Percent Of Payroll Research Articles

Pension System in Guinea Bissau: Key Challenges and Prospects for the Future

The government of Guinea Bissau is considering implementing the pension fund included in the 2015 Budget Law. It requested a technical assistance from the World Bank to conduct an initial diagnostic of the pension system with a focus on the public service pension scheme. The objective of this note is an initial step to respond to this request. The analysis shows that it is not recommendable for Guinea Bissau to set up a pension fund for the public service pension scheme at this stage. Although the 2015 Budget Law envisages to create a pension fund, its financing (6 percent of payroll) would not be enough to pay existing pensions. Importantly, creating a pension fund in a weak governance environment is extremely risky while the establishment of a strong regulatory framework would be a prior condition for the implementation of such a pension fund. As such, establishing a pension fund for the public service employees would bring significant administrative and fiscal challenges and therefore is not in the interest of the pensioners. However, some measures could be taken immediately to improve the public services pension schemes. These measures include to review and update the list of current beneficiaries including “proof of life,” systematically make pension payments through the banking system and introduce some administrative reforms. Changes to the parameters of the current public pension could be also be adopted to provide more equitable pension benefits. The government may also want to consider developing a model like World Bank’s PROST toolkit to: (i) assess the fiscal costs of the current scheme, and (ii) evaluate different pension reform options. The World Bank’s pension reform options simulation toolkit, PROST, models pension contributions, entitlements, system revenues and system expenditures over a long period. It is designed to help policy-making make informed policy decisions and is currently used in 46 countries. The World Bank could provide technical assistance to develop such a model although the ability to develop this model will depend on the availability of sufficient data. As a conclusion, the Government of Guinea Bissau is advised to maintain the current institutional structure of the public service pension scheme, introduce administrative reforms and develop and introduce a coherent reform package on the basis of a model like PROST to introduce parametric reforms to improve fiscal sustainability and equity.

The Impact of Mandatory Coverage on State and Local Budgets

The policy option of extending mandatory Social Security coverage to newly hired uncovered state and local workers is often included in packages to eliminate the program’s financing shortfall. The arguments for mandatory coverage go beyond financial considerations, though, as extending coverage would bring benefit protections that state and local workers currently lack and would improve equity by more broadly sharing the burden of Social Security’s legacy costs. The main argument against mandatory coverage is that it would raise costs to public employers and workers. The actual cost increase depends on the extent to which employers reduce their existing pensions when adopting Social Security. This paper estimates the costs under four different integration strategies: 1) no adjustment to existing pensions; 2) match the level of the first-year benefit; 3) match the lifetime benefit; and 4) match the benefit to levels in neighboring states with Social Security coverage. This analysis is conducted for 22 state-administered plans in 13 states that were identified as lacking coverage. The results show that the cost of adding Social Security varies significantly, with the smallest increase for the “match lifetime benefit” option and the largest increase for the “no adjustment” option. Presenting the additional costs as a percent of payroll may exaggerate their burden on the employer as the increases will likely be split between employer and employee. Perhaps a better way to gauge the size of the cost increase is as a share of a state’s budget; this measure shows only a very modest impact.

Could Different Retirement Benefits Result in More Effective Teachers?

We evaluate the chance that changing retirement benefits will lead to greater teacher effectiveness. Changing from defined benefit pensions to defined contribution or cash balance plans would raise initial compensation and effectiveness, while it would increase turnover and thus lower effectiveness. We simulate the effects of higher initial compensation and greater turnover on teacher effectiveness from changing retirement plans and calculate the potential transition costs. There is a 60–70 percent chance that effectiveness would fall if retirement benefits are changed. Transition costs could amount to 0.8 percent of payroll in the third decade after changing retirement benefits.

