MSS Reviewer

SOCIAL SECURITY CONCEPTS

Rizaldy T. CapulongDeputy Chief Actuary & Vice President for Capital Markets

OUTLINE• PRINCIPLES OF THE SOCIAL SECURITY PROGRAMS

• SOCIAL SECURITY CONCEPTS

• 5 PILLARS OF SOCIAL SECURITY PROTECTION• DEFINED CONTRIBUTIONS VS. DEFINED BENEFITS• TYPES OF MANDATORY SYSTEMS FOR RETIREMENT

INCOME• FINANCING A SOCIAL SECURITY SCHEME• ACTUARIAL VALUATION

DEFINITION OF SOCIAL SECURITY

• Social Security – any program of social protection established by legislation, or any mandatory arrangement, that provides individuals with a degree of income security when faced with the contingencies of old age, survivorship, incapacity, disability, unemployment, or rearing children; may offer access to curative or preventive medical care

Source: (ISSA/ILO)

OBJECTIVES OF SOCIAL SECURITY

To provide compensation for income loss To promote health and prevent illness To create living conditions that will satisfy

general needs of population and special needs of elderly, disabled and children

To redistribute income

TWO BASIC FUNCTIONS OF SOCIAL PROTECTION SYSTEM

A safety net function: ensures that each member of the society who is facing destitution is provided with a minimum level of cash income, health and social services which allow the member to lead a socially meaningful life;

An income maintenance function: permits economically active members of the society to build up entitlements to maintain decent standard of living during periods of contingencies

CHARACTERISTICS OF THE SOCIAL SECURITY PROGRAMS

Established by government law Generally provide individuals with cash

payments that replace at least part of the income loss

Principal methods of providing social security protection: social insurance employers liability scheme social assistance benefits funded from general revenues provident funds

METHODS OF PROVIDING SOCIAL SECURITY PROTECTION

• SOCIAL INSURANCE– financed by contributions– risks are shared and participation is compulsory– right to benefit is secured by contributions paid– contribution and benefit rates are related to

earnings– surplus funds that are not immediately

required are invested to earn additional income

METHODS OF PROVIDING SOCIAL SECURITY PROTECTION

• EMPLOYERS LIABILITY SCHEME– cover the risk of employment injury– employers directly responsible for the

provision of compensation and benefits– shortcomings:

• restricted protection of workers• modest level of cash payments• employers’ resistance to claims

– due to unsatisfactory features, many of these schemes have been converted into social insurance schemes

METHODS OF PROVIDING SOCIAL PROTECTION

• SOCIAL ASSISTANCE– based on the principle that individuals are entitled

to financial support from the state, should they be in need

– entire cost is met from state funds– benefits are paid as a legal right– also known as the “needs program”


• BENEFITS FUNDED FROM GENERAL REVENUES– benefits payable to all qualified residents of

specific categories– no conditions exist concerning insurance or means

test– a period of residence is required


• PROVIDENT FUNDS– employees and their employers pay regular

contributions into a central fund– contributions are credited to the individual

account of the member– upon contingency, total amount of credit in the

account is paid out in lump sum– some funds permit earlier partial withdrawals– no sharing of risks

IMPORTANCE OF SOCIAL INSURANCE

Promotes economic security for the individual and his family

Prevents individual from becoming a burden to relatives, friends and society

Attaining social security for everyone is one of the more important tasks of government

INDIVIDUAL EQUITY VERSUS SOCIAL ADEQUACY

• Individual Equity– a person who contributes to the system should

receive the level of benefit appropriate to his contributions and the risks involved

• Social Adequacy– benefits should be able to provide a certain

adequate standard of living to all contributors, downplaying the factors of number and amount of contribution

PRINCIPLES OF A SOCIAL INSURANCE SYSTEM

Must be generally compulsory Must be nearly universal in coverage Benefits should be related to earnings Provides only a minimum floor of income protection

against various risks covered Emphasizes the payment of benefits based on social

adequacy rather than individual equity


Benefits should replace lost earnings Benefits must be high enough to be effective and low

enough to encourage incentive and thrift There must be legal right to receive social insurance

benefits (right to benefit subject to contribution conditions)


Should embrace all contingencies in which an insured person is prevented from earning his living whether by inability to work or death

Should be financed by contributions, preferably with those who are protected and their employers jointly paying the bill

Self-employed persons should be insured against the contingencies of invalidity, old age and death under the same conditions as employed persons

INTERNATIONAL LABOR ORGANIZATION (ILO)

• tripartite organization (workers, employers and government)

• set up to bring government, employers and trade unions for united action in the cause of social justice and better living conditions everywhere

• important function is the adoption of International Labor Conference of Conventions and Recommendation which set International Labour Standards

ILO Convention No. 102• Multilateral agreement with regard to minimum

standards of social security• Nine (9) branches of social security

– Old-age– Survivor– Invalidity– Family allowances– Sickness– Maternity– Medical care– Unemployment– Employment-injury

ILO Convention No. 102

• Social Security System provides seven (7) out of nine (9) branches of social security– Old-age– Survivor– Disability– Sickness– Maternity– Medical Care– Employment-injury

ILO Convention No. 102

• Government Service Insurance System provides seven (7) out of nine (9) branches of social security– Old-age– Survivor– Disability– Sickness– Medical Care– Employment-injury– Unemployment

COMPARISON WITH PRIVATE INSURANCE

• Similarities– Based on risk transfer and the widespread pooling

of definite risks– Provide for specific and complete descriptions of all

conditions relating to coverage, benefits and financing

– Require precise mathematical calculations of benefit eligibility and amounts


• Similarities– Require contributions and the payment of premiums

sufficient to meet the estimated costs of the program

– Provide predetermined benefits not based upon demonstrated need

– Provide economic security


• Differences Social Insurance Private Insurance

1. Compulsory Voluntary

2. Minimum floor income Larger amounts available , protection depending on individual

desires and ability to pay

3.Emphasis on social Emphasis on individual adequacy equity



4. Benefits prescribed by law Benefits established that can be changed by legal contract

5. Full funding not needed Must operate on fully because of compulsory funded basis without

contributions from new reliance on new entrants’ entrants and because the contributions

program is assumed to last indefinitely



6. No underwriting Individual or group underwriting

COMPULSORY NATURE OF COVERAGE

• Makes it easier to protect the population against certain risks

• Both healthy and unhealthy people can be covered

CONSTRAINTS OF A VOLUNTARY COVERAGE

• Greater probability of adverse selection• More difficulty in achieving minimum economic

security• Those most in need of protection may seldom or

not participate (low income group) • Less coverage because some will be unwilling to

participate

ADVANTAGES OF COMPULSORY COVERAGE

• Greater coverage because both the low and high wage-earners are required to participate

• Both the socially poor and rich are protected against economic loss

• Provides certain advantages to lower income groups because the benefit formula is heavily weighted in their favor

