SOCIAL SECURITY CONCEPTS Rizaldy T. Capulong Deputy Chief Actuary & Vice President for Capital Markets
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”
METHODS OF PROVIDING SOCIAL PROTECTION
• 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
METHODS OF PROVIDING SOCIAL PROTECTION
• 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
PRINCIPLES OF A SOCIAL INSURANCE SYSTEM
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)
PRINCIPLES OF A SOCIAL INSURANCE SYSTEM
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
COMPARISON WITH PRIVATE INSURANCE
• 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
COMPARISON WITH PRIVATE INSURANCE
• 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
COMPARISON WITH PRIVATE INSURANCE
• Differences Social Insurance Private Insurance
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
COMPARISON WITH PRIVATE INSURANCE
• Differences Social Insurance Private Insurance
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
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BENEFIT ADEQUACY
• DEFINED CONTRIBUTION
• 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
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PERCEIVED VALUE (EASE OF UNDERSTANDING)
• DEFINED CONTRIBUTION
• 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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PERCEIVED VALUE (EASE OF UNDERSTANDING)
• 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
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PERCEIVED VALUE (EASE OF UNDERSTANDING)
• 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
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EQUITY
• DEFINED CONTRIBUTION
• 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
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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
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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
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“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
PAY-AS-YOU-GO Financial System
– How does it work?
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
– How does it work?
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
PAY-AS-YOU-GO Financial System
– Where is this applicable?
PAY-AS-YOU-GO System
SHORT-TERM BENEFITS
Medical careSicknessMaternityUnemployment benefitsFuneral grants
PAY-AS-YOU-GO Financial System
– How does it work?
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
– How does it work?
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
FULL FUNDING Financial System
– How does it work?
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
FULL FUNDING Financial 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
FULL FUNDING Financial System
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)
SCALED PREMIUM FINANCIAL SYSTEM: An Alternative System of Financing
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
SCALED PREMIUM FINANCIAL SYSTEM: An Alternative System of Financing
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
SCALED PREMIUM FINANCIAL SYSTEM: An Alternative System of Financing
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
A. Government-Financed Schemes
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
A. Government-Financed Schemes
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
B. Compulsory Contributory Schemes
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
B. Compulsory Contributory Schemes
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
B. Compulsory Contributory Schemes
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
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
• Vietnam
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
Financing Systems in Southeast Asia
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
Financing Systems in Southeast Asia
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
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)
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
Financing Systems in Southeast Asia
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
Financing Systems in Southeast Asia
Old Age, Disability, and Survivors Sickness and Maternity Work Injury
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
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
• Singapore
Financing Systems in Southeast Asia
Old Age, Disability, and Survivors Sickness and Maternity Work Injury
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
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
• Thailand
Financing Systems in Southeast Asia
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
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
Financing Systems in Southeast Asia
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
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
Financing Systems in Southeast Asia
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
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
Economical and Social Challenges & Strengthening Financing Systems
• 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.
Economical and Social Challenges & Strengthening Financing Systems
– 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
SOURCES OF STATISTICAL INFORMATION
• 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
SOURCES OF STATISTICAL INFORMATION
• 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)
SOURCES OF STATISTICAL INFORMATION
• 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
GENERAL DEMOGRAPHIC AND ECONOMIC DATA
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
GENERAL DEMOGRAPHIC AND ECONOMIC DATA
Wages, interest rates, inflation, GDP (continued)
• GDP expenditure deflators• Primary factor income distribution• Inflation and interest rates• Exchange rates• National budget
GENERAL DEMOGRAPHIC AND ECONOMIC DATA
• 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
SCHEME SPECIFIC DATA
• 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
SCHEME SPECIFIC DATA
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
DESIGNING SOCIAL SECURITY BENEFITS
• 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
DESIGNING SOCIAL SECURITY BENEFITS
• 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
DESIGNING SOCIAL SECURITY BENEFITS
• 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
HIGHLIGHTS OF BENEFIT DESIGN AROUND THE WORLD
• RETIREMENT AGE– 170 out of 172 countries around the
world follow a mandatory retirement age, with 57 countries allowing early pension.
145
HIGHLIGHTS OF BENEFIT DESIGN AROUND THE WORLD
• 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
HIGHLIGHTS OF BENEFIT DESIGN AROUND THE WORLD
• 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
HIGHLIGHTS OF BENEFIT DESIGN AROUND THE WORLD
• 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
HIGHLIGHTS OF BENEFIT DESIGN AROUND THE WORLD
• 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
HIGHLIGHTS OF CONTRIBUTION DESIGN AROUND THE WORLD
• 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
HIGHLIGHTS OF CONTRIBUTION DESIGN AROUND THE WORLD
• 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
International standards: ILO CONVENTION 102
• 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
International standards: ILO CONVENTION 102
• 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
Trends in Social Security
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.
Trends in Social Security
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
Trends in Social Security
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
Trends in Social Security
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
Trends in Social Security
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