Disability benefits in an individual account system by Estelle James FIAP conference, 2007.

Slides:



Advertisements
Similar presentations
Annuities in Poland Current state of discussions Agnieszka Chłoń-Domińczak Ministry of Labour and Social Policy Tallin, October 12, 2006.
Advertisements

Crowd-out, Adverse Selection and Information in Annuity Markets: Evidence from the payout phase of the Chilean DC plan Edwards and James MRRC workshop,
Australian superannuation: a statistical outlier OECD-ABS Workshop on Pensions Canberra Ross Clare, Director of Research, ASFA Wednesday, 24 April 2013.
Life Insurance Policies “Whole Life Insurance”
7.01 Life Insurance. Term Insurance Provides insurance for a specific period of time Relatively low cost Policy benefits: young person can buy a large.
Protects the standard of living of the survivors Policyholder dies = ins. co. pays survivors Proceeds: the money paid to survivors Beneficiary: each person.
What Other Countries have Done: Issues for Government and Providers Presented at IIF conference, Dublin, November 2006 By Estelle James.
Issues in survivors’ insurance Estelle James World Bank Pension Mini-Course, 2011.
PRIVATIZATION OF SOCIAL SECURITY: LESSONS FROM CHILE by Peter Diamond Presented by Agata Narożnik Ertem Ejder.
European Commission 23 Feb 2010Directorate-General for Employment, Social Affairs and Equal Opportunities1 Pension systems across the EU - Before & after.
1 III Conference on Insurance Regulation and Supervision in Latin America Private Pensions in OECD countries Juan Yermo, OECD Santiago, Chile, 9 October,
Long-run Pension System Reforms in Europe and Central Asia Anita M. Schwarz Lead Economist Human Development Department Europe and Central Asia Region.
Group 6.  Definition: a plan for setting aside money to be spent after retirement. ◦ Individual retirement account (IRA )  contribute a limited yearly.
The fiscal impact of pension reform: economic effects and strategy Ewa Lewicka Kiev – May 27, 2004.
What Must You Know to Determine Retirement Savings Needs? 6 key questions.
1 The Gender Impact of Pension Reform—What Is It and Why? by Estelle James Presented at University of Lund, September 2006.
Issues in disability insurance Estelle James World Bank core course, November 2007.
1 Gender and Pension Reform— what policies matter and what would we like to know? by Estelle James Presented at World Bank ECA Workshop, January 2008.
Contribution Rates and Benefits of the U.S. Pension System International Pension Conference FIAP and the Chilean Pension Funds Administrations Association.
The impact of private participation on disability costs: evidence from Chile by Estelle James October 2007.
The Benefits of Defined Benefit Pension Plans From a Manitoba School Sector Perspective.
Employee Benefit Plans Joseph Applebaum, FSA October 4, 2002 Views expressed are those of the speaker and do not represent the views of the U.S. General.
Section 3. The Life Insurance Policy - contract between insurance company and insured -major elements of a life insurance policy -name of the insured.
COMPARISON ON CHINA, CHILE, CANADA AND THE U.S. FIN434 SYDNEY DUDEK YING WU Retirement Security.
Increasing contributions presentation Increasing contributions in your retirement plan account.
PENSION REFORM EXPERIENCES IN CENTRAL AND EASTERN EUROPE Agnieszka Chlon-Dominczak Ministry of Economy, Labour and Social Policy, Poland Kiev, May 28th,
Chile’s 2008 re-reforms: what are they and what are the implications? By Estelle James, Alejandra Cox Edwards & Augusto Iglesias MRRC Research Workshop,
Payout choices in Chile: what are they are why? (and comparisons with Singapore) by Estelle James,
Pension Systems in Times of Financial Crises: Serbia
1 Pension Challenges and Pension Reforms in OECD Countries Peter Whiteford Social Policy Division OECD
Key Social Security Policy Choices in Thailand by Estelle James.
Criteria for Social Security Reforms--an International Perspective by Estelle James.
Investment Basics Stock & Bond Basics Mutual Fund Basics Retirement PlanningBuying a Home
