Social Security Reform in Advanced Countries: Evaluating Pension Finance

By Toshihiro Ihori; Toshiaki Tachibanaki | Go to book overview
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5

Private mandatory retirement provision

Design and implementation challenges 1

Hazel Bateman, Suzanne Doyle and John Piggott


5.1.Introduction

In 1992, Australia introduced the Superannuation Guarantee, the first private mandatory retirement saving policy in the English-speaking world. At that time, the only country to have adopted a policy of this type was Chile, in 1981. 2 Private mandatory policies require either employers and/or employees to invest some fraction of the employee's wages with a private sector organization, with the aim of eventually helping to finance the employee's retirement. Typically, these worker accumulations are defined contribution (DC), fully funded, and kept in individual accounts.

In the eight years since 1992, more than a dozen countries, mostly from Latin America and the transition economies of Central Europe, have either adopted mandated private retirement provision or have stated their intention to reform their pension policies along these lines. 3 Further, a number of developed countries have either reformed their pension systems in this direction (for example, the UK) or have debated doing so (the US). Rarely has a novel policy design spread so swiftly across disparate nations.

Private mandatory retirement provision stands in sharp contrast to public provision, which is typically defined benefit (DB) and unfunded. Two differences are immediately apparent. First, while public provision permits centralized administration, competitive private service providers do not enjoy these benefits of scale. Special attention must therefore be paid to administrative cost, and by implication administration (and investment) charges that will adversely affect the net rate of return on accumulations. Second, public provision covers both accumulation and payout phases of retirement provision, with the central authority playing the role of plan sponsor. With private mandated policies, no plan sponsor exists. All that is defined is the contribution, and regulations and employer obligations associated with the accumulation phase typically expire at retirement. Payout regulations must therefore be separately stipulated. However, very few countries that have adopted private mandatory

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