• Makes the social insurance program truly viable

st 3rdPillar

Redistribute& income

replacement

1Pillar

DB or Notional DC, Earning-related

Contribution/Pay-as-you go/

Partially-funded

2ndPillar

DC, Benefits Equals

Cont + Earnings

Tax-Preferred Private savings /

Fully funded

Individual savings accountObjectives

Form

Financing

4thPillar

Informal intra-family Or inter-generational

sources

Financial and Other assets

Continuing protection

Tax preferred Private savings/

Fully Funded

DB or DC

Income Smoothing and enhanced savings

Mandatory Publicly Managed Pillar

Mandatory Privately Managed Pillar

Voluntary PrivatelyManaged Pillar

Voluntary Privately and Informally

Managed Pillar

THE FIVE PILLARS OF OLD AGE INCOME SECURITY

Demogrant or social pension

0Pillar

Means-tested, Minimum Benefits

Government

Mandatory Publicly Managed Pillar

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DC VS DB*

• INVESTMENT RISK• BENEFIT ADEQUACY• PERCEIVED VALUE (EASE OF

UNDERSTANDING• EQUITY

*SOCIETY OF ACTUARIES: Course 5 Study Notes “Introduction to Retirement Income Security Systems” by Patricia Scahill & Steven McKay, 2002

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INVESTMENT RISK

• DEFINED CONTRIBUTION

• Employee assumes investment risk

• DEFINED BENEFIT• Employer / gov’t

assumes investment risk

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BENEFIT ADEQUACY

• DEFINED CONTRIBUTION• Adequate benefits

achieved if contribution level sufficient throughout working career & if investment performance is good

• DEFINED BENEFIT• Adequate benefits

achieved if benefit level is sufficient and employee has enough service, even if participation commences late

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BENEFIT ADEQUACY

• DEFINED CONTRIBUTION• Benefit adequacy cannot be

achieved if individual starts contributing late

• Adequacy also jeopardized if employee earnings rise faster than the fund rate of return

• Main problem is limited capacity to improve past service benefits

• DEFINED BENEFIT• Benefits for employees who

change jobs frequently will likely be inadequate

• Great flexibility in improving past service benefits

34

BENEFIT ADEQUACY


• Benefit level directly affected by investment performance

• DEFINED BENEFIT• Investment

performance has indirect effect on benefit level in career earnings plans & for ad hoc pension increases

35

PERCEIVED VALUE (EASE OF UNDERSTANDING)


• Fairly easy to understand if employee statement is well designed

• DEFINED BENEFIT• Difficult for most

employees to understand until close to retirement, when they can relate the benefit to their expected income needs

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• DEFINED CONTRIBUTION• High perceived value since

employee sees exactly what company is contributing, and the value of the accumulated contributions

• DEFINED BENEFIT• Value often perceived to

be low because it is not understood, because employees do not expect to stay until retirement, and because the value is low at younger ages

37


• DEFINED CONTRIBUTION• Harder to explain to those

near retirement who want to know how much they can afford to spend each year after retirement

• DEFINED BENEFIT• Greater need for good

communications

38

EQUITY


• Same value to any two employees with same earnings, regardless of age or gender (until they annuitize)

• DEFINED BENEFIT• Value of benefits

increases with age, especially if the employee stays until eligible for immediate retirement benefits

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EQUITY

• DEFINED CONTRIBUTION• Same value for an

employee who quits before retirement as for an employee who stays until retirement

• DEFINED BENEFIT• Contributions are higher

for female employees because of longer life expectancy

• Benefits for early terminations can be subsidized by employer providing bigger benefits than pure actuarial equivalent

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Pension funding around the worldMandatory schemes by type of financing

Partially-Funded

33%

Funded or mixed18% PAYG

49%

Number of Plans =115

Source: World Bank (Yvonne Sin)

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EXAMPLES: DB & DCREGION DB DC

ASIA & PACIFIC

China, Japan, South Korea, Indonesia, Turkey, Saudi Arabia, Iran, Taiwan

China, India, Indonesia, Singapore, Malaysia, Kazakhstan, Brunei, Fiji, Kiribati, Nepal

AMERICAS U.S., Brazil, Canada, Mexico, Argentina

Mexico, Bolivia, Chile, Colombia, Costa Rica, Peru

AFRICAS Algeria, Benin, Egypt, Cameroon Kenya, Gambia, Nigeria, Swaziland, Uganda

EUROPE Germany, France, U.K., Italy, Russia, Spain, Netherlands, Switzerland, Sweden, Poland, Belgium, Norway, Austria

Russia, Switzerland, Sweden, Poland, Bulgaria, Croatia, Estonia, Latvia, Poland, Romania, Slovak Republic

Legend:2011 GDP: green (top 10); orange (top 11 to 20); blue (top 21 to 30); black (others)

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TYPES OF MANDATORY SYSTEMS FOR RETIREMENT INCOME

• FLAT-RATE PENSION• EARNINGS-RELATED PENSION• MEANS-TESTED PENSION• FLAT-RATE UNIVERSAL PENSION• PROVIDENT FUNDS• OCCUPATIONAL RETIREMENT SCHEMES• INDIVIDUAL RETIREMENT SCHEMES

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FLAT-RATE PENSION

• A pension of uniform amount or one based on years of service or residence but independent of earnings

• Financed by payroll tax contributions from employees, employers, or both

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EARNINGS-RELATED PENSION

• A pension based on earnings• Financed by payroll tax contributions from

employees, employers, or both

45

MEANS-TESTED PENSION

• A pension paid to eligible persons whose own or family income, assets , or both fall below designated levels

• Generally financed through government contributions, with no contributions from employers or employees

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FLAT-RATE UNIVERSAL PENSION

• A pension of uniform amount normally based on residence but independent of earnings

• Generally financed through government contributions, with no contributions from employers or employees

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PROVIDENT FUNDS

• Employee and employer contributions are set aside for each employee in publicly managed special funds.

• Benefits paid as a lump sum with accrued interest

48

OCCUPATIONAL RETIREMENT SCHEMES

• Employers required by law to provide private occupational retirement schemes financed by employer and, in some cases, employee contributions

• Benefits paid are lump-sum, annuity or pension

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INDIVIDUAL RETIREMENT SCHEMES

• Employees and, in some cases, employers must contribute a certain percentage of earnings to an individual account managed by a public or private fund manager chosen by the employee

• Accumulated capital in the individual account is used to purchase an annuity, make programmed withdrawals, or a combination of the two and may be paid as a lump sum

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OVERVIEW

• SOCIAL SECURITY• BRANCHES OF SOCIAL SECURITY• TYPES OF RETIREMENT PROGRAMS• CONTRIBUTION/BENEFIT DESIGN BY BRANCH

– PENSIONS: OLD-AGE, DISABILITY, SURVIVORS– SICKNESS & MATERNITY– WORK INJURY– UNEMPLOYMENT– FAMILY ALLOWANCES

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SOCIAL SECURITY

• PROGRAMS ESTABLISHED BY STATUTE THAT INSURE INDIVIDUALS AGAINST INTERRUPTION OR LOSS OF EARNING POWER AND FOR CERTAIN SPECIAL EXPENDITURES ARISING FROM MARRIAGE, BIRTH OR DEATH

• INCLUDES ALLOWANCES TO FAMILIES FOR THE SUPPORT OF CHILDREN

52

“PROTECTION” OF INSURED PERSON & DEPENDENTS

• THRU CASH PAYMENTS TO REPLACE AT LEAST A PORTION OF INCOME LOST AS A RESULT OF – OLD AGE– DISABILITY– DEATH– SICKNESS– MATERNITY– WORK INJURY– UNEMPLOYMENT

