Cycloptichorn wrote:I had a hard time understanding how the article '15 questions' answered the questions of where the money is going to come from to pay for this.
#15
How was the transition financed?
The true net economic costs of moving from an unfunded pay-as-you-go system to a fully funded system are zero. That is to say, the total funded and unfunded debt of a country does not change by moving from an unfunded system to a funded one. There is, however, a cash flow problem when moving toward a fully funded retirement system. In the case of Chile, transition costs can be broken down into three different parts. First, there is the cost of paying for the retirement benefits of those workers who were already retired when the reform was implemented and of those workers who chose to remain in the old system. That makes up by far the largest share of the transition costs at present. These costs, of course, will decline as time goes by. Second, there is the cost of paying for the recognition bonds given to those workers who moved from the old system to the new in acknowledgement of the contributions they had already made to the old system. Since these bonds will be redeemed when the recipients retire, this cost to the government will gradually increase as transition workers retire (but will eventually disappear). It is worth stressing that these are new expenditures only if we assume that the government would renege on its past promises. The third cost to the government is that of providing a safety net to the system, a cost that is not new in the sense that the government also provided a safety net under the old pay-as-you-go system. Because the new private system is much more efficient than the old government-run program and because, as stated above, to qualify for the minimum pension under the new system, a worker must have at least 20 years of contributions, this cost has so far been very close to zero. The size of this expenditure will, of course, depend on the success of the private system.
To finance the transition, Chile used five methods. First, it issued new government bonds to acknowledge part of the unfunded liability of the old pay-as-you-go system. Second, it sold state-owned enterprises. Third, a fraction of the old payroll tax was maintained as a temporary transition tax. That tax had a sunset clause and is zero now. Fourth, it cut government expenditures. And, fifth, pension privatization and other market reforms have contributed to the extraordinary growth of the Chilean economy in the last 13 years, which in turn has increased government revenues, especially those coming from the value added tax.
In sum, the transition to the new system has not been an added burden on Chile because the country was already committed to paying retirement benefits. On the contrary, the transition--the fiscal requirements of which have varied between 1.4 and 4.4 percent of GDP per year--has actually reduced the economic and fiscal burden of maintaining an unsustainable system.
Cycloptichorn wrote:There was no specific mention of how individual accounts are managed, how they are administrated, how the returns are paid out, and how much the financial planners charge for their services.
Pay outs #10 and #11
Charges are explaiined in #2 and #7 (which I didn't cut and paste... I can't do all of the work for you)
10. Could you describe the pay out requirements for personal accounts?
The new private system provides workers with three different types of retirement benefits:
a) Old-Age Pensions. Male workers must reach the age of 65 and female workers the age of 60 to qualify for this pension. However, it is not necessary for men and women who reach these respective ages to retire, nor do they get penalized if they choose to remain in the labor force. No other requirements are necessary.
b) Early-Retirement Pensions. To qualify for this option, a worker must have enough capital accumulated in his account to purchase an annuity that is (1) equal to at least 50 percent of his average salary during the last 10 years of his working life; and (2) at least 110 percent of the minimum pension guaranteed by the state.
c) Disability and Survivor's Benefits. To qualify for a full disability pension, a worker must have lost at least two thirds of his working ability; to qualify for a partial disability pension a worker must have lost between 50 percent and two thirds of his working ability. Survivor benefits are awarded to a worker's dependents after the death of said worker. If he did not have any dependent individuals, whatever funds remain in his pension savings account belong to the beneficiaries of his estate.
Types of Pensions. There are three retirement options:
a) Lifetime Annuity. Workers may use the money accumulated in their accounts to purchase a lifetime annuity from an insurance company. This annuity provides a constant income in real terms.
b) Programmed Withdrawals. A second option is to leave the money in the account and make programmed withdrawals, the amount of which depends on the worker's life expectancy and those of his dependents. If a worker choosing this option dies before the funds in his account are depleted, the remaining balance belongs to the beneficiaries of his estate, since workers now have property rights over their contributions.
c) Temporary Programmed Withdrawals with a Deferred Lifetime Annuity. This pension option is basically a combination of the first two. A worker who chooses this option contracts with an insurance company a lifetime annuity scheduled to begin at a future date. Between the start of retirement and the day when the worker starts receiving the annuity payments, the worker makes programmed withdrawals from his account.
In all three cases a worker may withdraw in a lump-sum (and use for any purpose) those funds accumulated in his account over and above the money necessary to obtain a pension equal to at least 120 percent of the minimum pension and to 70 percent of his average salary over the last 10 years of his working life.
11. If a worker takes programmed withdrawals, but outlives his account balance, what happens? Is there a safety net to insure he still has a source of income?
If a worker outlives the balance in his account, then the government provides the minimum pension, as defined by the Chilean Congress, if that worker has contributed to his account for a minimum of 20 years. If a worker does not have at least 20 years of contributions, he may apply for a welfare-type pension that is lower than the minimum pension. So, yes, there is a safety net under the Chilean private pension system, as there was one under the old government-run system. However, since the new system is far more efficient than the old one, the cost to the Chilean taxpayer is considerably lower.
Cycloptichorn wrote:It is disingenuous to claim that everyone would recieve that large a return; there are many people that would lose money! You must recognize this fact and tell me how it will be dealt with.
Cycloptichorn
As I already said there is still a minimun government gaurantee which you would have seen if you read #9
9. Could you explain in more detail how the government's rate of return guarantee works? For example, doesn't the government require that investment returns exceeding certain amounts be set aside for buffering returns in case they fall below certain prescribed amounts in the future? Doesn't the government guarantee funds that go bankrupt? How many funds have gone bankrupt and at what cost to the government?
Each year each AFP must guarantee that the real return of the AFP is not lower than the lesser of (1) the average real return of all AFPs in the last 36 months minus 2 or 4 percentage points, depending on the type of fund, and (2) 50 percent of the average real return of all AFPs in the last 36 months. If the returns are higher than 2 or 4 percentage points above the average return of all AFPs over the last 36 months, or higher than 50 percent of the average return of all AFPs over the preceding 36 months, the "excess returns" are placed in a profitability fluctuation reserve, from which funds are drawn in the event that the returns fall below the minimum return required. For instance, if the industry's average return for the preceding 36 months is 10 percent and an AFP has a return of 17 percent, then the "excess returns" are 2 percentage points (10 percent plus 50 percent of the average return, which is 5 percent, equals 15 percent, which is the threshold in this case). If, on the other hand, the industry's average return is 2 percent and an AFP has a return of 4.5 percent, then the "excess returns" are 0.5 percentage points (2 percents plus two percentage points equals 4 percent, which is the threshold in this case, since it is higher than 2 percent plus 50 percentage of the average, 1 percent, which would be equal to 3 percent. Should an AFP not have enough funds in the profitability reserve, funds are drawn from a cash reserve, which is equivalent to 1 percent of total assets under management. If that reserve does not have enough funds, then the government makes up the difference and the AFP is liquidated. To date, no AFP has gone bankrupt, although three have been liquidated for not meeting the minimum capital requirements, so the cost to Chilean taxpayers has been zero. It is also worth noting that the system establishes two different legal entities for the management company and the fund it administers, which is the property of workers. So, it is possible that a management company go bankrupt (that is, its net worth is negative) without it affecting the fund.