Enhancing Social Security Benefits for Low Earners: Effects of Reducing Eligibility Requirements for Social Security Retirement Benefits

Under current law, eligibility for Social Security retirement benefits requires 40 quarters (roughly 10 years) of earnings in covered employment. While individuals with less than 40 quarters of employment may receive benefits based on the earnings record of an eligible spouse, a small number of unmarried individuals fail to qualify for retirement benefits due to a short earnings record. These non-qualified individuals often must depend on Supplemental Security Income (SSI) for support in retirement. However, SSI eligibility requirements limit earnings and asset accumulation, making it more difficult for beneficiaries to work or save. This paper explores the effects of eliminating the 40 quarters eligibility requirement. Doing so would allow retirement benefit eligibility for individuals with very short work histories and reduce dependency on SSI benefits. The effects of reducing the 40 quarters eligibility requirement are analyzed for the 1950 birth cohort using the Policy Simulation Group's GEMINI and PENSIM microsimulation models of the Social Security population and private pensions. Eliminating the 40 quarters eligibility requirement would increase benefits for approximately 5.8 percent of individuals. These benefit increases would be concentrated in the bottom three deciles of lifetime earnings, where 15 percent of individuals would receive increased benefits. Average benefit increases for affected individuals in the bottom three deciles of earnings would be around $2,400 per year. Benefit increases are concentrated among immigrants, whose shorter periods in the labor force increase the likelihood of not satisfying the current 40 quarters eligibility requirement. Due to the relatively small number of affected individuals, increases in total system costs would be modest. The 75-year actuarial deficit would increase from 1.70 percent of taxable payroll under current law to around 1.79 percent of payroll. While reducing or eliminating the 40 quarters eligibility requirement could increase benefit availability for very low lifetime earners, it would also increase benefits for individuals whose primary earnings were derived from employment not covered by Social Security. These individuals, mostly employees of state and local governments, could receive windfalls if other corrective actions were not taken. However, application of the existing WEP/GPO provisions to newly Social Security eligible state/local government employees could help correct for any imbalances in relative benefit generosity, although some modifications to WEP/GPO rules to maintain neutrality between covered and non-covered employees may be necessary. Moreover, increased Social Security retirement benefits could potentially remove individuals from SSI, which could then put at risk these individuals' eligibility for means-tested assistance programs such as Medicaid and Food Stamps. In most cases, however, increased Social Security benefits would supplement SSI rather than eliminate it.

Sustainable Social Security: What Would It Cost?

The standard measure of the 75-year Social Security imbalance is 1.87 percent of payroll, but raising taxes this much would not make finances sustainable. We consider exact and approximate infinite horizon measures based on different strategies for extending the projections past 75 years. These indicate imbalances of 3.1 to 5.7 percent of payroll. We also suggest a simpler common sense measure: the tax increase necessary to make the Trust Fund Ratio equal in the 74th and 75th years. Under the Trustees' mortality projection, it indicates 3.1 percent imbalance, with a more rapid mortality decline of 4.2 percent. All sustainability measures indicate greater imbalance than is currently thought.

The Outlook for Pension Contributions and Profits in the U.S.

This paper addresses the relationship between defined benefit pension plans and corporate profits and examines the outlook for defined benefit plans in the wake of the bear market. Due to a soaring stock market during the extended bull market of 1982-2000, together with federal regulations and legislation that shifted funding requirements forward, pension contributions virtually disappeared as a corporate expense for much of the previous two decades. Our analysis suggests that in the absence of the stock market boom and the regulatory and legislative changes that reduced funding, the average firm's contribution to its pension plan would have been 50 percent higher during the 1982-2001 period - 9.9 percent of payroll instead of 6.6 percent of payroll. The downturn in contributions had a significant impact on corporate profits. Lower pension contributions, all else equal, will produce a dollar-for-dollar increase in before-tax profits. Our analysis implies that corporate profits were roughly 5 percent higher than they would have been otherwise. Higher profits produce a feedback effect as they lead to further capital gains and further reductions in contributions. Given the current bear market and an aging workforce, the feedback now goes in the opposite direction. Now that the stock market bubble has burst, our analysis suggests that contributions relative to wages would return to their pre-1982 levels of about 10 percent. This implies that - on a permanent basis - contributions would double from their current level of $40 billion to $80 billion. Assuming that investors view the increase as permanent, the feedback effect would lower the value of equities held by pension funds by $20 billion. In short, as the economy emerges from recession and the bear market draws to a close, firms and investors must be prepared to contend with a strong headwind from pension funding obligations that could slow the recovery.