• THRU SERVICES PRIMARILY– HOSPITALIZATION– MEDICAL CARE– REHABILITATION

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SOCIAL SECURITY

• INCOME MAINTENANCE PROGRAMS– PROVIDES CASH BENEFITS TO REPLACE LOST

INCOME• BENEFITS IN KIND

– FINANCE OR PROVIDE DIRECT SERVICES

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3 APPROACHES TO INCOME MAINTENANCE PROGRAM COVERAGE

• EMPLOYMENT-RELATED– INSURED/DEPENDENTS/SURVIVORS CLAIM BENEFITS AS A MATTER OF

RIGHT– BENEFIT PROPORTIONATE TO SALARY OR YEARS OF EMPLOYMENT OR

SERVICE• UNIVERSAL

– INSURED/DEPENDENTS/SURVIVORS CLAIM BENEFITS AS A MATTER OF RIGHT

– FLAT BENEFITS• MEANS-TESTED

– BENEFITS BASED ON COMPARISON OF A PERSON’S INCOME OR RESOURCES AGAINST A STANDARD MEASURE

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3 APPROACHES TO INCOME MAINTENANCE PROGRAM COVERAGE

• EXAMPLES– EARNINGS-RELATED: U.S., Brazil, Canada,

Argentina, Japan, South Korea, India, Denmark, Russia, Egypt, Libya

– UNIVERSAL: Bolivia, Canada, Brunei, Nepal, New Zealand, Denmark, Russia, Botswana, Mauritius, Hong Kong

– MEANS-TESTED: U.S., Brazil, Canada, Argentina, South Korea, India, New Zealand, Swaziland, Australia, Hong Kong

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OTHER TYPES OF PROGRAMS

• PROGRAMS DELIVERED THRU FINANCIAL SERVICES PROVIDERS– MANDATORY INDIVIDUAL ACCOUNT– MANDATORY OCCUPATIONAL PENSION– MANDATORY PRIVATE INSURANCE

• PROVIDENT FUNDS• EMPLOYER-LIABILITY SYSTEMS

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TYPES OF MANDATORY SYSTEMS FOR RETIREMENT INCOME

• FLAT-RATE PENSION• EARNINGS-RELATED PENSION• MEANS-TESTED PENSION• FLAT-RATE UNIVERSAL PENSION• PROVIDENT FUNDS• OCCUPATIONAL RETIREMENT SCHEMES• INDIVIDUAL RETIREMENT SCHEMES

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EXAMPLES OF COUNTRIES WITH FLAT-RATE PENSION

• ALBANIA, CZECH REPUBLIC, ESTONIA, GERNSEY, IRELAND, ISLE OF MAN, JERSEY, LITHUANIA, LUXEMBOURG, MALTA, NETHERLANDS, NORWAY…

• ARMENIA, CHINA, GEORGIA, ISRAEL, JAPAN…• ANTIGUA, BERMUDA, JAMAICA, VENEZUELA• SEYCHELLES

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EXAMPLES OF COUNTRIES WITH EARNINGS-RELATED PENSION

• ALBANIA, AUSTRIA, ANDORRA, BELARUS…• AZERBAIJAN, BAHRAIN, INDIA… • ANTIGUA AND BARBUDA, ARGENTINA, BAHAMAS,

BARBADOS, BELIZE…• ALGERIA, BENIN, BURKINA FASO…

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EXAMPLES OF COUNTRIES WITH MEANS-TESTED PENSION

• AUSTRIA, BELARUS, BELGIUM, BULGARIA, CYPRUS, ESTONIA, FINLAND…

• ARMENIA, AUSTRALIA, AZERBAIJAN…• ANTIGUA AND BARBUDA, ARGENTINA, BAHAMAS,

BARBADOS, BELIZE...• LIBERIA

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EXAMPLES OF COUNTRIES WITH FLAT-RATE UNIVERSAL PENSION

• DENMARK, RUSSIA• BRUNEI, NEPAL, NEW ZEALAND• BOLIVIA, CANADA• BOTSWANA, MAURITIUS

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EXAMPLES OF COUNTRIES WITH PROVIDENT FUNDS

• BRUNEI, FIJI, INDIA, INDONESIA, KIRIBATI, NEPAL, MALAYSIA, SINGAPORE, SOLOMON ISLANDS, SRI LANKA, VANUATU, WESTERN SAMOA

• GAMBIA, KENYA, SWAZILAND, UGANDA

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EXAMPLES OF COUNTRIES WITH OCCUPATIONAL RET. SCHEMES

• FRANCE, ICELAND, LIECHTENSTEIN, SWITZERLAND• AUSTRALIA, HONG KONG, PAPUA NEW GUINEA• BERMUDA

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EXAMPLES OF COUNTRIES WITH INDIVIDUAL RET. SCHEMES

• BULGARIA, CROATIA, ESTONIA, HUNGARY, LATVIA, POLAND, ROMANIA, RUSSIA, SLOVAK REPUBLIC, SWEDEN

• CHINA, KAZAKHSTAN, BOLIVIA, CHILE, COLOMBIA, COSTA RICA, DOMINICAN REPUBLIC, EL SALVADOR, MEXICO, PANAMA, PERU, URUGUAY

• NIGERIA

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SOURCES OF FUNDS

• PERCENTAGE OF COVERED WAGES OR SALARIES PAID BY THE WORKER

• PERCENTAGE OF COVERED PAYROLL PAID BY THE EMPLOYER

• GOVERNMENT CONTRIBUTION– GENERAL REVENUES– SPECIAL EARMARKED TAXES

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PENSIONS

• OLD-AGE PENSION• DISABILITY PENSION• SURVIVORS PENSION• COVERAGE• SOURCES OF FUNDS• QUALIFYING CONDITIONS

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SICKNESS & MATERNITY

• CASH SICKNESS BENEFITS• MEDICAL CARE BENEFITS• MATERNITY BENEFITS• COVERAGE• SOURCES OF FUNDS• QUALIFYING CONDITIONS

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WORK INJURY

• COMPENSATION FOR WORK-CONNECTED INJURIES & OCCUPATIONAL ILLNESSES

• SHORT & LONG TERM BENEFITS• TYPES OF SYSTEMS

– SOCIAL INSURANCE– PRIVATE/SEMIPRIVATE ARRANGEMENTS

• COVERAGE, ADMINISTRATIVE ORGANIZATION

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UNEMPLOYMENT

• COVERAGE• SOURCES OF FUNDS• QUALIFYING CONDITIONS

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FAMILY ALLOWANCES

• TYPES OF SYSTEM & COVERAGE– UNIVERSAL– EMPLOYMENT-RELATED

• SOURCES OF FUNDS• ELIGIBILITY• BENEFITS• ADMINISTRATIVE ORGANIZATION

Cash Flow in a Typical Social Security Scheme

Contributions from employers

Contributions from insured persons

Penalty payments

Government subsidy

SOCIAL SECURITY INSTITUTION

Benefit Payments

Administration Expenses

Investment Expenses

Investment income

FINANCIAL SYSTEMS: Pay-as-you-go vs. Full-funding

Pay-as-you-go scheme

Full-funding scheme??

SOCIAL SECURITY INSTITUTION

PAY-AS-YOU-GO Financial System

– How does it work?

