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Second Pillar Reform Options 26 November 2004

Second Pillar Reform Options 26 November 2004. Concept - Goals of a Pension System - Reform environment - Second pillar reform options Reform issues in Thailand - Thailand situations - Second pillar potential benefits Position and priorities Conclusions. Agenda.

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Second Pillar Reform Options 26 November 2004

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  1. Second Pillar Reform Options26 November 2004

  2. Concept - Goals of a Pension System - Reform environment - Second pillar reform options Reform issues in Thailand - Thailand situations - Second pillar potential benefits Position and priorities Conclusions Agenda

  3. Goals of a Pension System Primary goals: to provide adequate, affordable, sustainable and diversified pension Adequate refers to both the absolute and relative level (poverty alleviation and income replacement) Affordable refer to financing capacity of individual and society Sustainable refers to the financial soundness of the scheme now and in the future Diversify refers to multi–pillar system to make retirement income less vulnerable to diverse economic, demographic and political risks

  4. Goals of a Pension System (cont.) Secondary goals : To facilitate national saving and domestic investment To create financial market development

  5. State of country development such as level of (in-)formality, income and urbanization Legacy of existing schemes, including the scope of coverage and level of explicit or implicit liabilities Administrative capacity to collect contributions, administrate files, disburse benefits and manage financial reserves Reform Environment

  6. Financial market condition such as sound core banking system and public debt market, and regulatory and supervisory capacity Macroeconomic stability, including sound public finance, and low inflation rate Government determination and capacity to start a reform and to make it successful Reform Environment (cont)

  7. Multi-Pillar Pension Taxonomy Note: The size of x or X characterizes the importance of each pillar for each target group.

  8. World Bank (Anglo-Saxon, Latin America and beyond) Second Pillar: Mandate and funded (whether corporate or individual) Third Pillar: Voluntary and funded (whether corporate or individual) The second pillar: Variation about different theme Clarifying the definition • Europe and beyond • Second Pillar: Corporate (whether unfunded or funded, mandate or voluntary) • Third Pillar: Individual (whether unfunded or funded, mandate or voluntary)

  9. Second pillar as a reform option: Replacing the first pillar (Chile, Mexico or Kazakhstan) Addition to a reduced first pillar (Hungary, Poland, Argentina) Introducing a mandated scheme in addition to basic pension (Australia and Hong Kong) The Second Pillar: Reform options

  10. In 2003, the population in the labor force was 32.4 million. However, only 7.4 million workers were covered by social security and around 1.5 million in the government sector were covered by the government pension system - First pillar Number of Employed Person by Work Status(In thousands) Work Status Nov 2000 Total 31,920.6 Employer 864.6 Government employees 2,613.8 Private employees 10,247.4 Own-account workers 10,104.3 Unpaid family workers 8,090.3 Source : National Statistical office Second Pillar in Thailand

  11. There are only 2 mandatory schemes in Thailand: GPF and private teachers’ provident fund. Second Pillar in Thailand (cont) • Some of state enterprises had replaced the original pension system with provident fund.

  12. Investment and Saving in Thailand (as percentage of GDP) 1987 1996 1987-91 1992-96 Domestic Investment (I) 27.9 41.7 35.9 40.7 Domestic Saving (s) 27.2 33.7 31.3 34.3 Saving-Investment Gap -0.7 -8.0 -4.6 -6.4 Source : Bank of Thailand

  13. Investment and Saving in Thailand (cont) (as percentage of GDP) 1998 1999 2000 2001 2002 2003proj Domestic Investment (I) 20.4 20.5 22.7 23.9 23.8 25.8 Domestic Saving (s) 33.2 30.7 30.3 29.3 29.9 31.0 Saving-Investment Gap 12.8 10.2 7.6 5.4 6.1 5.2 Source : IMF

  14. There is a researchfound that the impact of national saving depends on the pension fund are mandatory rather than voluntary. “More precisely, the evidence suggests that increases in pension funds financial assets increase national saving when pension funds are the result of a mandatory pension program. In contrast, changes in pension funds financial assets do not have a significant effect on national saving when pension funds are accumulated in response to a public program designed to promote voluntary saving.”Pension Funds and National SavingPablo Lopez Murphy and Alberto R. MusalemAugust 24th, 2004

  15. Making pension system financially more sustainable and less vulnerable to political influence Being part of a multi- pillar structure with better diversification against demographic, economic and political risk Allowing for lower contributions at given target replacement rate or higher replacement rate at given contribution rate The second pillar reform options:Potential benefits, such as ….

  16. Having better labor market effects than unfunded system Contributing to higher saving, investment and capital formation (and economic growth) The second pillar reform options:Potential benefits, such as ….(cont)

  17. Target on the formal sector and regconize their need of second pillar Understanding of limitations of public financing and management Development of “multi-pillar” concept to diversify risks Second pillar reforms should be evaluated primarily in terms of the ability to achieve objectives and fulfill criteria Position and Priorities

  18. While fiscal considerations often dominate the reform discussion, there are many more reform considerations and objectives Conclusions • A good reform requires a comprehensive assessment of reform needs, existing systems, and reform environment (including the political economy of a country and the administrative capacity) • Important to choose system that- is sustainable so promises can be kept- distributes tax burden and benefits fairly • With appropriate design of second pillar: pre-funding, defined contribution, good fund management and first pillar: social safety net will help to satisfy pension criteria.

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