Individual Account System Research Articles

Study of an SB2 Beneficiary’s Pension Plan

The individual account pension system established by the Social Security Act 1997 shows that the contributions of beneficiaries invested in retirement fund managers have had negative returns and the investment instrument in which the contributions of the retirement savings system are invested are not known. The objective of this study is to analyze the contributions in AFORES of an SB2 classification beneficiary invested in SIEFORES and the performance they have generated that the statements reveal to quantify in a prospective study the value of the pension in its old age. It is hypothesized that the pension obtained by a beneficiary is insufficient to sustain a quality of life at this unproductive stage of life. It applies the hemerographic-legislative technique, and a quantitative study of time series. As a result of the study is concluded that the regime individual account system pensions contains uncertainty factors for the beneficiary and meets strict requirements for temporaryity and work activity, and pension income to be received in old age will not guarantee the quality of life of individual account holders.

Financial and Economic Evaluation of Cotton Production in New HalfaAgricultural Corporation, Kassala State, Sudan (1981/1982-2009/2010)

The New Halfa agricultural Production Corporation (NHAPC) is considered as one of the leading agricultural scheme in cotton production, being the second largest in comparison with the Gezira scheme concerning the area. The Government’s agricultural policies were the main factors for the studying and knowing the financial and economic evaluation indicators for the production of cotton in New Halfa Agricultural Production Corporation during the period (1981/1982-2009/2010), and the comparison between these indicators for different periods in producing cotton at New Halfa Agricultural Production Corporation (first period 1981/1982-1991/1992) individual account system, (second period 1992/1993-2009/2010) liberalization in the following phases: Financial and economic indicators (net present worth NPW, benefit cost ratio B/C , internal rate of return IRR, net benefit investment N/K ratio, and payback period), area, production and average yield. The study was mainly based on the secondary data of the cotton crop at (NHAPC) such as areas, production, average yield, return, costs, benefits and net benefits for period (1981/82- 2009/10), using descriptive statistics, simple mathematics, and different ways of analysis and descriptive tables. The financial and economic evaluation during the periods (1981/1982- 2009/2010), (1981/1982-1991/1992), (1992/1993- 2009/2010) study showed that the production of cotton was feasible and the indicators were positive. The study recommended that the Government should have a commitment to appropriate agricultural policies, subsidize the agricultural sector particularly with regard to increasing the areas of cotton production, reduce the cost of production, process cotton locally to increase the added value, and manufacture the inputs locally for making more foreign currencies, and increase the cotton production through research development and extension.

Prospective Study of the Pension System in Mexico: AFORES in the Human Rights, Model of Guaranteeism, and Vital Minimum

The individual account pension plan will soon recognize those beneficiaries about to receive their pension under this scheme. The 1997 Social Security Law has incorporated strict requirements to the pension plan; therefore, the possibility to obtain a retirement through an individual account is complicated for the employee. The pension will not necessarily guarantee the quality of life given that the retirement funds have been accumulated based on contribution rates and voluntary savings but not on the monthly average of the contribution base wage, which are funds affected by negative yields. The objective of this study is to analyze the AFORES classification SB2 and the performance invested in the SIEFORES to quantify the value of the pension. It applies the hemerographic-legislative technique in the model of the guaranteeism and the principle of the minimum vital in the framework of the human rights, and a quantitative study of time series. It is concluded that individual account system pensions will not guarantee the quality of life of individual account holders.

A Study on Individual Training Account System Experiences and Labor Market Outcomes of the College Graduate Youth

A Study on Individual Training Account System Experiences and Labor Market Outcomes of the College Graduate Youth

Impact of changing policies on agricultural productivity: a case of the Gezira scheme, Sudan

The purpose of this paper is to explore the impact of changing agricultural policies on the productivity of agricultural crops and area in the Gezira scheme, Sudan. The study focuses on four major institutional changes namely, joint account system (JAS), individual account system (IAS), economic liberalisation (EL) and water users associations (WUAs) in the Gezira scheme. Data on productivity and area of the crops were collected for the period of 40 years from 1970s to 2009 to investigate the historical impact of policies on productivity in Gezira scheme. Data were statistically analysed using SPSS. The results indicate that sorghum productivity and area have been increasing owing to change in policies. Cotton productivity and area show decreasing trend with time. Groundnuts productivity gives mixed results. The accumulated impact of IAS, EL and WUAs gives positive results on sorghum but negative results for cotton. It can be said that change of institutional polices and arrangements in irrigated sector have an influence on productivity of agricultural crops.