An Assessment of the Proposals of the President's Commission to Strengthen Social Security

Two of the Social Security Commission's plans restore actuarial balance without their individual accounts, primarily or entirely through benefit reductions. Both have voluntary carve-out individual accounts, with one requiring (subsidized) add-on contributions for opening accounts. Liability track diverted payroll taxes (with interest) and are repaid by reducing traditional benefits. The diverted payroll worsens Trust Fund finances because the liability accounts carry sub-market interest rates and because of cash-flow problems. If all eligible workers (two-thirds) open accounts, general revenue transfers over 75 years are 1.2 to 1.5 (0.8 to 1.2) percent of payroll. Preserving disability benefits at their scheduled levels raises transfers to 1.5 to 1.7 (1.1 to 1.3) percent. Nevertheless, expected combined benefits are significantly reduced (and risk-adjusted benefits more so). In 75 years, account assets are 53 to 66 (35 to 44) percent of GDP, and liability accounts exceed 20 (15) percent of GDP.

Management Training and Development: A New Zealand Study

AbstractStudies have shown that management training and development (MTD) can be a strategic weapon in improving performance and in building and sustaining competitive advantage. However, recent studies suggest that MTD is under-valued and under-used as a strategic tool by New Zealand firms as, despite a managerial skill shortage, New Zealand firms have not invested heavily in MTD. The present paper discusses a study of employer-based MTD in New Zealand that investigated managerial attitudes towards, and propensity to engage in, MTD. The study found several indicators that predict four MTD related variables (the MTD index, the percent of payroll spent on MTD, the increase in training expenditure and expected future increases in the MTD budget). The results suggest organisations that engage in MTD improve organisational effectiveness and implement their business strategy better and that MTD was seen as an important tool in gaining a competitive advantage.

Management Training and Development: A New Zealand Study

AbstractStudies have shown that management training and development (MTD) can be a strategic weapon in improving performance and in building and sustaining competitive advantage. However, recent studies suggest that MTD is under-valued and under-used as a strategic tool by New Zealand firms as, despite a managerial skill shortage, New Zealand firms have not invested heavily in MTD. The present paper discusses a study of employer-based MTD in New Zealand that investigated managerial attitudes towards, and propensity to engage in, MTD. The study found several indicators that predict four MTD related variables (the MTD index, the percent of payroll spent on MTD, the increase in training expenditure and expected future increases in the MTD budget). The results suggest organisations that engage in MTD improve organisational effectiveness and implement their business strategy better and that MTD was seen as an important tool in gaining a competitive advantage.

Would a Privatized Social Security System Really Pay a Higher Rate of Return?

Many advocates of social security privatization argue that rates of return under a defined contribution individual account system would be much higher for all than they are under the current social security system. This claim is false. The mistake comes from ignoring accrued benefits already promised based on past payroll taxes, and from underestimating the riskiness of stock investments. Confusion arises because three distinct reforms are muddled. By privatization we mean creating individual accounts (which could, for example, be invested exclusively in bonds). By diversification we mean investing in stocks, and perhaps other assets, as well as bonds; diversification might be undertaken either by individuals in their private social security accounts, or by the social security trust fund. By prefunding we mean closing the gap between social security benefits promised to date and the assets on hand to pay for them. Any one of these reforms could be implemented without the other two. If the system were completely privatized, with no prefunding or diversification, the social security system would need to raise taxes and/or issue new debt in order to pay benefits already accrued. If the burden were spread evenly across all future generations via a constant proportional tax, the added taxes would completely eliminate any rate of return advantage on the individual accounts. We estimate that the required new taxes would amount to about 3 percent of payroll, or about a quarter of all social security contributions, in perpetuity. Unlike privatization, prefunding would raise rates of return for later generations, but at the cost of lower returns for today's workers. For households able to invest in the stock market on their own, diversification would not raise rates of return, correctly adjusted to recognize risk. Households that are constrained from holding stock, due to lack of wealth outside of social security or to fixed costs from holding stocks, would gain higher risk-adjusted returns and would benefit from diversification. If this group is large, diversification would raise stock values, thus helping current stockholders, but it would lower future stock returns, thus hurting young unconstrained households. Overall, since the number of truly constrained household is probably not that large, privatization and diversification would have a much smaller effect on returns than reformers typically claim.