Criteria for Evaluating Social Security Systems in Thailand By Estelle James.
Life & Health Insurance Chapter 15. Kinds of Life Insurance 1. Term Insurance –For a short period of time (parent with young children) 2.Permanent Insurance.
The Economic Impact of Pension Reform and its Implementation by Estelle James.
The Payout Stage in Chile and Singapore--and implications for older women by Estelle James.
Planning INFLATION- the general rise in price of goods and services (savings must exceed) You have to have a plan for retirement Years ago companies had.
What We Can Learn From Other Countries About the Why’s and How’s of an IA System in the US? by Estelle James.
The Comprehensive Wealth of Immigrants and Natives David Love and Lucie Schmidt Williams College Retirement Research Consortium Annual Meeting August 6,
Choosing between Defined Benefit Plans & Defined Contribution Plans Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma August 15, 2005.
The USS Problem Dennis Leech University of Warwick 15/10/2014.
Fundamental Analysis Classical vs. Keynesian. Similarities Both the classical approach and the Keynesian approach are macro models and, hence, examine.
COMPARATIVE COSTS OF IA SYSTEMS by Estelle James prepared for delivery at World Bank Institute Pension Reform Seminar, Budapest, 2001.
Design features of an IA System: What Can We Learn from Other Countries? By Estelle James.
Do Individual Accounts Postpone Retirement? Evidence from Chile Alejandra C. Edwards and Estelle James.
Social Security: Where Are We? Where Are We Going? Melanie Griffin.
What Can Federal Policy and Individuals Do To Improve Current Retirement System By: Jose Arauz.
1 BASIC PRINCIPLES OF PENSION ECONOMICS by Estelle James World Bank Institute.
What is a 401K plan? It is a savings account in which employers can help their employee save for retirement while reducing taxable income, and workers.
Copyright (c) 2000 by Harcourt Inc. All rights reserved. Next page Slides to Accompany “Economics: Public and Private Choice 9th ed.” James Gwartney, Richard.
Public Sector Pensions An Overview Hazel Bateman Centre for Pensions and Superannuation Australian School of Business, UNSW October 2011.
BA School of Business and Finance Research Ageing in Europe Students: Laura Mazure Marita Greidāne Endijs Melecis Uļjana Salija Reinis Vucāns Anna Mavļutova.
1 The Gender Impact of Pension Reform—What Is It and Why? By Estelle James.
Do the Old Gain at the Expense of the Young? An Economic View of Social Security, Medicare, and the Government Budget Jim Luke Professor of Economics Lansing.
Goals: Describe the financial planning process. Explain action for implementing a financial plan. Identify actions for reviewing a financial plan.
Impact of changes in multi-pillar pension systems in CEE countries on individual pension wealth dr Agnieszka Chłoń-Domińczak (SGH) Poznań, 24 September.
The Health of the Nation. Judging the Health of a Nation Quality of its doctors and medical institutions Doctors from all over the world come to the U.S.
KAHLIANNE JONES PD2 APRIL 8TH, 2010 Healthcare Reform, Medicare, and Medicaid.
Impact of Social Security Reform on Labor Force Participation: Evidence from Chile Alejandra C. Edwards and Estelle James Presented at AEI, November 2009.
AGEING AND FULLY-FUNDED PENSIONS GUILLERMO ARTHUR E. PRESIDENT INTERNATIONAL FEDERATION OF PENSION FUND ADMINISTRATORS (FIAP) Presentation prepared for.
Political Economics Riccardo Puglisi Lecture 6 Content: An Overview of the Pension Systems Distinguish Features Economic and Political Explanation A Simple.
Changing employment relations & reforms of social security systems.
Smell Dating: The New Tinder?  Smell Dating sends you a shirt and requests that you wear it for three days and three nights without deodorant.  Once.
Changing world of work & reforms of social security systems
Seminar presentation:
Pension Challenges and Pension Reforms in OECD Countries
Disability benefits in an individual account system
Changing employment relations & reforms of social security systems
A reality check on Funded Pensions
Presentation transcript:

Disability benefits in an individual account system by Estelle James FIAP conference, 2007

2 Wide variation in disability costs Disability take 10-30% of total soc sec costs –OECD: ranges from 2-3% of wage in low cost countries (US, Japan) to 5-10% in high cost countries (Netherlands, Portugal, Spain) –higher cost in E.& C. Europe (>10% in Poland) –lower cost (<1% of wages) in Latin America Variations due to: –exogenous forces--health and age of population –policy choices--size of benefits, if to death or old age –abuses—moral hazard, lax assessment, corruption, substitute for early retirement or unemployment benefit –incentives from financing mechanism

3 How is disability handled in multi-pillar systems? Does disability use DC, pre-funding and private insurance, as in retirement scheme, or does it use DB, PAYG finance and public management? How are disability and old age benefits integrated? –if disability benefits greater, moral hazard problem –is money in individual accounts applied toward disability benefits? Kept to retirement age? Different countries have used different models Which model yields lowest cost and most accurate targeting of benefits? Are policy choices leading to high cost avoided?

4 Several models in countries with individual accounts (IAs) Disability benefit is DB in all cases—young disabled workers won’t have large DC accounts PAYG and publicly managed in Europe; pre- funded and private insurance in Latin America Sweden—IA preserved until switch to old age benefits at 65; government runs & finances disability benefits on PAYG basis (Latvia similar) E. and Central Europe— –disability benefit remains to death; public agency runs; –individual surrenders IA funds and gets PAYG benefit (or keeps funds in IA and get smaller PAYG benefit) –Doesn’t avoid cost problems

5 Chilean model Disabled individual is guaranteed a DB (lifetime annuity = 70% wage for permanent disability); kept to death even if person returns to work Funds in IA applied to disability annuity but if not enough this is topped up by additional payment Each AFP must purchase group insurance policy that covers cost of top-up for its affiliates Insurance companies sell group policy to AFPs and offer annuities to disabled workers Cost of insurance < 1% of wage; included in general administrative fee Similar in other Latin countries, with variations

6 How Latin American system differs from public PAYG Largely pre-funded: –through accumulation in retirement account –through additional payment when person is permanently disabled, to finance lifetime annuity Assessment procedure includes participation by private pension funds and insurance companies, who have a pecuniary interest in controlling costs (if cost falls with admin.fee constant, profits rise) Available data suggest this approach keeps successful claims and costs low, less sensitive to population aging and political pressures to grant disability benefits

7 I. Role of AFPs in assessment procedure in Chile Initial claims evaluated by Regional Medical Boards chosen by Superintendencia of AFPs –But AFP Association has organized medical observers who attend regularly and monitor procedure AFPs appeal approved claims to Central Board To be insured, individual must have worked & contributed in recently –AFPs have contribution records, check eligibility Reference wage: average earnings during past 10 years (price-indexed). –AFPs check records for low density of contributions AFPs have reps on Technical Commission that determines medical criteria for granting disability

8 Some empirical results In 2004 only 25% of claims were accepted as fully disabled and insured (some of rest got MPG) Reference wage often 60% of wage when working Age-specific disability rate lower than elsewhere –Example: age 45-54, 2.9 per thousand insured members accepted as new disabled in Chile, compared with 7.8 per thousand in US, 8.6 in OECD, 18.1 in Poland Insurance fee/wage 1% instead of 1.8% in US (to age 65), 3-5% Europe, >10% Netherlands, Poland Similar costs in other Latin American countries Less work disincentives, good for economy

9 II. Impact of pre-funding on costs in Chile vs. PAYG system Pre-funding takes place in two stages –Accumulation in IA applied toward disability DB –Additional payment covered by group D&S insurance –So if worker becomes permanently disabled, lifetime cost is covered up-front rather than yearly as in PAYG I used simulations to compare D&S insurance fee in pre-funded Chilean scheme with annual costs in PAYG scheme for same population structure and incidence of disability

10 Simulation results In short run new Chilean-type scheme is more expensive than new PAYG scheme because balance in IAs small compared with promised DB; also transition costs of previous system In long run Chilean scheme costs 25% of PAYG –Accumulation in IAs cover about half total cost –Anticipated investment earnings reduces additional payment needed to cover lifetime annuity Pre-funded system is less sensitive to population aging. Larger account balances partly offset higher disability rates for older workers But pre-funding makes system sensitive to interest rate shocks because annuities are more expensive if interest rates are low (recent large fee hikes)

11 Recent issues Cross-subsidization—disability fee is same % of wage for all members. So young workers, women subsidize others. New reform may change this by allowing different price for women Selection—each AFPs may try to cut its cost by attracting affiliates with low disability incidence. New reform may change this by requiring pooled disability insurance for all AFPs

12 What can other countries learn? Using private companies to participate in disability assessment can be reality check against overly-generous programs—saves money for workers, who ultimately pay disability fee Pre-funding lifetime disability through money in IA+additional payment from insurance companies makes costs –higher in short run, much lower in long run –less sensitive to population aging but more sensitive to interest rate changes Worth serious consideration as way to curb excess disability benefits in countries that are having trouble controlling costs