Pension Reform in the Presence of Financial Market Risk

As their populations grow older, the industrial countries face steep increases in public pension costs. If countries change their pension systems in advance of sharply higher pension costs, it is possible to prepare for the added retirement costs by funding a portion of the future liabilities through increased saving. By boosting capital formation and economic growth, higher saving has the potential to increase the incomes - and the welfare - of future workers and retirees.This paper considers investment accumulation and pension adequacy in light of financial market risk. We examine two alternative reforms of the U.S. pension system that are aimed at pre-funding part of future pension liabilities and increasing national saving. The first policy expands the role of advance funding in the existing Social Security system by moving toward a policy of tax increases that are large enough to maintain close actuarial balance over a 75-year horizon. Under the alternative policy, the traditional Social Security program adopts pay-as-you-go financing after 2033 and a new system of individual investment accounts is adopted to supplement (reduced) pensions under the traditional system. Advance funding takes place in the new individual investment account system.

Existed Pension System and Reforms

In considering the Azerbaijan’s pension system and its financial mechanisms in this paper, the main point is to draw attention to changes in the legislation and further development processes. The main directions of reforms of the pension system in Azerbaijan, development of individual account system in the state social insurance system, changes in the calculation of pensions, international experiences are reviewed in this chapter and sustainable development prospects of Azerbaijan’s insurance-pension system are analyzed. As summary of research the number of recommendations on pension system’s development, its difficulties and solutions are provided.

New Zealand: The Supreme Political Football

New Zealand, like Australia, entered the 1980s without a mandatory earnings-related pension program. Unlike Australia, however, New Zealand also ended the twentieth century without such a program. Although the New Zealand pension system has been perhaps the most frequently changed of any of the six countries considered here, the basic shape of that program remains very close to what it was two decades ago. Indeed, one prominent analyst of New Zealand pension policy has likened it to an old-fashioned wobble doll [which] has taken many a thump from politicians in the last decade. But like the wobble doll, after some gravity-defying oscillations it returns to much the same position...of a basic, flat-rate, taxable, individual state pension, no compulsory private saving and no tax incentives... Understanding those two seemingly conflicting attributes of New Zealand pensions - frequent pension policy change and the absence of a fundamental transformation of pension policy - is one of the primary objectives of this chapter.The other primary objective concerns the lessons that New Zealand experience has to offer about the politics of major pension reforms. Since 1997, New Zealand has seriously both a move to an individual account system and a large collective investment fund. A contributory, individual accounts plan (although without earnings-related benefits) was put before voters in a 1997 referendum, and overwhelmingly rejected. A collective investment fund proposed by the current Labour-Alliance coalition government was enacted by Parliament in 2001, but it remains vulnerable to dismantling by a future government. Are there lessons that New Zealand can offer about the political hurdles that are likely to arise with each of these reform proposals? And does New Zealand suggest any lessons about ways in which these hurdles can be resolved?

How to Integrate Disability Benefits into an Individual Account System: The Chilean Model

Chile offers an innovative approach to disability insurance within a multi-pillar social security system. The individual's retirement savings account is used as part of his disability insurance, but if he becomes disabled the account is topped up enough to finance a defined benefit annuity that pays 70% of the reference wage. This is accomplished primarily through the private insurance market, but with government providing regulations and back-up guarantees. The private pension funds and insurance companies that participate in the assessment process have a pecuniary interest in keeping costs low, unlike most public systems that are run by agencies without a personal incentive to contain costs. The individual accounts, used for old age retirement savings, help to finance the disability and survivors' insurance as a joint product. This further keeps costs down and makes the system less sensitive to demographic shocks than a public pay-as-you-go system would be. However, pre-funding a defined benefit makes system costs much more sensitive to interest rate shifts. The defined benefit reduces risk to the worker but non-differentiated pricing creates cross-subsidies and, in a competitive market, incentives for creaming. Some of the cost reductions to the private insurance may imply a larger future public obligation, due to the minimum pension guarantee. This study examines the potential successes and pitfalls of this mixed public-private funded system of disability insurance and evaluates whether it provides a useful model for the US and other countries.

DOES SOCIAL SECURITY AFFECT RETIREMENT AND LABOR SUPPLY? EVIDENCE FROM CHILE

This paper explores the effects of the social security system on retirement and labor supply decisions. Due to the regulations established by Chilean social security law reform, two social security systems coexist in Chile: the “Pay-As-You-Go” and the individual account system. The coexistence of the systems allows us to better understand the effects of both social security systems on retirement and labor supply. We find that (1) larger benefits in any social security system induce earlier retirement and (2) larger variance of benefits in the individual account system induces later retirement. We do not find major impacts of social security on labor supply of individuals in the labor force.

