensions and health care plans.The private annuity or life insurance business seems universally desirable, witness Sweden. Inflation destroys savings.Pensions combined with health care plans are sometimes compulsory.