Collected are contributions only needed to fund current benefits, expenses and contingency fund

Contribution rates have to be increased periodically

No funds to investC

B



No funds would be set aside in advance ahead of the times when benefits are payable

The benefits would be paid from current income of the scheme

Under this system, a social insurance scheme incurs steadily increasing annual benefit expenditures


Given the pattern of rising annual expenditures in a pension scheme, the contribution rate would be low at the inception of the scheme and would increase annually for many years thereafter


– Where is this applicable?

PAY-AS-YOU-GO System

SHORT-TERM BENEFITS

Medical careSicknessMaternityUnemployment benefitsFuneral grants



FULL FUNDING Financial System

– Collected are contributions needed to fund current and future benefits, expenses and contingency fund

– Stable contribution rate, lower in long term– Reserves are accumulated and invested,

ROI > Inflation– Guaranteed payment of

benefits during periods when benefits exceedcontributions

B

C


Full funding of a social insurance scheme may be achieved by equating [1] the present value of estimated future expenditures on benefits and administration, to [2] a factor times the present value of estimated future insured earnings

Both of these elements are estimated for existing insured persons and for future new entrants



Solving [1] and [2] for the factor gives a level contribution rate (LCR) as a proportion of insured earnings, which would be adequate to meet the disbursements of the scheme for an indefinite period

This LCR is called the general average premium and the system of finance is referred to as the General Average Premium System


– How about in social insurance pension schemes?

Since social security schemes are not subject to premature cessation, and since they normally have continuous flow of new entrants, it is not necessary to have a high level of funding to guarantee benefits

Full-funding is rarely used to finance social insurance pension schemes, other than being used principally to indicate the probable long-term cost of the pension scheme


What Financial System Does A Social Insurance Pension Scheme Need?

– A financial system that has the following criteria: The contribution rate should not exceed the capacities of

insured persons, employers and the economy in general to support it

The reserves generated should not exceed the capacity of the country to effectively absorb the investments in a profitable manner

Contribution rates should remain relatively stable for extended periods of time, or any increases should be gradual

SCALED PREMIUM FINANCIAL SYSTEM: An Alternative System of Financing

The contribution rate is established so that, over a specified period of equilibrium (e.g., 5, 10 or 20 years), the contribution income and interest on the reserves of the scheme will be adequate to meet the expenditures on benefits and administration

A period of equilibrium is chosen which is of limited duration but is sufficiently long to guarantee a certain stability of the contribution rate

The contribution rate is determined in such a way that the expected receipts (contributions and investment income) of the scheme, during the period of equilibrium, will be equal to expected expenditures

The financial system does not provide for the use of the principal of the accumulated funds to cover current expenditure (only the interest on the accumulated funds is used)


When current contributions plus investment income are no longer sufficient to cover expenditure, the premium is raised to the level required for a subsequent period of equilibrium


25

20

15

10

5

GENERAL AVERAGE PREMIUM

SCALED PREMIUM (20-YR PERIOD OF

EQUILIBRIUM)

PAY-AS-YOU-GO (PAYG)

20 40 60 YEARS

CO

NT

RIB

UT

ION

RA

TE

As % of earnings


Overview of Financing Schemes

A. Government-Financed Schemes B. Compulsory Contributory SchemesC. Voluntary Contributory Schemes

A. Government-Financed Schemes

• Financed by the government's general revenues

• Take the form of: 1. Public Assistance

• Provides assistance to those with less than a specified income and assets or wealth

• Objective is to relieve poverty rather than maintain income


1. Public Assistance• Advantages

– Efficient since directs resources only to those who need it– Involves high degree of equity since it collects taxes according

to the ability to pay and redistributes them according to need

• Disadvantage: – Means tests are difficult to administer


2. Universal Benefits Available to all who meet specific demographic, social

or health criteria, regardless of the beneficiaries' financial situation

Advantage:– Relatively simple arrangement to administer

Disadvantage:– Expansive coverage makes for high total expenditure

B. Compulsory Contributory Schemes

• Financed by mandatory contributions by employer and/or employee

• Take the form of:1. Provident Funds

• Defined contribution• Employers and employees contribute a fixed proportion of the

latter's wages to an individual account established for each employee


1. Provident Funds • Accumulated funds are available for withdrawal upon

reaching the statutory withdrawal age • Advantage:

– Encourages saving

• Disadvantages:– Sensitive to inflation– No mechanism for ensuring that everyone receives adequate

benefits – Makes no allowance for the different life spans of different

people


2. Social Insurance • Defined benefit• Pools contributions during the working life and pays

benefits when the contingency occurs• Usually funded on a pay-as-you-go (PAYG) basis • Advantages:

– Offers assistance as a matter of right– stabilizes income over the lifecycle


2. Social Insurance • Disadvantage:

– Contribution rates are often too low for the prescribed benefits. As a result, governments are brought into covering the scheme's deficits, thereby eroding its insurance character

3. Employer Liability Scheme• Require employers, when liable, to provide specified

payments or services directly to their employees

C. Voluntary Contributory Schemes

• Financed by voluntary contributions by employer and/or employee

• Advantage:– Provides additional pension benefits to those on higher income

• Disadvantage:– Expensive– Highly regressive because the higher one's income, the more one

can benefit from it

Overview of Financing Schemes• None of the schemes are by itself adequate to perform saving,

redistribution, and insurance functions• Because of this, the World Bank proposed establishment of

three tiers ('pillars') of schemes:1. A state-financed universal minimum pension; 2. A mandatory and fully-funded defined benefits scheme funded from

contributions and in which benefits will be closely tied to contribution;3. Voluntary individual and company saving and pension plans.

• All types of social security financing have their strength and weaknesses

• The challenge is to find the system which best matches national conditions, economic circumstances, demographic situation, needs, and preferences.

Financing Systems inSoutheast Asia

• Indonesia

Contribution Rate as a Percentage of Total Insurable Earnings

IP: Insured Person; SE:Self-Employed; ER:Employer; Gov: Government; Admin: Administrative Organization

Source: Social Security Programs Throughout the World: Asia and the Pacific, 2008

Old Age, Disability, and Survivors Sickness and Maternity Work Injury

Provident Fund IP : 2% SE : N/A ER : 3.7% Gov : NoneSocial Insurance System IP : None SE : 0.3% ER : None Admin: Employees Social Security System (Jamsostek)

Social Insurance System IP : None SE : N/A ER : 3-6% Gov : None Admin: Employees Social Security System (Jamsostek)

Social Insurance System IP : None SE : N/A ER : 0.24-1.74% Gov : None Admin: Employees Social Security System (Jamsostek)

Financing Systems in Southeast Asia

• PhilippinesOld Age, Disability, and

Survivors Sickness and Maternity Work Injury

Social Insurance System IP : 3.33% SE : 10.4% ER : 7.07% Gov : Any Deficit Admin: Social Security System

Social Insurance System 1. Cash Sickness & Maternity Funding Included in Old Age, Disability and Survivors Admin : Social Security System2. Medical Benefits IP : 1.25% SE : PhP100 ER : 1.25% Gov : Covers no or Low-Income persons; Any deficit Admin: Philippine Health Insurance Corporation

Social Insurance System IP : None SE : N/A ER : Php 10-0.2% Gov : Any deficit Admin: Social Security System, Employees’ Compensation Commission




