NOTE: Free essay sample provided on this page should be used for references or sample purposes only. The sample essay is available to anyone, so any direct quoting without mentioning the source will be considered plagiarism by schools, colleges and universities that use plagiarism detection software. To get a completely brand-new, plagiarism-free essay, please use our essay writing service.
One click instant price quote
... They may have invested in firm-specific human capital, which lse's value if the firm des play. Thus, few emplyee's would consciously agree t accept default risk n their person benefits in re t increase their expected cash wages. This is true even when the employee has all the relevant information necessary t assess the default risk f the firm. In mst cases, the emplyee's d nt have the relevant information, and this fact makes the welfare lss even greater. Fr example, consider the profile f a "typical" defined benefit plan beneficiary.
The vast majority f the covered by PBGC guarantees in the United States are blue clear and white clear workers fr whm person benefits constitute a large print f that retirement savings. These emplyee's are very unlikely t have asset prtflis f sufficient size r the investment expertise necessary t hedge the nn-diversifiable risks f their defined benefit person asset. nly the mst highly compensated managerial emplyee's f the firm might have the financial wealth and knowledge required t diversify away the risks f their defined benefit person claims. But t hedge this risk, they would effectively have t take a short position in the spring firm's equity. Typically, managers and emplyee's are prohibited frm shrivelling the firm's securities by the prvisin's f their incentive compensation package. In contrast, an investor in the stock r bnd's issued by the spring firm is explicitly taking an interest in the fortunes f the firm itself.
The function f these securities is t all investors t participate in the risk and return projects f the firm. Investors can diversify away much f the default risk associated with any ne specific firm as part f their that prtflis. Emplyee's with a substantial part f their wealth in firm specific defined benefit person annuities usually can achieve such primal diversification. They are like investors wh are constrained t hld a large fraction f their wealth in the frm f lng-term bnd's issued by a single firm, which is als their employer. Thus, bth their tangible and human capital are significantly exposed t the fortunes f a single firm. The are reading establishes a rationale fr insuring defined benefit pensin's against the risk that the plan sense will default n its price t provide benefits.
It des nt establish a rationale fr the government t provide such insurance. Indeed, James Pesand's analysis f the person systems in several developed countries reveals that the number f gvernment's that provide such insurance is remarkably limited. Whether r nt a national government fees person insurance, there is a case fr government ver sight. If a significant part f the private person system failed t deliver the benefits promised t million f people wh had relied n the benefits fr their retirement security, the government would surely step in t provide at least sme f the benefits. Thus, even in the absence f a format system f person insurance, the government is the de fact "guarantee f last report. " As already stated, in a defined contribution person plan the beneficiary's retirement income depends directly n the performance f the assets in the fund. The employee bears the entire investment risk; the retirement account is, by definition, fully funded by the cntributin's, and the employer has n legal blighting been making its periodic cntributin's.
Fr defined contribution plans, investment policy considerations are essentially the same as fr a tax-qualified individual retirement account: a trade-ff between risk and expected return. In a defined benefit plan, the sense's investment policy des nt, in general, affect the retirement benefits received by the plan's beneficiaries. Fr well-funded plans r fr plans sponsored by financially healthy emplyer's, the promised benefits are paid regardless f the person fund's investment performance. Nevertheless, investment performance in defined benefit plans can affect benefit payments if the plan sense defaults with inadequate assets t cover promised benefits, and government insurance is insufficient t cover all the resulting shortfall (i. e. , the insured benefits are capped at sme level). Even fr defined benefit plans that have fully funded the entire benefit price, investment policy can matter if the sense pursues any policy ther than strict "matching" f assets t the plan's liabilities t the beneficiaries.
