The Payout Stage in Chile and Singapore—and implications

The Payout Stage in Chile and Singapore--and implications for older women by Estelle James

Why do pension plans have different effects on men and women? • Women have lower lifetime earnings than men, therefore smaller retirement savings – work less – earn lower wage rates • Women live longer than men – Therefore need more retirement income, not less – longevity insurance, price indexation more important – Are younger than, likely to outlive husbands, therefore survivors’ insurance important (cost of living of individual 70% cost for couple) • Most very old people are women and very old women are often pockets of poverty 2

The accumulation stage in Chile and Singapore • Chile— – 10% net contribution + 3% for survivors’ & disability insurance+admin fee – Can’t take out until retirement – Real rate of return 1982 -2002— 10% • Singapore: – 30 -40% contribution rate – But can take out for housing—most do, leaves less for retirement – Is survivors & disability insurance provided during accumulation? – Real rate of return about 1. 5% 3

Balance at retirement similar in two countries and balance/wage ratio much higher in Chile • Despite lower contribution rate and lower wage • Because no withdrawal for housing, higher rate of return (would hold even if rate were cut in half in Chile) • Average accumulation similar to Minimum Sum • But this buys larger pension/wage (replacement rate) in Chile because wage much lower • This is especially important for women 4

Age of retirement • Chile: – 65 for men, 60 for women – Early retirement possible if have 50% replacement rate (ratio of pension/wage) – 60% retire early, so we know their RR>50% • Singapore: – 62 but must put minimum sum aside at 55 – Very few retirees have 50% replacement rate • Probably retirement age is too low in both countries, especially for women, as longevity increases 5

Payout choices limited in both countries • Chile: – Annuity or programmed withdrawal – Lump sum not allowed unless RR>70% – 2/3 have chosen to annuitize (marketing, tied to ER) • Singapore: – Annuity, CPF or bank for Minimum Sum – Lump sum allowed for rest – Very few annuitize • Conditions for lump sum much easier in Singapore, RR of remainder much less than 70%. Retirees and their spouses may run out of money before they die—especially women 6

• Chile: Annuities market – 2/3 retirees annuitize—aggressive marketing by insurance companies, favored by regulations – Participating annuities not allowed--misinformation – Indexed pensions required—protects long-lived by shifting benefits from young old to very old; indexed investment instruments needed – Annuities pay MWR=>100%, govt interest rate (MWR = EPV of lifetime payouts/initial premium) • Singapore: – Little annuitization, indexation not required or available, little marketing (small accumulations) – Most annuities are participating—do workers trust? – Annuities paid MWR>100% in 1999 but less now • Longevity and inflation insurance especially important for women; weak in Singapore 7

Protection for wives and widows • Chile: – Survivors benefits required during work stage – Married men must purchase joint pension (joint annuity or joint PW) when they retire--financed by lower pension for husband, not by state – Widows can keep their own pension in addition to widow’s benefit (in many countries they must choose) – Widows maintain previous hh standard of living – Married women biggest gainers from pension reform • Singapore: individual annuity; survivors benefits? Does wife get first claim on return of capital? 8

Other annuity issues re gender • Gender-specific tables used in both countries— unisex tables used in Europe and US employment plans--controversial. But this matters less when joint annuity is used • Divorced women – Divorce still not common in either country but increasing in Singapore; just became legal in Chile – Are account balances split upon divorce? What about survivors’ benefits and joint annuity? Remains to be determined Chile • Partner rights in non-married couples? 9

Income floor • Chile: – MPG sets floor on pension and survivors’ benefits—for workers who have contributed at least 20 years and their survivors – Ad hoc indexation to wages— 25% average wage – Financed by general treasury – Mainly protects low earning women & widows – Social assistance protects non-contributing women • Singapore: – No MPG; means-tested benefits? 10

• Chile: Conclusion – has oriented its program toward retirement pensions and protection for survivors, so high accumulation – competition brings high rate of return and RR, makes annuitization popular – indexed pension protects long-lived, survivors’ benefit & joint annuity protects widows, MPG protects low earners—policy choices – This provides high protection for older women • Singapore – many purposes, mainly housing, so low accumulation – non-competitive, lower rate of return and RR, annuitization not used much (why? ) – no indexation, survivors’ benefits, joint annuity, MPG – will leave very old women and widows, who outlive 11 voluntary savings, in difficult financial condition