Means tests must always turn regressive at some point in the income or wealth distribution. Because the means test withdrawal cannot exceed the benefit amount, the implicit tax can only rise with income or wealth so far. From there, it turns into a fixed sum tax, like the notorious Thatcher poll tax albeit phased-in at the lower end.
Consider the Australian Government’s Age Pension assets test, which functions as an implicit wealth tax targeted at the middle class. The single Age Pension benefit is approximately $953 a fortnight. The maximum implicit tax amount can then only be $953 per fortnight – whether you’re worth $600,000 or $600 million. The implicit tax amount payable by wealth (excluding the family home) for a single person is shown below.
Populist politicians are destroying Chile’s revolutionary pension system. In 1981 Chile became the first country to privatize social security, ending the pay-as-you-go system that had been in place since 1924 and had collapsed. Now Chile’s left wants to resurrect it.
The state-run pension system was plagued by corruption and rent-seeking since its earliest days. Among the 11,395 laws passed by the Chilean Congress between 1926 and 1963, 10,532 granted pension privileges to special-interest groups, many of them politically connected. In 1968, Chilean President Eduardo Frei, a center-left Christian Democrat, described the cronyism that plagued social security as an “absurd monstrosity” that the government couldn’t afford.
Pension privatization reversed this perverse dynamic. Instead of taxing active workers to pay pensioners through the bureaucracy, the new system, created by former Labor Minister Jose Pinera, established that 10% of the employee’s salary is transferred automatically to an account under his name at one of the Administradoras de Fondos de Pensiones, or AFP. These private pension funds compete to attract workers and invest their pensions for a fee.
This has restored the link between contributions and pension benefits by making workers responsible for saving the funds that will support them once they retire. This novel system also limited corruption and rent-seeking, and Chilean taxpayers are no longer on the hook for pension deficits, which in 1981 represented 3% of gross domestic product.
Longer life expectancy is also a problem. When the AFP system was created, men retired at 65 with an average life expectancy around 67. Women retired at the age of 60 with a life expectancy around 74. Today, the retirement ages are unchanged but life expectancy has increased to 77 for men and 83 for women. This means more years of retirement have to be funded by the same years of saving.
Young women would have to work nearly 40 years longer than men to build up the same retirement pot, according to a report highlighting the pensions gender gap.
The average woman in her 20s can expect to have £100,000 less in her pension pot than a man of the same age as a result of earning less, working part-time, and taking time out of paid employment to care for family members.
The calculations, made by pensions company Scottish Widows to coincide with International Women’s Day, showed that a female saver would typically save £2,200 annually for the first 15 years of her career, compared with £3,300 for a young man. The average woman in her 20s today would have to work 37 years longer than a man of the same age to reach retirement parity.
At the end of April, the New York City Council took a bold step and approved a city-sponsored retirement plan for private-sector employees who do not have retirement coverage at work, creating the city’s first ‘auto-IRA’ (individual retirement account). SCEPA’s Retirement Equity Lab, which testified in support of the policy, estimated the New York auto IRA plan will provide coverage to 2.8 million city workers that today have none.
Mayor de Blasio signed the bill last week implementing the city’s auto-IRA program.
The NYC Auto IRA Bill Is Well- Designed
Employers with more than five employees will have to automatically deduct a percentage of their workers’ pay and forward it to city-facilitated, not-for-profit IRAs. (Employers with less than five employees, self employed, and gig workers need to voluntarily join.) Auto IRA account’s are individually-owned and professionally managed, and administered by an independent board headed by city-appointed trustees. While employers are required to participate, employees would have the right to change their contribution rates or opt-out of the program. The plan is also portable; participants can maintain their accounts when they change jobs.
Chile’s privately run pension funds are in a battle for survival, reeling under the impact of billions of dollars of withdrawals as politicians and social movements attack a system once viewed as a model for the world.
Chileans have taken out more than $30 billion from their retirement savings in the past year and congress has authorized a third wave of withdrawals that could drive the figure to more than $50 billion. That would leave the pension funds with about $180 billion of equities and fixed-income assets. Many lawmakers are now calling for the whole system to be dismantled.
Created during the dictatorship of August Pinochet on the advice of free-market economists known as the Chicago Boys, the private pensions Chileans are required to fund are a bedrock of the country’s system. The savings they have generated over the past four decades have given local credit markets and the peso a stability that is the envy of serial defaulters such as Argentina or Ecuador, and prompted countries including Peru and Colombia to adopt similar structures. Yet, many complain that the funds have failed to provide decent pensions.
Distrust in the system, and a need for cash, meant Chileans rushed to pull money out of their savings accounts as the pandemic forced the government to shutter much of the economy.
