Rethinking Pension Reform

Cover......Page 1
Half-title......Page 3
Title......Page 5
Copyright......Page 6
Contents......Page 7
Preface......Page 9
Acknowledgments......Page 13
Disclaimer......Page 15
A Tribute to Franco......Page 17
DEFINITION OF TERMS......Page 21
DEFINED BENEFIT PENSION PLANS......Page 22
DEFINED CONTRIBUTION PENSION PLANS......Page 23
FUNDING METHODS......Page 24
COMPARING DB AND DC PENSION PLANS......Page 25
INDIVIDUAL VERSUS POOLED ARRANGEMENTS......Page 28
Chilean DCModel......Page 29
401(K) Plans and Individual Retirement Accounts (IRAs) in the United States......Page 30
Mandatory Provident Funds......Page 31
Hungary......Page 32
SUMMARY......Page 33
SOCIAL SECURITY......Page 37
Macroproperties......Page 38
Microproperties......Page 45
DESIGN FEATURES......Page 47
THE “IDEAL MODEL” (COMPARISON WITH OTHER SCHEMES)......Page 53
THE IDEAL MODEL FOR SOCIAL SECURITY......Page 54
DESIRABLE PROPERTIES......Page 58
Comparison with Other Plans......Page 60
SUMMARY......Page 61
THE CHILEAN REVOLUTION AND ITS CONQUEST OF LATIN AMERICA AND THE WORLD BANK......Page 62
COMPARING FUNDED SCHEMES WITH PAYGO SCHEMES......Page 65
OVERVIEW OF LONG-TERM CONTRIBUTIONS REQUIRED UNDER A PAYGO SYSTEM VERSUS A FUNDED SYSTEM......Page 66
The PAYGO Scheme......Page 68
The Funded Scheme......Page 70
FINANCING THE TRANSITION FROM PAYGO SCHEMES WITH DEFICITS......Page 73
MOVING FROM DB TO DC SOCIAL SECURITY SCHEMES......Page 76
IMPORTANCE OF BENCHMARKS AND GOOD GOVERNANCE......Page 80
ABILITY OF PRIVATE MANAGERS TO BEAT PASSIVE BENCHMARKS......Page 81
IMPACT OF HIGH FEES......Page 82
REGULATION AND POLITICAL RISK......Page 84
RISK RELATING TO CONTRIBUTIONS......Page 85
Fraud......Page 86
Absence of Good Advice on Asset Allocation or Private Managers......Page 87
Insufficient Choice......Page 88
SUMMARY......Page 89
4 Welfare Costs of Defined Contribution Schemes......Page 91
THE IMPORTANCE OF TARGETS......Page 95
INDIVIDUAL PERSPECTIVE......Page 97
THE CONTRIBUTORY, FUNDED, DEFINED BENEFIT (CFDB) PLAN......Page 99
COMPARISON BETWEEN CFDB AND DC PLANS......Page 100
ECONOMIC ENVIRONMENT......Page 102
ADDITIONAL INVESTMENT ASSUMPTIONS......Page 104
RESULTS OF THE ANALYSIS......Page 105
One Participant in the Plan......Page 106
Two Participants in the Plan......Page 108
Forty Participants in the Plan......Page 110
Increase in Volatility......Page 111
Diversification in the Investment Portfolio......Page 112
SUMMARY......Page 114
THE PROBLEM OF TRANSITION FROM PAYGO TO PARTIAL OR FULL FUNDING: IS IT WORTH DOING, AND IF SO, HOW?......Page 123
DESCRIPTION OF THE BASIC TRANSITION MECHANISM......Page 124
A HYPOTHETICAL STATIONARY ECONOMY......Page 125
GENERALIZATIONS: ALTERNATIVE PATHS TO FULLY FUNDED EQUILIBRIUM......Page 128
MERGING TWO FUNDS INTO ONE......Page 130
THE SOCIAL SECURITY SYSTEM IN THE UNITED STATES: THE NEED FOR REFORM......Page 131
Clinton’s Promise – A Missed Opportunity......Page 133
The Bush Administration Proposal......Page 134
Our Proposal......Page 135
Comparing Our Proposal with the Adjustment of the PAYGO System......Page 136
MANAGING THE TRUST FUND PORTFOLIO......Page 138
DESCRIPTION AND OPERATION OF THE SWAP CONTRACT......Page 139
A SIMULATION OF THE WORKING OF THE SINKING FUND......Page 141
HOW THE RATE OF RETURN AFFECTS THE MERITS OF ALTERNATIVE SCHEMES......Page 145
IMPACT OF THE INCREASE IN THE STOCK OF CAPITAL ON THE RATE OF RETURN......Page 147
SUMMARY......Page 148
REFORMING THE SOCIAL SECURITY SYSTEM IN SPAIN......Page 165
DESCRIPTION OF THE SOCIAL SECURITY SYSTEM......Page 166
Contributions......Page 168
Retirement Pensions......Page 169
EVOLUTION OF THE ECONOMICS OF THE SYSTEM UP TO THE YEAR 2000......Page 171
SUMMARY OF RECENT DEMOGRAPHIC TRENDS IN SPAIN......Page 172
RECENT MACROECONOMIC AND LABOR TRENDS AND PROJECTIONS......Page 173
FINANCIAL PROJECTIONS FOR THE CONTRIBUTIVE SOCIAL SECURITY SYSTEM......Page 175
BASELINE SCENARIO AND THE NEED FOR REFORM......Page 176
PROPOSALS FOR REFORM......Page 177
MAINTAINING THE CURRENT PAYGO SYSTEM......Page 178
APPLICABILITY OF OUR REFORM PROPOSAL FOR SPAIN......Page 179
Combining an Investment Fund with Additional Reforms......Page 181
Potential Paths for Payroll Tax Cuts......Page 188
RESULTS OF DIFFERENT PROPOSALS......Page 191
SUMMARY......Page 197
IMPLEMENTING A MORE FLEXIBLE RETIREMENT AGE POLICY......Page 200
EXTENDING THE CONTRIBUTION YEARS USED TO CALCULATE THE PENSION......Page 201
GOVERNMENT DEBT......Page 206
CORPORATE DEBT......Page 208
HELPING RETIREES ACHIEVE RETIREMENT OBJECTIVES......Page 209
THE OPTIMALITY OF GRRP DB PLANS FOR SOCIAL SECURITY......Page 212
THE THEORY OF CHOICE UNDER UNCERTAINTY IN FINANCE......Page 213
APPLICATIONS TO PENSION FINANCE......Page 214
APPLICATION TO PURE DC PLANS......Page 216
THE OPTIMAL INVESTMENT CHOICE MODEL......Page 218
THE CASE FOR MIXED PENSION SCHEMES......Page 219
CAPITAL MARKET AND INVESTMENT MANAGEMENT ISSUES......Page 220
SUMMARY......Page 223
INTRODUCTION......Page 224
COMBINING PAYGO AND FUNDING THROUGH PARTIAL FUNDING......Page 225
THE CASE FOR VARIABLE CONTRIBUTIONS......Page 228
DESCRIPTION OF THE SIMULATION TECHNIQUE......Page 230
DATA ASSUMPTIONS......Page 232
VARIABLE CONTRIBUTIONS – ESTABLISHING FORMAL RULES......Page 234
KEY PARAMETERS......Page 235
RESULTS......Page 238
SUMMARY......Page 241
CONCLUSION......Page 242
References......Page 245
Index......Page 255