• Vietnam





Old Age, Disability, and Survivors Sickness and MaternitySocial Insurance System IP : 5% SE : N/A ER : 11% Gov : Subsidies as needed; Total cost of pensions for persons who retired before 1995 Admin: Vietnam Social Security

Social Insurance System1. Cash Sickness & Maternity IP : None SE : Voluntary ER : 5% Gov : None2. Medical Benefits IP : 2% SE : Voluntary ER : 2% Gov : Administrative Cost; Cost for low-income personsAdmin: Vietnam Social Security Ministry of Health

• Vietnam





Work Injury Unemployment

Social Insurance System IP : None SE : N/A ER : Included in Scikness and Maternity Gov : None Admin: Vietnam Social Security

Social Insurance System IP : 1% SE : N/A ER : 1% Gov : 1% Admin: Vietnam Social Security

• Burma (Myanmar)





Sickness and Maternity Work InjurySocial Insurance System IP : 1.5% SE : N/A ER : 1.5% Gov : Subsidies as needed Admin: Social Security Board

Social Insurance System IP : None SE : N/A ER : 1% Gov : None Admin: Social Security Board

• Malaysia



Provident Fund IP : 11% SE : M$50-M$5,000 ER : 12% Gov : None Admin: Employees’ Provident FundSocial Insurance System IP : 0.5% SE : N/A ER : 0.5% Gov : None Admin: Social Security Organization

Provident Fund Medical only - Funding included in Old Age, Disability, and Survivors - 10% of the total insured person and employer provident fund contributions finance certain medical expenses

Social Insurance System IP : None SE : N/A ER : 1.25% Gov : None Admin: Social Security Organization




• Singapore



Provident Fund IP : 0-20% SE : 2.17-8.5% ER : 0-14.5% Gov : None Admin: Central Provident Fund

Employer Liability ER : Total Cost Admin : Ministry of PowerProvident Fund Funding included in Old Age, Disability, and Survivors Gov : Subsidy under certain wards Admin : Central Provident FundSocial Assistance Gov : Total Cost Admin : Ministry of Health

Employer Liability involving Compulsory Insurance IP : None SE : N/A ER : Total Cost Gov : None Admin: Ministry of Manpower, Commissioner for Labor




• Thailand






Social Insurance System IP : 3% SE : 3,360 baht flat rate ER : 3% Gov : 1% Admin: Social Security Office

Social Insurance System IP : 1.5% SE : Included in Old Age, Disability, and Survivors ER : 1.5% Gov : 1.5% Admin: Social Security Office

Employer Liability System involving Compulsory Insurance with a Private Carrier IP : None SE : N/A ER : 0.2-1% Gov : None Admin: Social Security Office

• Thailand





Unemployment Family AllowancesSocial Insurance System IP : 0.5% SE : N/A ER : 0.5% Gov : 0.25% Admin: Social Security Office

Social Insurance System Funding included in old age, disability, and survivors Admin : Social Security Office

• Laos






Social Insurance System IP : 4.5% SE : N/A ER : 5% Gov : Administrative Cost Admin: Social Security Organization

Social Insurance System Funding included in old age, disability, and survivors Admin : Social Security Organization

Social Insurance System Funding included in old age, disability, and survivors Admin : Social Security Organization

Economical and Social Challenges & Strengthening Financing Systems

• Facing the challenge of ageing societies– Increase employment and economic growth– Greater labor force participation of women – Extending coverage to untapped informal sectors– Raising the retirement age– Increasing efficiency in collection of contributions– Consider shifting from pay-as-you-go funding to pre-funding


• Social Security and the Economic Crisis– Social security benefits should be strengthened, and be included in

respective economic stimulus packages, • To alleviate the risk of poverty immediately for those who lose

their jobs or are not able to work, and• Stabilize the demand for goods and services produced by those

who still have jobs.


– Social safety nets should be strengthened in countries of limited social security coverage and with no unemployment benefits or other income support schemes

– Longer term solutions should be sought that would help to correct the fundamental inequities in the global economy and society.

– Sound financing. Schemes should be financed to ensure to the furthest extent possible their long-term financial viability and sustainability

• Recognized importance of actuarial advice in the operation of the SSS

• SSS Charter requires a valuation every 4 years or more frequently as may be necessary

The Actuarial Tradition

• To know about the present financial status of the fund and likely future financial development of a scheme;

• To assess the financial sustainability of a social security scheme in relation to benefit provisions and the financing arrangement of the scheme under present law; and

• To advise and recommend possible amendments to the scheme’s provisions and financial arrangements.

Why do we conduct a valuation?

• Investments• Member Loans• Benefit Administrations

Other Uses of Actuarial Studies

• 1962 Valuation• 30 June 1977 Valuation• 31 December 1977 Valuation• 1979 Valuation• 1983 Valuation• 1990 Valuation• 1995 Valuation• 1999 Valuation• 2003 Valuation• 2007 Valuation

10 Major SSS Actuarial Valuations

• Increase in pension amounts• Across-the-board pension increases• Minimum monthly pension• 13th month pension• Supplemental monthly pension for disability

pensioners

Other Less Formal Valuation Studies

• Changes in pension formula– retirement pension: 10x– death pension: 8x– disability pension: 9x– dependents pension

• Lowering of retirement ages• Increase in salary ceiling• Unemployment insurance

Other Less Formal Valuation Studies

• Data collection and analysis• Model building and adjustments• Selection of assumptions and indicators• Feeding of the model• Base run and results analysis• Sensitivity testing• Additional simulations• Writing of the report• Presentation of findings and recommendations

Actuarial Valuation Process

• Membership Distribution– sex, age, salary

• Pensioners and Dependents• Compliance/Delinquency Rate

(Unemployment)• Benefits (Pension Increase/ Salary Increase)

Factors Affecting Valuation

• Investment (Real Rate of Return/ ROI)• Operating Expenses

Factors Affecting Valuation

• Programs must be financially viable and sustainable over the long term

VIABILITY AS A PROGRAM CONSIDERATION

• Full Projection Method– Matches inflow and outflow projections on a year-

to-year basis– Estimates the life of the funds

VALUATION METHOD

• Optimistic • Realistic• Conservative

SCENARIOS

• General Population Projections and Vital Statistics– National demographic projections– World Population Prospects (prepared by the UN

Population council)– Other demographic studies performed by regional

or international development institutions

SOURCES OF STATISTICAL INFORMATION

• Economic and Labor Market Statistics– National economic development plans for the

short and medium-term macroeconomic frame (developed by IMF and other bodies responsible for planning and finances)

– Labor force statistics compiled from labor market surveys

– Wage statistics– Household surveys


• Scheme-Specific Information– A computer system containing the database on

registered employers, individual insured persons and beneficiaries

– Departments in charge of:• Planning and technical studies• Legal concerns • Accounting and finance• Investment• Inspection


• Scheme-Specific Information– Departments in charge of: (continued)

• Collection of contributions• Taxation• Delivery of benefits

– Decentralized social security offices in charge of contribution collection and benefit delivery

– Alternative delivery systems (i.e. post offices and banks)


• Actuary must have a understanding of:Social insurance coverageContingencies coveredEligibility conditions for benefitsCalculation of benefit amountsSources of financingDefinition of insurable earningsRules governing the determination of contribution rateRules governing investments

LEGAL PROVISIONS OF THE SCHEME

General Population Data (historical and future)• Population by sex and age group• Fertility rates and sex ratio of newborns• Mortality rates• Immigration and emigration• Marriage rate by sex and age group

GENERAL DEMOGRAPHIC AND ECONOMIC DATA

Labor force, employment and unemployment (historical and future)• Labor force participation rate• Employment, average number of people• Self-employment, average number of persons• Unemployment, average number of persons• Unemployment rates


Wages, interest rates, inflation, GDP• Total compensation in nominal values (historical)• Wage share of GDP (historical)• Average wages for the economy and by the

sectors• GDP by economic sectors• GDP deflators by sector• GDP by expenditure components


Wages, interest rates, inflation, GDP (continued)

• GDP expenditure deflators• Primary factor income distribution• Inflation and interest rates• Exchange rates• National budget


• Appraisal of the institution’s data maintenance system

• Database on the insured population– Number of insured persons at the valuation date– New entrants and re-entrants to the insured

population– Level of earnings– Past accumulated credits– Density of contribution payments

SCHEME SPECIFIC DATA

• Database on beneficiaries- Number of pensioners

- Sex and age distribution of pensioners receiving a pension as of the valuation date


• Database on beneficiaries- Amount of pensions

- Total benefit expenditure by year- Reconciliation of total benefit expenditure- Average pensions and average replacement rates- Historical development of average pensions by age and

by number of years since inception- Historical development of minimum benefits in relation

to inflation and wage developments in the economy


133

DESIGNING/ ADMINISTERING/ MANAGING SOCIAL SECURITY

134

MAIN POINTS

• Social security is very important to any country because of the economic security it provides to individuals, families and the nation.

• Social security can be provided through 5 pillars a combination of which can be optimized for a particular individual or country depending on the situation. No one pillar can satisfy all the social security needs of an individual or country all the time because of the advantages and disadvantages of each pillar.

135

MAIN POINTS

• In particular, retirement income is an important branch of social security that must be carefully planned as it takes a long time to fund and there are again several schemes which can be combined and several ways for costs to be shared among individual workers, employers and government.

136

MAIN POINTS• Sources of funds for social security schemes are contributions

from employers, workers and/or government as well as investment income depending on the method of financing.

• On the other hand, level of costs may be affected by demographic and economic factors, as well as the design and strictness of implementation of the program.

• There are several methods to choose from in financing social security programs namely, pay-as-you-go, partial funding, full funding and terminal funding.

137

MAIN POINTS• Social security schemes must follow basic investment criteria

of safety, yield and liquidity however other goals have resulted in poorer returns for publicly managed funds compared to privately managed funds.

• For partially or fully funded pension schemes, successful investments delay the need to increase the contribution rate as investment income can be used to pay for benefits in excess of contributions net of operating expenses.

138

SOCIAL SECURITY PROGRAMS AROUND THE WORLD

• Designing social security benefits• Designing social security contributions• International standards: ILO Convention

102• Global trends & reforms

139

DESIGNING SOCIAL SECURITY BENEFITS

• QUALIFYING CONDITIONS• FORMULA FOR AMOUNT OF BENEFITS• MAINTENANCE OF VALUE OF BENEFITS

140


• QUALIFYING CONDITIONS– Occurrence of contingencies

• Exclusions– Intensity of contingencies– Number of years of contributions– Number of contributions

– Continuous contributions– Recent contributions– Number of previous claims– Duration of previous claims– Age– Relationship to member– Relevant period

141


• FORMULA FOR AMOUNT OF BENEFITS– Fixed amount– Depends on salary– Depends on length of service– Depends on both salary & length of service– Minimum & maximum– Supplementary benefits– Duration– Frequency

142


• MAINTENANCE OF VALUE OF BENEFITS– No increases– Ad hoc increases

• When

– Indexed to inflation• How often

143

HIGHLIGHTS OF BENEFIT DESIGN AROUND THE WORLD

• PILLAR OF SOCIAL SECURITY– 135 out of 169 SSPs around the world are social

insurance schemes while the other 33 are provident funds, non-contributory universal schemes or means tested schemes.

144


• RETIREMENT AGE– 170 out of 172 countries around the

world follow a mandatory retirement age, with 57 countries allowing early pension.

145


• RETIREMENT AGE– 94% of SSPs that have different retirement ages for

males and females require a retirement age of 60 years old or older

– 67% of SSPs have different retirement age for females, require a retirement age lower than 60 year old

– 63% of SSPs that have universal retirement age, require a retirement age at 60 years old or older

146


• RETIREMENT PENSION– At least 73 SSPs have an earnings-related

pension (Afghanistan, Canada, China, France, USA, Croatia, Equador, Greece, etc.) while 12 have a fixed pension (Bermuda, Estonia, Georgia, Guernsey, Jamaica, Jersey, Seychelles, etc.)

147


• MATERNITY BENEFIT– 104 SSPs base maternity benefits on wage– SSPs pay 30 (Tunisia & Cape Verde) to 300

(Slovenia) days of maternity benefits at the rate of 45% to 100% of daily wage

148


• FUNERAL BENEFIT– 55 countries do not have a funeral benefit

program– 57 countries do not require any contribution to

qualify for funeral benefits

149

DESIGNING SOCIAL SECURITY CONTRIBUTIONS

• LEVEL OR DEGREE OF PARTICIPATION• DISTRIBUTION OF FINANCING OR SHARING

AMOUNG SOURCES OF FUNDS• FORMULA FOR CONTRIBUTION AMOUNT• METHOD OF FIXING

150

LEVEL OR DEGREE OF PARTICIPATION

• Compulsory• Voluntary• Portable• Only when employed• Additional• Advance• Delayed

151

DISTRIBUTION OF FINANCING OR SHARING AMONG

SOURCES OF FUNDS• Worker only• Employer only• Government only• Worker and employer• Worker and government• Employer and government• Government, worker and employer

152

FORMULA FOR CONTRIBUTION AMOUNT

• Fixed• Depends on salary• Depends on nature of employment• Depends on risk assessment• Variability of contribution rate• Frequency• Duration• Age

153

METHOD OF FIXING

• Regressive / fixed amount• Flat contribution rate• Progressive• Maximum salary base• Minimum salary base• Schedule of changes in contribution rate• Schedule of changes in salary limits

154

HIGHLIGHTS OF CONTRIBUTION DESIGN AROUND THE WORLD

• Out of 161 SSPs, 121 SSPs are DB, 10 are Provident Funds/DC, and 30 are dual (both DB and DC)

• 50% of South American countries have dual (both DB and DC) SSPs, the highest proportion among all continents. In all other continents, majority of SSPs are DB.

155


• In Europe 34 SSPs are DB, and 7 are dual (both DB and DC), which represents the highest percentage of DB in any continent.