Payout Choices by Retirees in Chile: What are They and Why?

In 1981 Chile adopted its new multi-pillar system, which featured privately managed individual accounts. Starting in 1983 payouts from the accounts were permitted and detailed rules about payouts were put in place. The Chilean scheme therefore gives us an opportunity to examine how pensioners and pension providers react to individual account systems during the payout stage and how regulations shape these reactions. We use aggregate time series data obtained from the pension fund and insurance industry regulators, individual-level data on all annuitants in the system, and interviews with pension providers and regulators for this analysis. Retirees in Chile have a choice between early versus normal retirement from the system and between annuitization versus programmed withdrawals (PW); lump sum withdrawals are largely ruled out. These choices determine the time stream of benefits and the eventual financial burden that will be placed on the public treasury. Almost twothirds of all retirees have annuitized, but this proportion differs greatly between early and normal age retirees. Currently 60% of all retirees have chosen to retire early, many before age 55. (Early retirement means that they stop contributing and start withdrawing; it does not mean that they stop working). Most (85% of) early retirees have annuitized, while most (66% of) normal age retirees have taken PW. We present evidence that this disparate behavior is explained by incentives and constraints stemming from guarantees and regulations on pensioners and pension providers. These rules have lead workers with small accumulations to take PW at the normal age, with the minimum pension guarantee providing longevity and investment insurance. They lead workers with large accumulations to retire early, with annuities providing insurance. Regulations have given insurance companies selling annuities a competitive advantage in marketing to this group, and they do so aggressively. Early access to retirement saving through early retirement or front-loaded PW imposes a potential financial burden on the government because of the minimum pension guarantee, which has been rising in real value through time. As a result, the expected public share of the total pension payout grows with a cohort's age and may exceed expectations as cohorts that retired under the new system grow very old. Annuitization mitigates (but does not completely eliminate) this cost to the public treasury. This analysis suggests that, with appropriate incentives, a high proportion of pensioners will purchase annuities in countries with individual account systems. But these countries need to coordinate early withdrawal conditions with minimum pensions and other safety nets, in order to avoid moral hazard problems and unexpected public liabilities.

Individual accounts: Lessons from Sweden

Abstract Increasing numbers of countries are using mandatory funded individual accounts to provide retirement. Sweden in 2000 instituted a mandatory funded individual account system that differs in a number of ways from earlier such systems. It incorporates features that reflect lessons learned from other countries; in particular, ways to reduce the system's administrative costs.

Pension reform in Europe in the 1990s: Lessons for Latin America

Reform of European pension systems started from a situation in which income differentials were fairly small, partly owing to the high coverage of the system. In Latin America, informal working and inadequate coverage are still problems, and income inequality is high. Even so, both regions are moving towards individual account systems with strong links between contributions and benefits. Latin America has introduced compulsory financial accounts. Europe is moving towards lifetime pay-as-you-go accounts. Some European countries have set up notional defined contribution systems. In Latin America, the need to provide guarantees for the poor and the specific problem of women’s poverty will be at the forefront as long as coverage remains inadequate. Other important issues are the minimum retirement age and the moral hazard associated with systems that encourage or support early retirement. Where these points and the problems of poverty are concerned, the European experience repays careful study.

An empirical analysis of the investment performance of the Chilean pension system

The Chilean national pension system is often viewed as the model for moving from a pay-as-you-go system to a prefunded, individual account system. One measure of its success has been its 12% average real rate of return. This study uses monthly return data to examine the source of these returns and to compare the risk-adjusted returns of the pension system to those of Chilean stock indices, debt instruments, and mutual funds. Tests using the Sharpe ratio and the multi-factor Jensen alpha suggest that the pension returns are consistent with the overall riskiness of the Chilean economy. Based on our findings, neither the structure of the Chilean pension system nor the performance of the fund managers should permit the system to earn abnormally high returns in the future.

Administering Individual Accounts in Social Security: The Role of Values and Objectives in Sharing Options

