International Pension Plans Finance :30am Section November 29, 2007 Lauren Rardin Kristina Sewell

Introduction Old-age pensions – Australia – Italy – Sweden – United Kingdom Source of potential options for U.S.

Australia-Introduction Two types of old-age pensions – Traditional social security pension – Mandatory occupational pension

Australia-Occupational Pension Workers age 17 and over Similar to U.S. 401(k) plans – Employers contribute 9% of basic wage, subject to A$2,750 limit per qtr. (US$1,978) – Employees may choose to make tax-deductible contributions Deductible amount is subject to maximum, but contribution amount is unlimited

Australia-Occupational Pension Eligibility – Minimum of 55 years old – Permanently retired Benefit paid – Lump sum equal to contributions plus interest – Taxes and administrative fees deducted

Australia-SS Pension Funded solely by the government Paid out of the general revenue Eligibility – Men age 65, Women age 62.5 Qualifying age for women increasing to 65 by 2013 Deferment – Up to 5 years, receive bonus

Australia-SS Pension Benefit paid – Single person: equivalent of US$8,683/year – Couple: equivalent of US$14,500/year – Bonus for deferment paid as lump sum – Benefits adjusted by price index in March and September

Italy-Introduction Similar to US SS program Very complicated due to reforms

Italy-Funding Employee and Employer contribute – Employee: 8.89% of gross earnings – Employer: 23.81% of gross payroll No contributions for low paying jobs No cap on earnings that must be paid on, except for employees entering workforce after 1995

Italy-Eligibility Category 1 – New entrants to workforce after 1995 – Workers age 57 with 5 years of contributions Category 2 – Workers with less than 18 years of contributions – Men age 65 and women age 60 with 20 years of contributions Category 3 – Workers with a minimum of 18 years of contributions by December 1995 – Men age 65 and women age 60 with 15 years of contributions

Italy-Benefit Paid Category 1 – Accrued benefit is multiplied by actuarial coefficient, based on age, to determine the benefit paid – Retirees forfeit % of benefit over the minimum wage if they re-enter the workforce Category 2 – Benefit from contributions after December 1995 calculated according to Category 1 – Benefit from contributions before 1996 based on a percentage of averaged earnings from last 5-10 years and multiplied by years of contributions – Earnings are adjusted for inflation

Italy-Benefit Paid Cont. Category 3 – Calculated the same as the contributions before 1996, in Category 2 – Given the category requirements, these retirees will have no contributions that fall into Category 1 – Benefit paid is not subject to reduction/penalty due to re-employment – Benefit paid is adjusted by the cost of living index

Sweden - Introduction Two part system – Notional Defined Contribution Plan – Premium Pension (Mandatory Individual Accounts) 18.5% payroll tax, US$40,000 ceiling – 16% for Notional Plan – 2.5% for Premium Pension Guaranteed Pension – retirees age 65+ who receive little or zero earnings related pension income All pension benefits are taxed a normal earnings rate

Sweden - Notional Plan Pay-as-you-go system Hybrid Plan – Hypothetical account balance for each participant – Benefit based on tax contributed, not years worked – Hypothetical account balance does not reflect actual funds saved by the government – Similar to cash balance plan

Sweden – Notional Plan Eligible to receive benefits at age 61 Account balance paid out as an annuity – Paid over remaining year of participant’s life – Unisex average life expectancy – Benefits adjusted based on wage index – Annual benefit for future retirees will decrease as life expectancy increases

Sweden - Premium Pension 1995 – Government began collecting money for the future individual accounts – Money held in interest bearing government account 1998 – Swedish Parliament passed legislation to implement mandatory individual accounts Premium Pension Agency – Established to administer the Premium Pension system

Sweden - Premium Pension Eligible to receive benefits at age 61 – Mandatory annuity – PPA is sole provider of annuities – No mandatory withdrawal May continue to work and receive full or partial premium pension benefits

Benefits of Individual Accounts Increase national savings Provide greater investment in economy Participants gain investment returns on contributions Participants have greater flexibility in timing of benefit payments

Concerns of Individual Accounts Higher administrative costs – New agency Choice of investment options – Default investment portfolio Mass investment could drive down stock prices Shortfall in payment of current benefits

United Kingdom - Introduction National Insurance – Basic State Pension (BSP) Flat benefit based on number of years worked – Second State Pension (S2P) Accrue benefits based on earnings Option of “contracting out” – can choose to contribute to private plan instead – Old Persons Pension Age 80+ Receive less than 60% of full BSP – Pension Credit Guarantees an minimum level of benefit Currently undergoing major reforms

United Kingdom - Contributions Employees – Contribute 11% of earnings between £97 and £645 per week (approx. US$ – US$1,335 per week)* – 1% of earnings above £645 (US$1,335) per week Employers – Contribute 12.8% of EE earnings in excess of £97 per week 15% of total contributions goes to fund social medical care Employees who choose to “contract out” of S2P – Employer and Employee pay lower payroll taxes *Current GBP to USD exchange rate from

United Kingdom - Eligibility Basic State Pension (BSP) – Full benefit = £84.35 per week (US$174.62) – Eligibility Men – age 65 Women – age 60 (gradual increase to 65 between 2010 and 2020) – Must contribute for 90% of years in working life to receive full benefit Men – typically 44 years Women – typically 39 years – No early benefits – 10.4% increase in annual benefit for each year of deferral Second State Pension (S2P) – Benefits derived from employee’s average earnings – Adjusted for price increases

United Kingdom - Reforms Begin taking effect in 2010 Individual accounts for low to middle income employees (2012) Fairer to women Overall more generous Reduce number of required years of contribution to 30 for men and women BSP will be indexed to earnings, not prices Retirement age will gradually increase to age 68 for men and women between 2024 and 2046

Conclusion - Highlights Australia – 100% funded by general tax revenue Italy – Benefits based on earnings, age, and years contributed into system Sweden – Mandatory Individual Accounts – Reduce “pay-as-you-go” nature – Hybrid Plan United Kingdom – Major Reforms to make plan MORE generous! – Individual accounts

Conclusion – United States United States needs to act! – Increase taxes – Decrease benefits – Reallocate funds U.S. should evaluate Social Security systems in other countries

Q&A Questions?

References "Australia Pension Plan PDF." Pension Rights Center Pension Rights Center. 23 Oct Department for Work and Pensions, (2007). Pensions Reform. Retrieved November 14, 2007, from DWP Web site: "Italy Pension Plan PDF." Pension Rights Center Pension Rights Center. 23 Oct Mitchell, Daniel J., Goran Normann (2000, June 29). Pension Reform in Sweden: Lessons for American Policymakers. Retrieved November 8, 2007, from The Heritage Foundation Web site: “Sweden Pension Plan PDF.” Pension Rights Center Pension Rights Center. Retrieved November 14, 2007, Web site: The Pension Service, Additional State Pension. Retrieved November 14, 2007, from The Pension Service Web site: Turner, John (2003). Individual Accounts: Lessons from Sweden. Social Security Reform, Retrieved November 8, 2007, from “United Kingdom Pension Plan PDF.” Pension Rights Center Pension Rights Center. Retrieved November 14, 2007, Web site: