Australian and United States Retirement Income Systems: Comparisons and Lessons. John Piggott and Rafal Chomik

Transcription

1 Australian and United States Retirement Income Systems: Comparisons and Lessons John Piggott and Rafal Chomik

2 1. Demographic & economic context 2. Retirement income system 3. Outcomes 4. Means testing 5. Compulsion and choice 6. Public employee pensions

3 1. Context: Demography and economy $20t GDP (USD, PPP, trillion) 400m Population (million) Gov. debt (% of GDP) $15t $16.2t 300m 314m 100% 80% 84% $10t 200m 60% 40% $5t 100m $1.4t $1.0t 26m 23m 20% 12% $t TX m TX %

4 1. Context: Demography and economy GDP per head (USD, PPP) Median income (USD, PPP) Income inequality (Gini) $60k $60k 0.60 $52k $45k $44k $45k $30k $30k $29k $25k 0.30 $15k $15k 0.15 $k $k 0.00

5 1. Context: Demography and economy 35 Life exp. at age 60 Total Fertility Rate Support ratio

6 2. Retirement income system Safety net for adequacy purposes Universal Targeted Public provision Compulsory income replacement Pay As You Go Funded Private provision Public provision Voluntary saving for income replacement Employment related Other Private provision Tax preferred Non tax preferred

7 2. Retirement income system Safety net for adequacy purposes Universal Targeted US relatively small Old age Supplemental Security Income scheme Compulsory income replacement Pay As You Go Public provision Private provision US relatively large Oldage Social Security Pension Funded Public provision Voluntary saving for income replacement Employment related Private provision Tax preferred US 401(k) Other Non tax preferred

8 2. Retirement income system Safety net for adequacy purposes Universal Targeted Public provision Australia s relatively large Age Pension scheme Pay As You Go Private provision Compulsory income replacement Funded Public provision Voluntary saving for income replacement Employment related Other Private provision Tax preferred Non tax preferred Australia s relatively large Superannuation Guarantee Australia s tax concessions for voluntary Super contributions

9 2. Retirement income system: Pillar 1 Non contributory, tax financed, means tested Access age: 65, moving to 67 Benefits flat at 28% of average f/t male earnings for singles, 40% for couples Benefits tax free, so higher net replacement rate Affluence tested, not targeted at destitution: 50% full, 25 30% part, 20 25% get nothing Costs 2.7% of GDP in 2010; 3.9% in 2050

10 2. Retirement income system: Pillar 2 Mandated Covers almost all employees Contribution rate of 9%, moving to 12% Preserved tax free at 60 Tax preferred No decumulation structure

11 3. Outcomes: Poverty & targeting 100% Coverage of targeted pension (% of 65+) 100% Value of targeted pension (% of AW) 20% Poverty (% of 65+ below 40% of pop median) 80% 78% 80% 16% 60% 60% 12% 40% 40% 8% 20% % 7% 20% % 18% 29% 4% 2009 reform increased pension value %

12 3. Outcomes: Income replacement 30% 25% 20% 15% 10% 5% 0% Taxes and contributions for workers and pensioners Worker with AW Pensioner with GRR of AW Pensioner with pension income = AW Worker with AW Pensioner with GRR of AW Pensioner with pension income = AW 100% 80% 60% 40% 20% % Coverage of private pensions 47% 57% 86% 91% 120% 100% 80% 60% 40% 20% 59% 47% 101% 68%...of working age...of labour force...of working age population...of labour force 50% of AW 100% of AW 50% of AW 100% of AW % NRR for low and average wage workers

13 3. Outcomes: Fiscal 7% 7% 6% 5% 6% 5% 4% 4% 3% 3% 2% 2% 1% 1% % %

14 4. Means test issues: EMTRs Effective marginal tax rates single age pensioner, January ,800 15,600 23,400 31,200 39,000 46,800

15 4. Economy wide analysis Revenue requirements matter: means testing is cheaper Personal taxes can vary with age as well as income Means testing is a form of personal capital taxation, and is also age based: it may be desirable (Conesa 2009) Higher taper rates are welfare improving: Lower taxes on workers means less compounding of distortions (Kumru and Piggott 2010)

16 100% 80% 60% 40% 20% % 5. Compulsion and choice Working age population covered by private pensions, by enrollment type Mandatory Auto enrolment Voluntary GRE LUX PRT ITA FRA ESP AUT CAN KOR SLV BEL UK SVK HUN DEU POL NZL MEX CZR NOR EST CHE CHI FIN ISR DNK ISL NDL

17 6. Public employee pensions Large legacy costs (15% of GDP), BUT Federal and states have now shifted to DC Military and judiciary the only exceptions Private sector reform as driver of public reforms

18 Conclusion 1. Similar demographics 2. Different pension system approaches 3. Different poverty & income outcomes 4. Lesson 1: benefits of means testing 5. Lesson 2: benefits of compulsion / costs of choice 6. Lesson 3: Public employee pensions follow

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20 4. Means testing: Revenue requirements P D P D p(1+2t) p(1+t) p t S p(1+t) p t 2 S Q Q