This paper seeks to clarify the current debate surrounding individual accounts by exploring systematically the variety of structural and administrative arrangements that either have been proposed for individual account systems in this country or have been adopted in other parts of the world. Plans from Chile, Latin America, Australia, the United Kingdom, Sweden and the United States are examined, including the Roth, personal security accounts, Ball, Porter, Moynihan and Feldstein/Samwick proposals. The paper focuses on two aspects of arrangements: (1) the mechanisms employed under each plan to move the money from contributors to pension fund managers and back to retirees and (2) the variations among the plans in the financial management choices available to workers. The purpose is to analyze the logic underlying different structural arrangements, and to help quantify the linkage between structure and outcomes. In particular, available information can help to illustrate some of the potential relationships between the structure of an individual account plan, gross investment returns, administrative costs, and net returns. The goals of individual accounts systems include an improved overall economy, higher rates of return on Social Security contributions, greater individual choice and responsibility, and reduced government liabilities. No single plan is likely to be the best one to achieve all of these goals. Constructing an individual account plan requires making choices in which one objective must be sacrificed in order to pursue another. The administrative costs associated with the plans implemented in Latin America and the United Kingdom have caused some analysts to look for alternative structures that promise lower costs and (potentially) higher net returns to workers. The alternatives tend to suffer from one or more drawbacks of their own, however. Employers may have to shoulder a higher burden, worker choice may be constrained, or the government may have to be relied upon to play a major role in collecting contributions, maintaining account information, or even managing the accumulating funds. The trade-off between worker choice and administrative costs is also present in the design of withdrawal options, where choice is likely to increase costs as a result of both adverse selection and the marketing and promotional costs of private insurers. A further issue that divides plans concerns the treatment of gender differences in life expectancy under the different payment options. Before Americans can consider proposals for individual accounts they must first develop more of a consensus about the relative importance of the objectives being pursued and the social values being understood.

The Prospect of Punsion Reform in China : The Unified Management of Regional Pension Funds and the Individual Account System

The Prospect of Punsion Reform in China : The Unified Management of Regional Pension Funds and the Individual Account System

401(k) Investment Decisions and Social Security Reform

This paper uses the 1995 Survey of Consumer Finances to show that 401(k) participants with an underlying defined benefit plan are more likely to invest in equities than are participants whose 401(k) is their primary plan. This suggests that workers with a guaranteed source of retirement income are more likely to invest their other retirement assets more aggressively. Removing this guarantee might result in more conservative investment. Therefore, using current 401(k) asset allocation behavior to project income under a Social Security individual account system with reduced guaranteed benefits could overstate returns to these accounts, thus overstating their attractiveness relative to the current system.

Mutual Funds and Institutional Investments: What is the Most Efficient Way to Set Up Individual Accounts in a Social Security System?

One of the biggest criticisms leveled at defined contribution individual account (IA) components of social security systems is that they are too expensive. This paper investigates the cost-effectiveness of three options for constructing funded social security pillars: 1) IA's invested in the retail market with relatively open choice, 2) IA's invested in the institutional market with constrained choice among investment companies, and 3) a centralized fund without individual accounts or differentiated investments across individuals. Our questions: What is the most cost-effective way to organize a mandatory IA system, how does the cost of an efficient IA system compare with that of a single centralized fund, and are the cost differentials large enough to outweigh the other important considerations? Our answers, based on empirical evidence about mutual and institutional funds in the U.S.: The retail market (option 1) allows individual investors to benefit from scale economies in asset management, but at the cost of high marketing expenses that are needed to attract and aggregate small sums of money into large pools. In contrast, a centralized fund (option 3) can be much cheaper because it achieves scale economies without high marketing costs, but gives workers no choice and hence is subject to political manipulation and misallocation of capital. Mandatory IA systems can be structured to get the best of both worlds: to obtain scale economies in asset management without incurring high marketing costs or sacrificing worker choice. To accomplish this requires centralized collections, a modest level of investor service and constrained choice. The system of constrained choice described in this paper (option 2) is much cheaper than the retail market and only slightly more expensive than a single centralized fund. We estimate that it will cost only .14-.18% of assets annually. These large administrative cost savings imply a Pareto improvement so long as choice is not constrained too much.'

Regulation of Withdrawals in Individual Account Systems

Funded mandatory pension systems based on individual accounts are spreading around the world. With the maturation of these systems, regulating the withdrawal of retirement savings will become increasingly important. Government regulation of withdrawals should mandate the purchase of inflation-indexed life annuities exceeding income available from government welfare programs for the retiree and potential survivors. Proper functioning of insurance markets does not, however, require annuitizing the entire account balance. Instead, more flexibility for the choice of withdrawals could be permitted for any remaining funds, helping to tailor income streams to individual needs and living arrangements.

Regulation of withdrawals in Individual Account Systems

Funded mandatory pension systems based on individual accounts are spreading around the world. With the maturation of these systems, regulating the withdrawal of retirement savings will become increasingly important. Government regulation of withdrawals should mandate the purchase of inflation-indexed life annuities exceeding income available from government welfare programs for the retiree and potential survivors. Proper functioning of insurance markets does not, however, require annuitizing the entire account balance. Instead, more flexibility for the choice of withdrawals could be permitted for any remaining funds, helping to tailor income streams to individual needs and living arrangements.