Fr example, fr person funds that invest heavily in equity securities, a funding shortfall can quickly develop if interest rates decline (thus increasing the present value f promised benefits) r if stock prices fall precipitously. If a funding shortfall is nt subsequently covered by either the plan sense r the government insurer, then sme f the promised benefits will nt be paid. In a strictly unfunded pay-as-yu-g government-perated person system, retirees' benefits depend entirely n the stream f revenue generated by taxes levied n currently active workers. If this were exactly true, benefits would fluctuate with changes in ecnmics fortunes, rising when tax collections rise and falling in recessions.
In practice this des nt happen in lck-step, since mst government pensin's are f the defined benefit variety and price t deliver retirement benefits according t a specified benefit formula. Nevertheless, with funding, benefit parts are susceptible t cuts when the public set experiences a rising rate f retired t active workers and / r large government deficits. In this event benefits accrued under that formula may be altered as a way f reducing this frm f government debt. As a case in pint, consider the 1983 reform f the United States social security system. A changing demographic structure fr workers led many t become concerned that there could be dramatically reduced benefits in the future in a pure pay-as-yu-g system. Hence, a key provision f that reform was t require substantial pre-funding f future benefits.
T d this, the social security paypal tax rate was raised and the excess f current revenues ver current benefit payments was invested in government bnd's held in a trust fund. While this reform apparently funds the plan, sme are less sure abut the result. In a private plan, funding is used t insure against default by the plan sense. Under social security, the price t pay benefits seemingly has the same level f full faith and credit f the government as the bnd's used t fund the plan.
Yet there seems t be a belief that p refunding will ensure that, when workers reach retirement, they will indeed receive benefits approximating the promised under the current benefit formula (i. e. , the ne in effect when they were active in the last free). A problem with this view is that there remains a potential risk associated with benefits promised under a government-run retirement income system. Even if the currently in the government are committee t maintaining the current schedule f promised benefits, they can credibly fully bind future gvernment's t d s. This arises frm a parade f power: the government is t powerful t bind itself credibly t any set f existing rules (Diamond 1993). Indeed, it has become evident in many countries that that benefit formula and the method f financing the benefits can be and free is changed.
In the United States, fr example, the Congress has changed bth in the past and it can surely d s again in the future. In Europe benefit prmise's have been ended by inflation t the same end (Turner and Rajnes), and perhaps mre strikingly, public pensin's in Chile were recently radically restructured, replacing the defined benefit public social security system with a mainly private defined contribution plan (Myers 1992). Anther example that highlights the importance f funding in securing promised person benefits in government-run plans is the case f underfunded state and local government retirement plans in the United States (Mitchell and Smith 1994). In mre than ne instance, firefighters, price fibers, and ther public emplyee's have been required t defer r even frg a print f the retirement benefits they had been promised because taxpayers were unwilling t shoulder the financial burden they image. Had these plans been fully funded as person benefits were accruing, it is doubtful that these public emplyee's would nw be asked t free any f their person benefits. These examples bring ut an important difference between government and private set blighting.
A private set plan sense can unilaterally repudiate its legal liability t make promised payments. It can default because f inability t pay, but it can repudiate its legal blighting with penalty. n the ther hand, a government - because it has the power t legislate changes in the law - can sometimes find ways t repudiate such blighting with immediate and bus penalty. Indeed, an integrated system in which private plan spnsr's supplement government-provided person benefits t achieve a promised "replacement rate" f pre-retirement earnings can be seen as a type f private set insurance against the political risks f the government-run system (Mertn, Bdie, and Marcus 1987; Myers 1977). In sum, a mixed public-private system f retirement income provision is a way f reducing the risks f each separate component through diversification across providers. Public set person plans can change the law t reduce promised benefit levels.
Private set person plan spnsr's are committee by law (and perhaps reputation) t pay promised benefits, but they may default. And sometimes, as an additional linkage reinforcing the first tw legs f the retirement income stl, the government may insure private person benefits against the risk f default. In the event f bankruptcy f the spring firm, a defined person plan may be terminated when person assets are less than accrued person benefits. If s, gvernment's may elect t provide, either explicitly r implicitly, plan termination insurance designed t mitigate the corresponding lss in person benefits suffered by plan members. There are tw distinct aspects t the study f the government's rle in insuring pensin's. The first, which is analytical, is t examine whether gvernment's should provide plan termination insurance and, if s, what steps should be taken s as t ensure the financial soundness f the insurance fund.
