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S3 What are the diff types of pension schemes you can have?

funded or PAYG DB or DC private or public mandatory vs public S4 How do u assess how effective the pension schemes are? Individual & economy wide criteria S5 What does the world bank recommend? policies to protect the old and promote growth there shud be 3 pillars for retirement Publicily managed system with mandatory participation and the limited goal of reducing poverty Mandatory shud be a mandatory privately managed DC scheme Voluntary savings Idea is to promote SG like a second pillarDB -> DC Idea is to promote growth Why has WB argued for this approach? Increase fiscal sustainability -- > by separating the redistributive function with the savings function, the public pillar and the size of the payroll tax needed to support it can be kept relatively small, thus many of the growth-inhibiting problems associated with a dominant public pillar risk diversification a public system is vulnerable to political risk, govt failure a mandatory system is vulnerable to market risk, economic risk Funded pensions enhance development of capital markets --> if u have a funded system, u can use those funds to invest & develop, leading 2 growth Aim of world bank Reduce poverty S7 How did WB assist countries with huge problems, risk mgt? Downsize public pillar, added private system as second pillar Why did WB initially face criticism? Chile was very concentrated system The currency fell after world bank assisted them 77-60% Hence, WB in 1999 published report stating everything's overstated. How did WB also revise their approach? Intro'd a 5 pillar approach Social assistance Public pensions Mandated Occupational/personal pension plans (DB/DC) Voluntary Occupational/personal pension plans (DB/DC) Other - informal support (family), social programs (eg healthcare), other indivi fin'l or non-fin'l assets What they did is if u have a DB, public pension works as well, no longer need to convert from DB etc What issues remain in int'l environ in the transitioning towards multi pillar arrangements? guarantee, admin, investment choice, ret benefits, compulsory, fin'l

literacy Guarantee - eg guarantee of capital, or return eg 3% pa Q is shud govt guarantee & if so at what stage? Administrative costs Can be very high Thus, benefits reduced!!! 1% higher cost (admin or investment) reduce ur final benefit by 26% How much investment choice Relevant to Aus & globe No of choice has sky rocketed Investment level or total fund level? Ret benefits? Some countries have rules about what one u shud get In Aus, it's still very underdeveloped post retirement market Shud it be compulsory? Only few countries have compulsory, eg US & NZ are against still Fin'l literacy Not a priority in a lot of countries But given in Aus the change from DB -DC, individuals have loads of decisions to make & hazel's research shows that literacy has a financial impact Ongoing & global problem. S11 Why is transition from public to private funded so difficult? Cost continues to increase over time Solution is to grandfather the PAYG system. ie older ppl still receive the old system. Thus dotted blue line. The liab form the remaining will decrease over time as they die. S15 long term benefit, but for the short term (30 yrs, yeah not really) because of double burden S16 What r some outstanding issues in Aus environ? Adequacy SG enuf? Tax How tax interferes Most have EET, we have TTE Ongoing issues about reforms Talk in media Efficiency Not a problem Cooper review was designed to address this prob How to reduce admin costs Ppl r now allowed to change funds but admin costs ^'d Investment strategy Cooper review suggested moving from a 1 size fit all to a structure that depended on engagement Ret benefits

A big problem Govt reviews only address accumulation part of super, but type of benefit u receive rarely discussed Next few yrs more reviews possible Consumer decision making How do we change PDS bc regulatory promotes a certain type of design that doesn't help reduce mistakes Role of fin'l advisors (commission to fee based) Behav fin lessons Hence, super is still an unfinished story

Rest of world Other countries have a completely diff set of q's to Aus In Aus we talk about investment, fin'l literacy But in developed countries, they are discussing affordability and sustainability How to make PAYG sustainable to avoid bankruptcy What do the graphs on s19-20 say? Most countries still have high reliance on publically provided system, critical issue for future What are the benefits of PAYG system? Bnefit paid straight away cf DC where u have to wait one generation Redistributive Works well if population has high labour pop and is young But for most countries, not the case Problems? It's easier for govt to say benefits will increase, harder to say tax will increase, hence they usually end up not delivering what they promise What have been some OECD trends? Share of pop age 65+ to double Share of working age pop falling in relative (terms & absolute terms --> Germany, jap, Italy, Korea) Projected increase in public pension spending from 7.5% of GDP to at least 11% (lec says this is conservative bc atm in France it's already at that level, and this is just spending, liabilities can increase to 300% of GDP) Not enuf time to address changes Hence, we can see world has dif probs to Aus, focused on affordability and sustainability What has been done? Don't need to rmb, just egs Some OECD countries have tried to diversify & encourage gradually thru tax incentives rather than compulsory S22 Other countries have pragmatic approach. Eg ^ pension age & V benefit ^ no of ppl eligible for scheme Postpone for 1 yr (not inflation adjusted)

However, all these reforms are very difficult Key story - know why it's very difficult for countries to reform from public PAYG system to a DC system