Pensions and Replacement Rates Generated by the AFP System. Ricardo Paredes Professor, Department of Industrial Engineering and Systems, PUC, Chile.

Transcription

1 Pensions and Replacement Rates Generated by the AFP System Ricardo Paredes Professor, Department of Industrial Engineering and Systems, PUC, Chile.

2 Index Motivation Purpose Technical Data Methodology Context Income of those who contribute Early Old-Age Pension Results Old-Age Pension Results Solidarity Pension Contribution Damage damage Conclusions

3 Motivation The Chilean system has begun to generate pensions mainly financed by it. Controversy regarding the quality of pensions and the responsibility of the AFP system. Much casuistry; different measurements; confusion regarding what can be attributed to the design of the AFPs and what can be attributed to other factors. Need to complement and update background information on rates of replacement, pensions and protection of the elderly; provide material for ordering the debate.

4 Purpose of the Study Determine the old-age pension replacement rates (at the legal and early retirement ages) provided by the AFP system; Assess the effect of the contribution density on pensions and replacement rates. Quantify the proportion of pensioners with support from the Solidarity Pillar, and Analyze replacement rates of civil servants.

5 Technical Data All new pensioners who retired at the legal age or took early retirement in the period January-March 2012, in all of the AFPs. Number of old-age pensioners: 25,992 Number of Pensioners who took Early Retirement: 941 AFP Pensioners: 736 (Men: 651 and Women: 85) Pensioners from other systems: 205 (withdraw savings as Freely Available Surplus and pensions) No. of old-age pensions at the legal retirement age: 25,051 No. of men: 5,992 No. of women: 19,059 (Bonus per-child-born-live) The number of years of contributions include contributions to both systems (recognition bonus).

6 Methodology Replacement Rate: Percentage representing the amount of the pension compared to the adjusted average earnings of the worker in the last 10 years, in gross and net terms (with pension discounts). Average income in the last 10 years: According to the methodology established by law (more demanding). 2 extreme cases: Individual 1 received a single salary of $1,200 in one month; Individual 2 earned $1,200 in each of the 120 months. Average income Individual No. 1 $10; and Individual No. 2 $1,200, if all zeros or months with no contributions are taken into account. How many zeros are accepted? Decree Law 3,500 states that up to 16 zeros or months with no contributions are accepted.

7 Criteria defined by law for calculating the replacement rate

8 Context: Replacement rates and international criteria Simulations performed by the OECD estimated a replacement rate of 64.3% for Chile. The OECD average is 68.8% with a high degree of variance. 50% in the United States; 41.5% in New Zealand, 101% in Greece. ILO introduced the concept of "adequacy" (minimum target) of 40% for replacement rates.

9 Income of those who contribute Ch$ % of those who contributed to March, 2012, had incomes below Ch$500,000. The average taxable income of contributors in the last 10 years (to March, 2012) was 20.6 UF

10 Early retirement Requirements: Have savings that will provide a pension of at least 70% of the average adjusted taxable incomes of the last 10 years, and more than 80% of the maximum pension with current solidarity contribution. Pensioners Former System: They can re-retire or withdraw freely available surplus (Transitory Article 17- Chapter XVIII DL 3,500.)

11 Years of contributions - men Nº No. de of hombres male contributors, pensionados early anticipadamente pensions 0 a 1 1 a 5 5 a a a a a a a 40 + de 40 Men contributed for an average of 28.3 years

12 Years of contributions - women 25 Nº de mujeres pensionadas anticipadamente No. of women contributors, early pensions a 1 1 a 5 5 a a a a a a a 40 + de 40 Women contribute for an average of 24.8 years

13 Early pension: income and gross pension (According to years of paid-in contributions, in UF, men and UF women) Average Income: 22.9 UF Average Pension: 18.7 UF 5 a a a a a a a 40 + de 40 Promedio Average Gross de Ingreso Income Bruto Promedio Average Gross de Pensión Pension Bruta

14 Early pension: replacement rate (According to years of paid-in contributions, men and women) 500% 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% 381% 435% 187% 164% 154% 135% 96% 109% 90% 80% 89% 87% 79% 71% 78% 76% 5 a a a a a a a 40 + de 40 Tasa Gross de average Reemplazo R.R. Bruta Gross average R.R.: 82% Net average R.R.: 93% Tasa Net average de Reemplazo R.R. Neta R.R.= Replacement Rate Note: Pensioners from other systems are excluded

15 Retirement at the Legal Age

16 Years of contributions men No. of men who retire at the legal age 0 a 1 1 a 5 5 a a a a a a a 40 + de 40 Men contribute for an average of 19.8 years

17 Years of contributions - women No. Nº of dewomen mujeres who pensionadas retire at the vejez legal edad age legal Mainly bonus per-child-born-live Principalmente Bono por hijo a 1 1 a 5 5 a a a a a a a 40+ de 40 Women contribute for an average of 6.2 years. If we exclude those who contribute for less than one year, the average is 15.7 years.

