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A Primer on U.S. Pension Systems S. Ghon Rhee, K. J. Luke Distinguished Professor of International Finance and Banking University of Hawai’i The 6 th International Financial Forum April 27-28, 2005, Seoul, Korea Asia-Pacific Financial Markets Research Center, University of Hawaii

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A Primer on U.S. Pension Systems

S. Ghon Rhee, K. J. Luke Distinguished Professor

of International Finance and Banking

University of Hawai’i

The 6th International Financial Forum

April 27-28, 2005, Seoul, Korea

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Retirees generally rely on three sources of income for retirement:

Source: U.S. Social Security Administration, Facts and Figures about Social Security (August 2004)

US Retirement Pension and Security Systems: Three-Legged Stool

Asia-Pacific Financial Markets Research Center, University of Hawaii


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The U.S. Social Security System: retirement:A “Pay-As-You Go” Basis

Social security taxes [or known as FICA (Federal Insurance Contributions Act) taxes] are collected and divided among four Trust Funds:

  • The federal OASI (Old-Age and Survivors Insurance) Trust Fund:5.3% of FICA tax

  • The federal DI (Disability Insurance) Trust Fund:

    0.9% of FICA tax

  • The federal HI (Hospital Insurance) Trust Fund:

    1.45% of FICA tax

  • The federal SMI (Supplementary Medical Insurance) Trust Fund:

    funded by general federal tax revenues and monthly premiums paid by enrollees

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Sources and Uses of retirement:Social Security Revenues in 2003

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Distribution of Social Security Tax Dollar (As of 2004 retirement: )

41.7 million people

7.9 million people

39.7 million people

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Trust Funds Operations (2004) retirement:

Unit: $ Billion

Source: The 2005 Annual Social Security and Medicare Trust Fund Report

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Short-Term Outlook for Trust Funds: retirement:OASI, DI, and HI Trust Fund Ratios (Assets/Annual Expenditures)%

Source: The 2005 Annual Social Security and Medicare Trust Fund Report

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Long-Term Outlook for Trust Funds (I): retirement:Social Security and Medicare Cost as a Percentage of GDP

Source: The 2005 Annual Social Security and Medicare Trust Fund Report


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Long-Term Outlook for Trust Funds (II) retirement:

Income and Cost Rates

(As Percentage of taxable payroll)

Source: The 2005 Annual Social Security and Medicare Trust Fund Report

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Life Expectancy at Birth retirement:(1960, 1980, & 2002)

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Life Expectancy at 65 retirement:(1960, 1980, & 2002)

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Average Retirement Age retirement:(1950-55, 1970-1975, & 1995-2000)

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Long-Term Deficits of Four Trust Funds (Percent of GDP) retirement:

Source: The 2005 Annual Social Security and Medicare Trust Fund Report

Asia-Pacific Financial Markets Research Center, University of Hawaii


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U.S. Retirement Market Assets (2003) retirement:

IRA 1.29 Trillion

Employer sponsored

accounts 1.4 Trillion

$2.7 Trillion

$9.3 Trillion

Total 12.0 trillion

The $2.7 trillion in mutual fund retirement assets accounted for 1/3 of all mutual fund assets

Source: Investment Company Institute, 2004 Fact Book

Asia-Pacific Financial Markets Research Center, University of Hawaii


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U.S. Retirement Assets retirement:by Types of Accounts

The $12 trillion in U.S. retirement market assets are divided between IRA ($2.98 trillion) and Employer Sponsored Accounts ($9.0 trillion)

$2.98 Trillion

$9.0 Trillion

Source: Investment Company Institute, 2004 Fact Book

Total 12.0 trillion

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Who Manages IRA Assets? retirement:

Unit: $ Billion

1.Bank and thrift Institutions

2. Life Insurers

3. Mutual funds

4. Securities Companies

Source: Investment Company Institute, 2004 Fact Book

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Mutual Fund-Managed Retirement Assets (2003) retirement:

$237 Billion

$260 Billion

$898 Billion

$1,292 Billion

Total $2,687 Billion

Source: Investment Company Institute, 2004 Fact Book

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Mutual Fund Retirement Assets by Types of Funds (2003) retirement:

Unit: $ Billion

Source: ICI, 2004 Fact Book

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Employer-Sponsored Retirement Assets (2003) retirement:

$1Trillion

$1.9 Trillion

Total $9.00 trillion

$1.3 Trillion

$2.5 Trillion

$2.3 Trillion

Source: ICI, 2004 Fact Book

Asia-Pacific Financial Markets Research Center, University of Hawaii


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401(k) Plan retirement:

  • 401(k) plans: Named after the section number of of the Internal Revenue Code; Most important component of profit sharing program

  • Similar salary-deferral retirement plans are authorized in the tax code for:

    457 plans: Public-sector employees

    403(b) plans: Nonprofit-sector employees

  • 401(K) plan assets: $1.9 trillion (2003)

  • Number of Participants:

    44 million workers

  • EBRI/ICI Joint Database

    • 15.0 million 401(k) plan participants

    • 45,152 employer-sponsored 401(k) plans

    • $776.0 billion in assets.

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Asset Allocation by 401(k) Plan (2003) retirement:

Source: EBRI/ICI (2004)

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Employee Stock Ownership Plans retirement:

  • An ESOP is a defined contribution plan that allows employees to become owners of stock in the company they work for.

  • Equity based deferred compensation plan.

  • Only ESOP is required by law to invest primarily in the securities of the sponsoring employer.

  • 401(k) plan may be used for employee ownership; a company can match employee contributions with its own stock.

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Growth of ESOP Assets (Estimates) retirement:

Year Assets

1990 $133 billion

1994 $184 billion

1995 $226 billion

1998 $350 billion

2001 $400 billion

2005 $500 billion

As of 2005: 10 Million People Participating in 11,500 plans

Source: National Center for Employee Ownership

Asia-Pacific Financial Markets Research Center, University of Hawaii


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Mahalo retirement:for You Attention!


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