• 138 SSPs require monthly contributions, 20 weekly, 3 quarterly

156


• URUGUAY: Higher contribution rate for higher salary• JAPAN: Higher contribution rate for miners and seamen

[8.224% vs. 7.852%]• KUWAIT: Retirement age is in the process of being

increased to 55 and is now at 50• BENIN & PHILIPPINES: Voluntary DC for overseas workers• CAMEROON: Contribution rate level depends on the risk

assessment

157

International standards: ILO CONVENTION 102

• Cost of benefits + cost of administration shall be borne collectively by way of insurance contributions or taxation or both in a manner which avoids hardship to persons of small means and takes into account economic situation of the Member (State) and of the classes of persons covered

158


• Contributions– Maximum limit for the contribution of

employees as a class– Total insurance contributions by employees

protected shall not exceed 50% of total financial resources allocated to protection of employees and their wives and children (except family benefit and, if separately administered, employment injury)

159


• Benefits– Minimum level of benefits by contingency– Sickness 45%– Unemployment 45%– Maternity 45%

– Old age 40%– Invalidity 40%– Survivors 40%– Employment injury

• Survivor 40%• Disability 50%

160

INTERNATIONAL STANDARDS: ILO CONVENTIONS

• MINIMUM STANDARDS OF SOCIAL SECURITY (CONVENTION 102)– Minimum coverage

• INVALIDITY, OLD-AGE & SURVIVOR BENEFITS (CONVENTION 128)

• MEDICAL CARE & SICKNESS BENEFITS (CONVENTION 130)

161

GLOBAL TRENDS & REFORMS

• Old age crisis• Increasing contributions• Phase out of DB• Multi-pillar: DB + DC• Migration from developing to developed

countries• Diseases: AIDS in Africa

162

Percentage of population aged 65 years and over, 1950-2050

5

10

15

20

25

30

35

40

1950 1970 1990 2010 2030 2050

Japan Germany Sweden UK France US

163

GLOBAL OLD AGE CRISIS• Aging world

– 1990: 0.5-B or 9% of world population over 60– 2030: 1.4-B or 16% of world population over 60

• Developing countries aging faster than industrial countries– 100 years for Belgium to double over 60 population– 34 years for China, 22 years for Venezuela

• Double whammy on govt budget: health & pension• Poor management

– Zambia public provident fund lost 23% per year between 1981 & 1988, ½ contributions in 1988 used for administrative expenses

164

GLOBAL OLD AGE CRISIS

• High payroll taxes distort labor markets & reduce growth– Hungary payroll taxes at 33%, ¼ population are pensioners, effective

retirement age falls to 54• Government pensions in developing countries rarely fully indexed to

inflation– Venezuela real value of pensions fell 60% in 1980s

• High government spending on old age security reduces funds for other important public goods and services– In 1989, Austria’s pension fund cost 15% of GDP, old age benefits

accounted for 40% of public spending• Higher subsidies for earlier generation of workers than later

generation– In Canada, Netherlands, Sweden and U.S., workers retiring in first 30

years of public pension scheme receive large positive lifetime transfers but future retirees may get less

*WORLD BANK: “Averting the Old Age Crisis” by Estelle James, 1994

165

SOME DESIGN HIGHLIGHTS OF PARTICULAR SOCIAL SECURITY

PROGRAMS AROUND THE WORLD

166

Armenia

• Lower retirement age for workers in more hazardous work.

• Age 63.5 (men) or age 58 (women) with at least 25 years of covered employment; age 58.5 (men) or age 53.5 (women) with at least 20 years of covered employment in hazardous work.

167

Benin

• Special system for public-sector employees• Special system for informal economy workers.• Voluntary provident fund for citizens working

abroad.

168

Burundi

• Old-age pension: age 60 (age 55 if prematurely aged or age 45 if working under arduous conditions) with 15 years of insurance.

• Retirement is not necessary.

169

Fiji

• Provident Fund system• for its old-age benefits, a couple may elect to

receive a monthly pension 2/3 of 22% of total employee and employer contributions plus accumulated interest for as long as either spouse lives.

170

Georgia

• Declining unemployment benefits• unemployment benefits are paid for 6 months

at a decreasing rate of 14 lari a month for the 1st 2 months, 12 lari a month for the 3rd and 4th month and 11 lari a month for the 5th and 6th month .

171

Hong Kong

• Universal old-age pension and means tested social assistance system with mandatory occupational individual accounts (mandatory provident fund schemes). (the schemes are privately run)

172

Kuwait

• Old-age pension Basic scheme: Age 50 with 15 years of contributions; if below age 50, 20 years of contributions.

• The minimum retirement age of 45 years is to increase gradually to 55 by 2017.

173

Saudi Arabia

• Shorter qualifying period for maternity benefits.

• Employed at least 18 working days or 120 working hours a month for 3 consecutive months

174

Uruguay

• Dual social insurance and private insurance system.

• Contributions are split between the social insurance and private insurance programs according to earnings ceilings.

175

Japan

• A two-tiered social insurance system involving a flat-rate benefit for all residents under the national pension program and earnings-related benefits under the employees' pension insurance program or other employment-related program.

176

Jordan

• Employees over age 16 in private establishments with five workers or more; government and public-sector employees not covered under civil or military pension laws; employees of universities, municipalities, and village councils; and Jordanians working at diplomatic missions and for international organizations.

177

Palau

• Coverage: Gainfully occupied persons, including some categories of self-employed persons; coverage is optional for self-employed persons with no employees and gross earnings under U.S.$10,000 a year but more than U.S.$300 per quarter.

• Exclusions: Casual labor and self-employed persons with no employees and annual gross income of less than U.S.$300 per quarter.

178

Pakistan

• Higher disability pensions if person is living in Punjab and Sindh.

• Sickness benefit: 75% of earnings; 100% in cases of tuberculosis and cancer (50% in the North-West Frontier Province and in Balochistan). Benefit is payable after a 2-day waiting period for up to 121 days (365 days for tuberculosis and cancer) in a 1-year period.

179

Thailand• Old-age pension: 15% of the average wage of the last 60 months. If the

insured person has paid contributions for over 180 months, the rate of the average wage will increase by 1% for each 12-month period of contributions over 180 months.

• Old-age lump sum: A refund of the employee's contribution is paid in a lump sum if the insured person has less than 12 months of contributions. If the insured person has more than 12 months but less than 180 months of contributions, a lump-sum refund consisting of the employer's and the employee's contributions plus interest is paid.

180

Turkey

• Social support supplement: All retirees receive a monthly flat-rate supplement of 4,690,000 liras.

• Benefit adjustment: Pensions are adjusted periodically according to changes in prices and wages.

181

Bahamas

• Benefits include hospitalization, general and specialist care, medicines, and transportation.

182

Costa Rica

• Benefit adjustment: Benefits are adjusted twice a year, in January and July.

• The basic benefit is increased by 0.0835% of average earnings for each month of contributions above 240.

183

Cuba

• Tuberculosis benefit: 100% of earnings until cured.

• Free burial services are provided by the government for all residents

184

Haiti

• Old-age pension: Age 55 with 20 years of contributions.

• In 1999, maternity benefits were introduced. Coverage for maternity benefits is being extended gradually. Medical benefits are provided through a clinic to all residents in exchange for a small token payment. Medical benefits include pediatric, dental, ophthalmic, and gynecology care and services; preventative care; health education; and surgery.

185

Mexico

• Christmas bonus: One month's pension.• Benefit adjustment: Pensions are adjusted according

to changes in the minimum wage.• Remarriage settlement: If a widow remarries, she

receives a final lump-sum settlement equal to 3 years' pension.

186

Saint Vincent & the Grenadines

• Maternity grant: The woman or her husband meets the qualifying conditions for cash sickness benefit.