Hospitals, Insurance, and the American Labor Movement: The Case of New York in the Postwar Decades

In the summer of 1989, an extended strike by the various “Baby Bell” telephone companies, including those of New York, Massachusetts, California, and thirteen other states in the Northeast, Midwest, and West Coast, brought to public attention the importance of health and hospital insurance to the nation's workers. In what theLos Angeles Timesheadline proclaimed was a “Phone Strike Centered on the Issue of Health Care,” workers at NYNEX, Pacific Bell, and Bell Atlantic went out on strike over management's insistence that the unions pay a greater portion of their hospital insurance premiums. In contrast to their willingness to grant wage concessions throughout most of the 1980s, the unions and their membership struck to protect what was once considered a “fringe” benefit of union membership. What had been a trivial cost to companies in the 1940s and 1950s had risen to 7.9 percent of payroll in 1984 and 13.6 percent by 1989. Unable to control the industry that had formed around hospitals, doctors, drug companies, and insurance, portions of the labor movement redefined its central mission: the fringes of the previous forty years were now central concerns. In the words of one local president engaged in the bitter communication workers strike: “‘It took us 40 years of collective bargaining’ to reach a contract in which the employer contributed [substantially to] the costs of health care, ‘and now they want to go in one fell swoop backward.’”

Pay Equity in Minnesota: the Facts Are in

This paper presents information about Minnesota's experience with pay equity at both the state and local government levels. Implementation for state government was initiated in 1983 and com pleted in June 1987. Most local governments have completed studies, and implementation is planned within the next few years. The cost to state government has been 3.7 percent of payroll, and the estimated cost to local governments averages 2.6 percent of payroll. Minnesota's experience shows that pay equity can be implemented smoothly at a reasonable cost.

The Case for Extending Social Security to Government Employees. Comment

Mickey Levy has contributed very worthwhile paper on the desirability of covering federal, state, and local government employees under Social Security in the Journal .' I am in complete agreement with his general viewpoint (and also with his views on the somewhat unrelated matter of the undesirability of financing the Social Security program in part from general revenues). However, I believe that he has placed too much emphasis on the windfalls that govemment employees have received from short periods of Social Security coverage after or during their government service in order to obtain the minimum Social Security benefit. The value of that benefit will diminish over time, because the 1977 Act froze it at $122 per month at the initial time of entering the roll. But even in the past, the minimum benefit was not the most important element in windfall benefits, but rather the availability of heavily weighted benefit for short service at moderate or high earnings. It did not, in the past, require much earnings to obtain more than the minimum benefit, and this will be even more the case in the future. In the absence of universal coverage, these windfall benefits can be ameliorated, at least for future service, by change in the benefit computation made by Social Security (for several methods of accomplishing this, see Robert J. Myers, An Alternative Approach to Universal Social Security Coverage, Transactions, Society of Actuaries, Vol. 31, 1979). Levy suggests method of transition for covering existing government employees under Social Security, by using a weighted average of predesignated rates of return that would have occurred under each pension program , based on the proportion of their contributions to each system. This might be fine in theory, but it is utterly impossible to do in practice. Rates of return are by no means precise elements, but rather, they differ widely depending upon the assumptions made. Finally, Levy states (in footnote 15) that the cost to the federal government of the Civil Service Retirement system is about 171/2 percent of payroll. Actually, the situation is quite different from this. The latest actuarial valuation showed that the level cost to the government was about 33 percent of payroll. However, if CSR were financed by the same standards applicable to private pension plans under ERISA, the annual employer cost in 1980 would be 79.8 percent of payroll (see Federal Pension Programs, Working Papers, President's Commission on Pension Policy, January 1981).