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IAA Response to World Bank Report on Old-age Income Support in the 21 st Century

28 e CONGRÈS INTERNATIONAL DES ACTUAIRES Le rendez-vous international de la profession actuarielle. 10 January 2005. IAA Response to World Bank Report on Old-age Income Support in the 21 st Century. Ken Buffin Social Security Committee International Actuarial Association.

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IAA Response to World Bank Report on Old-age Income Support in the 21 st Century

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  1. 28e CONGRÈS INTERNATIONAL DES ACTUAIRES Le rendez-vous international de la profession actuarielle 10 January 2005 IAA Response to World Bank Report on Old-age Income Support in the 21st Century Ken Buffin Social Security Committee International Actuarial Association

  2. Historical Perspective • Averting the Old-Age Crisis (1994) • Policies to protect the old and promote growth • Developments since 1994 • 1980 reform in Chile • World paradigm for reform • Three-pillar approach • Public debt problems

  3. Experience with Original World Bank Model • Funded individual DC accounts • Funded systems assets • Source of soft money diversion • Variable replacement ratios • Lower pensions • Move away from solidarity, pooling of risks • Redistribution and poverty alleviation • Payout phase not addressed adequately • Economists views vs. Actuaries views

  4. The 2005 World Bank Report • Current policy thinking • Framework for pension reform • Financial support for development projects • Enhanced focus on basic income provision • Importance of local country conditions • Extension to five-pillar model • Adequate, affordable. Sustainable and robust • Economic and social development goals

  5. General Overview • More balanced perspective • Country- specific conditions • Funded arrangements no panacea • Role for individual accounts • Need for regulation of funded arrangements • Vital payout phase • Recognition of actuarial role • Commitment to Notional Defined Contributions • Poverty alleviation and income replacement • Fiscal position of governments • Asset accumulation and economic development

  6. Complementary Essential Role of the Actuary • Actuarial role: design organization and implementation • Financial and actuarial monitoring • Modeling expertise for long-term projections • Role of economists and demographers • Financial sustainability • Credible financial projections

  7. The Multi-pillar Approach and Diversification • Original three-pillar approach • Expansion to five-pillar approach • Zero pillar minimum level of protection • Mandatory first pillar publicly managed, linked to earnings, redistributive, longevity protection, financed by intergenerational contributions • Mandatory second pillar, funded, contributory, private asset management, likely individual savings accounts or possibly defined benefit • Voluntary third pillar, funded, regulated privately managed • Fourth pillar financial and non-financial support

  8. Sovereign Government Employees • Need for more visibility and adequate review • Pension obligation for civil servants • Integral part of government debt • Role in political economy and fiscal equilibrium • Generous design results in unaffordable promises • Real funding investing in marketable securities • Virtual funding, virtual assets, government bonds

  9. The Pay-out Phase and DC Arrangements • Individual funded accounts and notional defined contribution arrangements • Main focus on accumulation phase • Account balance distribution • Old-age income security • Annuitization • Longevity risk, investment risk, inflation risk • Canadian Life Income Fund • Types of annuity providers • Kinds of annuity products

  10. DB Arrangements vs. NDC Systems • Problems of DB programs • Search for sustainability • Less risky design features • Switch to DC not a solution • NDC concept benefits linked to contributions • NDC risks and financial imbalances • NDC automatic balancing mechanisms • Adjustments to indexation basis • Demographic and economic changes • Inflexible, not transparent, misrepresented • The new Swedish system

  11. Funding versus financing • Variety of financial paths • Bias in favor of funding • Funding not a panacea • Not appropriate in less developed economies • A benchmark not a blueprint • Implicit pension debt • Solvency and sustainability • Stabilization fund

  12. Taxation • Consistent treatment • EET regime • TEE regime • TEE risks and credibility • EET future reserve creation

  13. Specific Issues • Automatic stabilizers • Comparison of Canada and Sweden • Savings Accounts for Unemployment • Risk of economic catastrophe • DC conversion • Management of public assets

  14. Feasibility of 5-Pillar System in Gulf Region • Constrained by lack of developed financial markets • Regional culture and expectations • Partially funded in most countries • Kuwait full funding • Generous minimum pensions and early retirement • Retirement age 55 or 50 for women in Kuwait • Reform through parametric changes

  15. Conclusion: Need for a Prospective Approach • Blueprint for further research • Informal sector • Retirement age and future lifestyle • Potential IAA/World Bank partnership

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