• Benefits include medical, surgical, and hospital treatment; medicines; appliances; and transportation.

187

USA

• Benefit adjustment: Benefits are adjusted annually for cost-of-living changes.

• Pension increment: An increment is provided for each month the insured delays retirement at the full retirement age, up to age 69. The increment amount depends on the year the insured person reached age 62. In 2003, the increment is 7.5% a year for those aged 62.

188

Ireland

• Blind person's pension (means-tested): Residents with low vision and of limited means, aged 18 or older.

• Adoptive benefit: 39 weeks of paid contributions in the 12-month period immediately before placement date of adoptive child, or a total of 39 weeks of paid contributions with 39 weeks paid or credited in last fiscal year (self-employed, 52 weeks paid contribution in either of the last 2 fiscal years).

189

MAIN POINTS

• A social security actuary must be knowledgeable about various options in designing benefits & contributions of a social security program & must know how to change the design of the program to suite or influence the behavior of the covered population & other stakeholders or to come up with a program that will be relevant to the member needs but at the same time affordable and sustainable.

190

MAIN POINTS

• In designing a social security program, an actuary must consider both international standards as set forth in the International Labor Organization Conventions on social security as well as international practice and experience so as not to repeat mistakes of other countries and to help insure the sustainability and relevance of the program. It is not necessarily the case that the most frequently used design is the least problematic.

Trends in Social Security

Number of Years Number of Countries % Distributionbelow 5 6 4.3%5 - 9.99 11 7.9%10 - 14.99 38 27.3%15 - 19.99 38 27.3%20 and up 46 33.1%Total 139 100.00%

Distribution of Social Security Programs Around the WorldBased on the Required Number of Years of Contribution

to Qualify for Retirement Pensions

Asia and the Pacific Africa Americas Europe

No. of Years No. of Countries % Dist’n No. of

Countries % Dist’n No. of Countries % Dist’n No. of

Countries % Dist’n

below 5 0 0.00% 0 0.00% 1 2.86% 5 13.51%5 - 9.99 3 10.00% 4 10.81% 0 0.00% 4 10.81%10 - 14.99 9 30.00% 11 29.73% 12 34.29% 6 16.22%15 - 19.99 8 26.67% 13 35.14% 9 25.71% 8 21.62%20 and up 10 33.33% 9 24.32% 13 37.14% 14 37.84%Total 30 100.00% 37 100.00% 35 100.00% 37 100.00%

Distribution of Social Security Programs Per RegionBased on the Required Number of Years of Contribution to

Qualify for Retirement Pensions

Trends in Social SecurityDistribution of Social Security Programs Around the World

Death Benefit as Percentage of Retirement Benefit

Asia and the Pacific Africa Americas Europe

Percentage No. of Countries % Dist’n No. of

Countries % Dist’n No. of Countries % Dist’n No. of

Countries % Dist’n

50% and below 10 38.5% 26 78.8% 18 52.9% 10 34.5%51% - 60% 5 19.2% 1 3.0% 4 11.8% 10 34.5%61% - 70% 0 0.0% 0 0.0% 4 11.8% 4 13.8%71% - 80% 1 3.8% 3 9.1% 4 11.8% 3 10.3%81% - 90% 0 0.0% 1 3.0% 1 2.9% 1 3.4%91% - 100% 10 38.5% 2 6.1% 3 8.8% 1 3.4%Total 26 100.00% 33 100.00% 34 100.00% 29 100.00%

Percentage Number of Countries % Distribution50% and below 64 52.5%51% - 60% 20 16.4%61% - 70% 8 6.6%71% - 80% 11 9.0%81% - 90% 3 2.5%91% - 100% 16 13.1%Total 122 100.00%

Distribution of Social Security Programs Per RegionDeath Benefit as Percentage of Retirement Benefit


Distribution of Social Security Programs Around the WorldMaximum Dependent’s Benefit as Percentage of Retirement Pension

≤20%20% < x ≤ 40%40% < x ≤ 60%60% < x ≤ 80%

80% < x ≤ 100%100% < x ≤ 120%120% < x ≤ 140%140% < x ≤ 160%160% < x ≤ 180%180% < x ≤ 200%

fixed amountno limit

0 10 20 30 40 50 60 70 80Number of Countries

Bene

fit A

mou

nt L

imit

, x

Countries with Express Limit on Number of Dependents

Country Limit on Numberof Dependents

Country Limit on Number

of DependentsBahamas 5 Cyprus 2Guyana 3 India 2Burkina Faso 6 Israel 2Côte d’Ivoire 3 Jordan 3Senegal 3 Philippines 5Albania 6

Note: Dependents herein refers exclusively to children dependents.


Region Male FemaleAfrica 59.16 58.33 Americas 62.10 60.65 Asia & the Pacific 59.25 57.32 Europe 63.94 62.06

Average Statutory Retirement Age by Region(Weighted, by Sex)

Region Insured Employer Total

Africa 4.77% 12.76% 17.54%

Americas 6.83% 10.10% 17.00%

Asia & the Pacific 6.85% 11.86% 18.21%

Europe 10.34% 20.55% 30.89%

World 7.19% 13.95% 20.99%

Average Contribution Rate by Region


Distribution of Social Security Programs Per Region by Type of Scheme

Region Flat-rate Earnings-related

Means-tested

Flat-rate universal

Providentfunds

Occupational

retirement schemes

Individual Retirementschemes

Total

Africa 0 37 3 3 4 1 1 49Americas 4 34 19 2 0 1 11 71Asia & the Pacific 9 26 14 5 12 3 4

73Europe 16 39 25 2 0 4 10 96Total 29 136 61 12 16 9 26 289

Asia Country* Men Women Programmed Increase in Age Requirement

Armenia 63 61.5 Increasing gradually to 63 for women by 2011

Australia 65 63 Increasing gradually to 65 for women by 2014; both increasing gradually to 67 from 2017 to 2023

Israel 67 62 To be raised gradually to 67 for women by 2017

South Korea 60 60 To be raised gradually to 65 from 2011 to 2033

Kuwait 50 50 Increasing gradually to age 55 by 2020

Taiwan 60 60 Will increase to 61 in 2018, increasing gradually to 67 by 2027

Turkey 60 58 Beginning 2036, increasing gradually to 65 by 2046 (men) and 2048 (women)

*as of 2010


Countries with Programmed Increase in Statutory Retirement Age

Americas Country** Men Women Programmed Increase in Age Requirement

US 66 66 Increasing gradually to 67 by 2027** as of 2011 Europe

Country*** Men Women Programmed Increase in Age Requirement

Estonia 63 61 Increasing gradually to 63 for women by 2016; both increasing gradually to 65 from 2017 to 2026

Germany 65 65 If born before 1965, increasing gradually from age 65 to age 67

from 2012 to 202967 (if born after 1964)Isle of Man 65 60 Increasing gradually to 65 for women by 2020

Serbia 64 59 Increasing gradually by 6 months a year to 65 (men) or 60 (women) by 2011

United Kingdom 65 60 Increasing gradually to 65 for women from 2010 to 2020*** as of 2010

Countries with Programmed Increase in Statutory Retirement Age


THANK YOU!!!

MSS Reviewer

Government & Nonprofit

social protection benefits

objectives of social

social services

program of social protection

social insurance schemes

degree of income security

additional income

income loss principal