As expected, the raw data show that Dutch men who worked at ages 62-65 were less likely to die over the subsequent five years than men who were not working (see Figure 1). Importantly, Figure 1 shows that mortality decreased at nearly identical rates for working and non-working men between 1999 and 2008, before the policy became available. The fact that these trends are parallel provides more confidence in the policy experiment, indicating that whatever was happening to working men prior to the DWB was also happening to non-working men. In contrast, the mortality rate in 2009-2011 continued to improve somewhat for working men, who were benefiting from the DWB, while the mortality rate for non-working men plateaued.
Author(s): Alice Zulkarnain, Matthew S. Rutledge
Publication Date: May 2021
Publication Site: Center for Retirement Research at Boston College
The differences in reliance on income sources between those who are already retired and those who are not yet retired are likely attributable, at least in part, to apprehension about the Social Security system, as well as the rise of 401(k)s accompanied by a decline in work-sponsored pension plans.
57% of retired U.S. adults say they rely on Social Security as a major income source, and 38% of nonretirees expect it to be a major source for them.
Likewise, 36% of retirees and 19% of nonretirees say a work-sponsored pension plan is or will be a major income source.
Nonretirees are most likely to say a 401(k) or other retirement savings account will fund their retirement (49%). Meanwhile, 35% of retirees mention 401(k)s as a major funding source of their retirement.
A recent analysis by Scientific Beta disputes “claims that ESG funds have tended to outperform the wider market.” Sony Kapoor, managing director of the Nordic Institute for Finance, Technology and Sustainability, a think tank, told the Financial Times that the research “puts in black and white what is only whispered in the corridors of finance — most ESG investing is a ruse to launder reputations, maximize fees and assuage guilt.”
BlackRock’s former chief investment officer for sustainable investing, Tariq Fancy, appears to understand this. He recently wrote in USA Today that he was concerned about portfolio managers exploiting the “E” of ESG investing because “claiming to be environmentally responsible is profitable” but advancing “real change in the environment simply doesn’t yield the same return.” Mr. Fancy criticized “stalling and greenwashing” in “the name of profits.”
This is a tacit admission that ESG investing upends the fiduciary duties portfolio managers owe their clients. As Mr. Fancy acknowledged, “no matter what they tout as green investing, portfolio managers are legally bound” to “do nothing that compromises profits.” As former Labor Secretary Eugene Scalia wrote on these pages last year, under the federal law that protects retirement assets, known as Erisa, “one ‘social’ goal trumps all others — retirement security for American workers.”
A new report provides a comprehensive overview of the many aspects of public sector hybrid retirement plan designs. The report finds that some shifts to hybrid designs were made without a proper evaluation of the long-term implications of the plan changes. In contrast, other hybrids are well-thought-out and more likely to provide retirement security to employees, enabling public employers to recruit and retain a qualified workforce.
A hybrid is not one particular plan design, but instead is an umbrella term capturing a wide range of different plan designs. Some hybrids are defined benefit (DB) pensions with risk-sharing provisions, while others blend attributes of DB and defined contribution (DC) plans. Each of these plan designs offers tradeoffs in terms of retirement benefits, risks, and costs.
Author(s): Dan Doonan, Elizabeth Wiley
Publication Date: 10 May 2021
Publication Site: National Institute on Retirement Security
A study due this week from the Intergenerational Foundation thinktank shows that while spending on pensioners and children respectively increased at similar rates before 2010-11, the austerity years to 2019 proved much more generous to the old.
The report finds that in 2018-19, the government spent “on average £14,660 on each child, £10,180 on each working-age adult, and £20,790 on each pensioner” and that the gap in per capita spending on children and pensioners more than doubled over the previous 20 years.
This means pensioners captured 30% of the growth in public expenditure throughout the period, with most of the gains coming after 2010 and the introduction of the triple lock, though many and varied ancillary benefits also played a part.
By design, Australia’s existing superannuation system reproduces inequalities built into the labor market. This is because employers must pay super as a proportion of wages into individual accounts that then earn compounding returns. Upon retirement, high-income workers may find they own a significant pool of capital.
Meanwhile, lower-income workers — disproportionately women — retire with the lowest super balances. The same will be true of younger or marginalized workers who are trapped in precarious or informal employment. As wages continue to decline and precarious work becomes more prevalent, the number of people with a stake in defending superannuation is shrinking year by year.
To make matters worse, in its present form, superannuation undermines genuinely redistributive institutions like the age pension. This is because conservative political forces are able to present them as a last-resort safety net rather than a guarantee of the right to a decent retirement.
[this relates to people in Chile being allowed to taking fairly large withdrawals from their official retirement savings]
This Monday, the application process will begin through digital platforms within the framework of the new 10% third withdrawal law.
As detailed by the Undersecretary of Social Welfare, Pedro Pizarro, the process will begin 100% online during the first two weeks of May, both for AFP users and for the nearly 700 thousand pensioners through the life annuity modality , who for the first time may request a cash advance.