Individual Accounts: Trends in Assetbased Retirement Policy

1
Individual Accounts Trends in Asset-based
Retirement Policy

• Chang-Keun Han Michael Sherraden
• Center for Social Development
• Global Symposium on Savings, Assets and Financial
  Inclusion
• Singapore, June 27-29, 2007

2
Policy Questions

• What are individual accounts?
• What are advantages and challenges of individual
  accounts?
• What does the expansion mean for asset-based
  policy?
• How can individual accounts work for low-income
  workers?

3
What are Individual Accounts?

• Funded accounts administered either by employers,
  the government, or third party. Benefits depend
  on contributions, investment earnings, and the
  amount of fees (Stewart, 2006)
• Individual accounts as the basis of a countrys
  pension system or as a complement to the basic
  system

4
Expansion of Individual Accounts
Bolivia, Bulgaria, China Costa Rica, El
Salvador Hong Kong, Hungary Kazakhstan,
Kyrgyzstan Latvia, Mexico, Mongolia Poland,
Singapore, Sweden, Uruguay
Croatia, Denmark, Dominican Republic Estonia,
Kosovo, Nigeria, Russia Slovakia
Argentina Australia Colombia Italy, Peru, UK
Chile (1981)

• References Kritzer (2005) (Countries with
  individual accounts as part of mandatory systems
  for retirement income)

5
Recent Initiatives of Individual Accounts

• New Zealand (KiwiSaver)
• Ireland (Special Savings for Retirement)
• South Africa (National Retirement Fund)
• India (New pension system for all workforce)
• UK (National Pensions Saving Scheme NPSS)
• (Stewart, 2006)

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Explanations of Individual Accounts

• Reform of pension systems
• Economic transition (Eastern Europe)
• Rebalancing the roles of public and private
  sectors
• Introducing a second pension (Australia)
• Policy transfer (Latin America, Eastern Europe)
• Encouraging investment and market development
• (Stewart, 2006)

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Advantages of Individual Accounts

• Transparency/clarity
• Closer link between contribution and benefits
• Actuarial fairness
• Portability
• Usually more individual choice
• Potentially higher returns
• Administrative reform
• (Kritzer, 2005 Matijascic Kay, 2006
  Sherraden, 2006 Stewart, 2006)

8
Challenges of Individual Accounts

• Coverage
• Adequacy of retirement security
• Inflation risks
• Costs
• Political and managerial risks
• (Kritzer, 2005 Matijascic Kay, 2006
  Sherraden, 2006 Stewart, 2006)

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Implications for Asset-based Policy

• Apparent shift from income-based policy to
  asset-based policy (Sherraden, 2003)
• Individual accounts may help people identify more
  clearly with accumulating pension wealth and feel
  a sense of ownership of the assets
• Individual accounts may assist the development of
  a capital-owning democracy (Daykin, 2000)

10
Future Directions of Individual Accounts

• Priority should be to include more low-income
  workers into individual accounts (Sherraden,
  2003)
• To help low-income workers keep saving in
  individual accounts, more incentive mechanisms
  should be introduced
• It is important to provide relevant information
  regarding investment options, regulations, tax,
  and other features of individual accounts
• Still, administration costs in individual
  accounts may be high. It is imperative to make
  investment options simple and achieve economy of
  scale

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References

• Daykin, C. (2000). Experience and Trends in
  Occupational Pensions Tour dHorizon in OECD
  Countries. In Regulating Private Pension Schemes
  Trends and Challenges. Private Pension Series No.
  4. OECD.
• Kritzer, B. E. (2005). Individual accounts in
  other countries. Social Security Bulletin 66 (1)
  31-37.
• Matijascic, M. Kay, S. J. (2006). Social
  security at the crossroads Toward effective
  pension reform in Latin America. International
  Social Security Review 59 (1) 3-26.
• Sherraden, M. (2003). Individual accounts in
  social security Can they be progressive?
  International Journal of Social Welfare 12 (2)
  97-107.
• Sherraden, M. (2006). Schemes to boost small
  savings Lessons and directions. Presented at a
  conference of Access to Finance Building
  inclusive financial systems. World Bank,
  Washington, D.C. May 30-31.
• Stewart, F. (2006). Governance and structural
  challenges with individual accounts. OECD / IOPS
  Global Forum.
• Turner, J. (2004). Individual accounts Lessons
  from Sweden. International Social Security Review
  57 (1) 65-84.
• Vittas, Dimitri. (2002). Policies to Promote
  Saving for Retirement A Synthetic Overview.
  Financial Sector Development. The World Bank.