1. MANAGING SOCIAL SECURITY COSTS THROUGH BENEFIT DESIGN
Gary Hendricks Regional Pension Workshop Majuro, Republic of the Marshall Islands April 25-29, 2016

2. Managing Social Security Costs
Population aging is a worldwide phenomenon Increasing the retirement age is the most important adjustment countries should be making now and in the future.
All other provisions of Social Security schemes also affect costs and require periodic review.

3. Managing Social Security Costs: Design Features to Consider
FUND INCOME
Contribution Rate
Assessment Base
New Sources
FUND OUTGO (BENEFITS)
Eligibility requirements
Years of service
Accrual rate
Valorization of earnings (pensionable earnings)
Minimum and maximum benefits
Post-retirement benefit adjustments

4. Managing Social Security Costs: Fund Income: Contribution Rate
Perform cash flow projections of income and outgo
How large is the shortfall
How does it develop (quickly, gradually, in spurts)
Scrutinize patterns
What contribution rates are politically “possible”?
Are there contribution rate differentials between occupations and sectors? Should there be?
Develop a strategy for adjusting rates
Longest lead times are better
Phasing using small incremental changes
Intermittent changes

5. Managing Social Security Costs: Fund Income: Assessment Base
Assessment Base is the financial base to which contribution rate is applied.
Defining the Base
Near universal one is earnings
Must be measurable and verifiable
Broadening the base
All occupations covered?
Government employees integrated?
Adjusting minimum covered wage
Adjusting minimum and maximum covered wages

6. Managing Social Security Costs: Fund Income: New Income Sources
Government subsidies (from general revenue or earmarked tax to avert poverty of widows and orphans)
Company revenues/profits that are partly the result of labor inputs
Must not be highly discriminatory against particular companies or industries
Borrow money from government or international development bank (WB, ADB)

7. Managing Social Security Costs: Calculation of Benefits
Eligibility requirements
Number of months of contribution or recorded earnings required to receive a benefit
Reason for requirement in a public scheme:
Worker should have substantial commitment to labor force
Avoid de minimus benefits
This is usually at least 10 and as many as 20 years

8. Managing Social Security Costs: Accrual Rate and Years of Service
Key determinants of replacement rate (percent of earnings worker receives as pension)
Accrual rate
Percent of pensionable earning worker receives for each month of service.
Length of service (creditable)
Number of months to which accrual rate applies
Rules vary for determining months of service
Use multiple accrual rates lowering the rate at higher earnings levels
When change retirement age, good time to review things like number of creditable years of service

9. Managing Social Security Costs: Valorization of Earnings
Many different measures are in use
Average of last 3 or 5 years of credited earnings
Career or work life earnings
Can use an Indexing factor for each year in the calculation (e.g., scale worker’s covered wages to average covered wage for each year)
Length of averaging period (beginning and ending age) can affect average pensionable wage
Elimination of low/high earnings years

10. Final Adjustments to Benefit Calculation
Apply a minimum
Apply a maximum

11. Managing Social Security Costs: Adjusting Benefits after Retiring
Benefit indexation
None
Change in wages
Change in prices
Minimum benefits (adjust minimum)