18 Income and pension according to number of years of contribution (Men and Women) UF a 1 1 a 5 5 a a a a a a a 40 + de 40 Promedio Average de Net Ingreso Income Neto Promedio Average de Net Pensión Pension Neta Greater number of years of contribution higher pension

19 Old age pension: income and gross pension (According to number of years of contribution, in UF, Men) Average income+ 10 years: UF 12.8 Average pension + 10 years: UF a 1 1 a 5 5 a a a a a a a 40 + de 40 Average Promedio Gross de Ingreso Income Bruto Promedio Average de Gross Pensión Pension Bruta

20 Old age pension: Replacement rate (According to number of years of contribution, % Men) 500% 450% 400% 350% 300% 250% 395% 451% R.R. Average gross income + 10 years: 76% R.R. Average net income + 10 years: 87% 200% 150% 100% 139% 122% 120% 106% 102% 97% 89% 86% 92% 81% 80% 81% 85% 75% 71% 70% 71% 81% 50% 0% 0 a 1 1 a 5 5 a a a a a a a 40 + de 40 Tasa Gross de Reemplazo average R.R. Bruta Tasa Net de average Reemplazo R.R. Neta R.R.: Replacement Rate.

21 Old age pension: income and gross pension (According to number of years of contribution, in UF, Women) Income average + 10 years: UF 14.8 Average pension + 10 years: UF 7.5 Greater retirement gap 5 years earlier and greater life expectancy a 1 1 a 5 5 a a a a a a a 40 + de 40 Promedio Average Gross de Ingreso Income Bruto Promedio Average Gross de Pensión Pension Bruta

22 Old age pension: Replacement rate (Depending on number of years of contribution, %, Women) 600% 500% 400% 496% 566% R.R. Average gross + 10 years: 51% R.R. Net average + 10 years: 58% 300% 200% 100% 221% 194% 131% 114% 94% 83% 71% 65% 55% 46% 51% 68% 62% 57% 48% 41% 45% 59% 0% 0 a 1 1 a 5 5 a a a a a a a 40 + de 40 Tasa Gross de average Reemplazo R.R. Bruta Tasa Net de average Reemplazo R.R. Neta R.R.: Replacement Rate.

23 Pensioners with Solidarity Pension Contribution (APS) Of the total number of old-age pensioners, 4,373 have APS (17.5%) Women: 4,112 pensioners with APS (21.6%) 95% of women with APS have 1 paid-in contribution (bonus per-childborn to-live) APS is granted at the age of 65, so women's pensions will increase on meeting this requirement Nº No. pensionados of pensioners with con APS a 1 1 a 5 5 a a a a a a a 40 + de 40

24 Pension Damage (Civil Servants) 317 former civil servants were identified among retirees in the first quarter of Gross replacement rate: 42% Net replacement rate: 48% Gross pension: 14.9 UF Gross income: 35.3 UF Compared with the overall sample, a replacement rate 15 percentage points lower for a similar number of years of contributions is observed.

25 Conclusions The relationship between pensions and contributions is positive and very strong. More years of contributions, larger pensions. NET replacement rates of pensioners who contributed at least 10 years was 87% for men and 58% for women. The net replacement rate for early pensions is 93%. Replacement rates for those who contributed for more than 10 years are relatively high in Chile, compared to the ILO s sufficiency criteria. Old-age pensions and replacement rates for men are significantly higher than those of women. Men who retired at the legal age, contributed for an average of 19.8 years and women for 15.7 years.

26 Conclusions 3 of every 4 pensioners are women, which is explained by the bonus per-child-born-live, which requires joining an AFP and paying in one contribution. This severely distorts both the number of pensioners, their average pensions and the beneficiaries of APS, who have not been contributors to the AFPs. Low replacement rates for women are due to an earlier retirement age and longer life expectancy. Replacement rates for women improve due to the effect of the APS and the bonus per-child-born-live when they reach age 65. In future, they will improve due to greater incorporation into the labor market. But life expectancy and returns of the fund, could be a negative factor. Public sector pensioners have lower replacement rates, which is due to the Social Security damage caused by the state as their employer. Need to review policies regarding senior citizens.