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A Primer on U.S. Pension Systems

A Primer on U.S. Pension Systems S. Ghon Rhee, K. J. Luke Distinguished Professor of International Finance and Banking University of Hawai’i The 6 th International Financial Forum April 27-28, 2005, Seoul, Korea Asia-Pacific Financial Markets Research Center, University of Hawaii

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A Primer on U.S. Pension Systems

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  1. A Primer on U.S. Pension Systems S. Ghon Rhee, K. J. Luke Distinguished Professor of International Finance and Banking University of Hawai’i The 6th International Financial Forum April 27-28, 2005, Seoul, Korea Asia-Pacific Financial Markets Research Center, University of Hawaii

  2. Retirees generally rely on three sources of income for retirement: Source: U.S. Social Security Administration, Facts and Figures about Social Security (August 2004) US Retirement Pension and Security Systems: Three-Legged Stool Asia-Pacific Financial Markets Research Center, University of Hawaii

  3. The U.S. Social Security System:A “Pay-As-You Go” Basis Social security taxes [or known as FICA (Federal Insurance Contributions Act) taxes] are collected and divided among four Trust Funds: • The federal OASI (Old-Age and Survivors Insurance) Trust Fund:5.3% of FICA tax • The federal DI (Disability Insurance) Trust Fund: 0.9% of FICA tax • The federal HI (Hospital Insurance) Trust Fund: 1.45% of FICA tax • The federal SMI (Supplementary Medical Insurance) Trust Fund: funded by general federal tax revenues and monthly premiums paid by enrollees Asia-Pacific Financial Markets Research Center, University of Hawaii

  4. Sources and Uses of Social Security Revenues in 2003 Asia-Pacific Financial Markets Research Center, University of Hawaii

  5. Distribution of Social Security Tax Dollar (As of 2004 ) 41.7 million people 7.9 million people 39.7 million people Asia-Pacific Financial Markets Research Center, University of Hawaii

  6. Trust Funds Operations (2004) Unit: $ Billion Source: The 2005 Annual Social Security and Medicare Trust Fund Report Asia-Pacific Financial Markets Research Center, University of Hawaii

  7. Short-Term Outlook for Trust Funds:OASI, DI, and HI Trust Fund Ratios (Assets/Annual Expenditures)% Source: The 2005 Annual Social Security and Medicare Trust Fund Report Asia-Pacific Financial Markets Research Center, University of Hawaii

  8. Long-Term Outlook for Trust Funds (I):Social Security and Medicare Cost as a Percentage of GDP Source: The 2005 Annual Social Security and Medicare Trust Fund Report

  9. Long-Term Outlook for Trust Funds (II) Income and Cost Rates (As Percentage of taxable payroll) Source: The 2005 Annual Social Security and Medicare Trust Fund Report Asia-Pacific Financial Markets Research Center, University of Hawaii

  10. Life Expectancy at Birth (1960, 1980, & 2002) Asia-Pacific Financial Markets Research Center, University of Hawaii

  11. Life Expectancy at 65 (1960, 1980, & 2002) Asia-Pacific Financial Markets Research Center, University of Hawaii

  12. Average Retirement Age(1950-55, 1970-1975, & 1995-2000) Asia-Pacific Financial Markets Research Center, University of Hawaii

  13. Long-Term Deficits of Four Trust Funds (Percent of GDP) Source: The 2005 Annual Social Security and Medicare Trust Fund Report Asia-Pacific Financial Markets Research Center, University of Hawaii

  14. U.S. Retirement Market Assets (2003) IRA 1.29 Trillion Employer sponsored accounts 1.4 Trillion $2.7 Trillion $9.3 Trillion Total 12.0 trillion The $2.7 trillion in mutual fund retirement assets accounted for 1/3 of all mutual fund assets Source: Investment Company Institute, 2004 Fact Book Asia-Pacific Financial Markets Research Center, University of Hawaii

  15. U.S. Retirement Assets by Types of Accounts The $12 trillion in U.S. retirement market assets are divided between IRA ($2.98 trillion) and Employer Sponsored Accounts ($9.0 trillion) $2.98 Trillion $9.0 Trillion Source: Investment Company Institute, 2004 Fact Book Total 12.0 trillion Asia-Pacific Financial Markets Research Center, University of Hawaii

  16. Who Manages IRA Assets? Unit: $ Billion 1.Bank and thrift Institutions 2. Life Insurers 3. Mutual funds 4. Securities Companies Source: Investment Company Institute, 2004 Fact Book Asia-Pacific Financial Markets Research Center, University of Hawaii

  17. Mutual Fund-Managed Retirement Assets (2003) $237 Billion $260 Billion $898 Billion $1,292 Billion Total $2,687 Billion Source: Investment Company Institute, 2004 Fact Book Asia-Pacific Financial Markets Research Center, University of Hawaii

  18. Mutual Fund Retirement Assets by Types of Funds (2003) Unit: $ Billion Source: ICI, 2004 Fact Book Asia-Pacific Financial Markets Research Center, University of Hawaii

  19. Employer-Sponsored Retirement Assets (2003) $1Trillion $1.9 Trillion Total $9.00 trillion $1.3 Trillion $2.5 Trillion $2.3 Trillion Source: ICI, 2004 Fact Book Asia-Pacific Financial Markets Research Center, University of Hawaii

  20. 401(k) Plan • 401(k) plans: Named after the section number of of the Internal Revenue Code; Most important component of profit sharing program • Similar salary-deferral retirement plans are authorized in the tax code for: 457 plans: Public-sector employees 403(b) plans: Nonprofit-sector employees • 401(K) plan assets: $1.9 trillion (2003) • Number of Participants: 44 million workers • EBRI/ICI Joint Database • 15.0 million 401(k) plan participants • 45,152 employer-sponsored 401(k) plans • $776.0 billion in assets. Asia-Pacific Financial Markets Research Center, University of Hawaii

  21. Asset Allocation by 401(k) Plan (2003) Source: EBRI/ICI (2004) Asia-Pacific Financial Markets Research Center, University of Hawaii

  22. Employee Stock Ownership Plans • An ESOP is a defined contribution plan that allows employees to become owners of stock in the company they work for. • Equity based deferred compensation plan. • Only ESOP is required by law to invest primarily in the securities of the sponsoring employer. • 401(k) plan may be used for employee ownership; a company can match employee contributions with its own stock. Asia-Pacific Financial Markets Research Center, University of Hawaii

  23. Growth of ESOP Assets (Estimates) Year Assets 1990 $133 billion 1994 $184 billion 1995 $226 billion 1998 $350 billion 2001 $400 billion 2005 $500 billion As of 2005: 10 Million People Participating in 11,500 plans Source: National Center for Employee Ownership Asia-Pacific Financial Markets Research Center, University of Hawaii

  24. Mahalo for You Attention!

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