The send, which is descriptive, is t document the international experience with plan termination insurance, t highlight the similarities and differences in the public policy response t the risk f bankruptcy. In the United States, plan termination insurance is provided through the Person Benefit Guaranty Crpratin (PBGC). In spite f an nine series f refrm's, the lng-term financial soundness f the PBGC remains a may concern. The fact that pain is divided as t whether termination insurance is required is mst apparent in Canada.
f the 11 jurisdictions (10 prices and the government f Canada) that regulate private person plans, nly ne, the Price f near, has introduced plan termination insurance. Further, within a decade f introducing plan termination insurance in 1980, near was considering its real. The level f insured benefits is far mre most in near than in the United States. Yet there is a parallel concern regarding the lng-run solvency f the insurance system, in light f the risks posted by a relatively small number f play funded plans and the pprtunities fr strategic behavior. This tripartite system f income support has been remarkably successful in improving the welfare f the elderly ver the past half century.
In 1959 ver ne-third f the elderly were in party, a higher percentage than fr either the rest f the adult population r children. By 1992 nly 13 percent f the elderly were in party, a rate well be that f children and slightly are that f ther adults. Despite the great improvement in the income f the elderly, important questions remain. The first is the primal mix f these three retirement components. Several factors have brought this issue t the from. Perhaps the mst fundamental is Social Security.
Social Security reform is inevitable. At the current rate f taxation and benefit parts, the Social Security trust fund is expected t be bankrupt in 2029. Whether reform should take the frm f tax increases r benefit reductions, however, is an pen question. If Social Security benefits are an essential part f retirement income, then tax increases may be the mst appropriate way t site the trust fund problem.
Conversely, if private savings are preferable t public savings, benefit reductions may be mre appropriate. Reexamining the trades in the three-legged stl may therefore indicate which direction Social Security reform should take. Changes in the nature f employer pensin's are a send concern. Traditionally, employer pensin's were defined benefit plans -- the employer guaranteed a certain replacement rate fr preretirement earnings. ver the past twenty-five years, however, participation in defined benefit pensin's has been essentially stagnant. In contrast, there has been a dramatic growth in defined contribution pensin's -- plans that guarantee a fixed contribution rate rather than a replacement rate.
Between 1975 and 1989 the share f primary plan enrollment in defined contribution plans rse frm 13 percent t 35 percent, and the number f emplyee's with supplemental defined contribution plans tripled. Wrks used: Agreed Peter. Person Financial Security in Germany, The Person Research Council, Philadelphia, 1996 Bdie Jan She, and David Wise, eds. , Pensin's in the U. S.
Economy. Chicago: University f Chicago Press, 1987 Christopher D. Darwin, ccupatinal Person Provision in the United Kingdom, The Person Research Council, Philadelphia, 1996 Dan M: Social Investing... McGill, ed. 1984. E. Philip Davis, An International Comparison f the Financing f ccupatinal Pensin's, The Person Research Council, Philadelphia, 1996 Diamond Peter A. "A Framework fr Social Security Analysis. " Journal f Public Ecnmics 8 (1977) Diet Andrew.
The Taxation f Private Pensin's. The Person Research Council, Philadelphia, 1996 Friedman Benjamin M. , and Mark J. Warshawsky. 1993. "The Cst f Annuities: Implications fr Saving Behavior and Bequests. " Quarterly Journal f Ecnmics, 105: 135 - 54. Estelle James and Dimitri Vittas: Mandatory Saving Schemes: Are They an Answer t the ld Age Security Problem? , The Person Research Council, Philadelphia, 1996 Ipp lit Richard A. : Pensin's, Ecnmics and Public Policy. Hmewd, IL: Person Research Council and Dw Jobs-Irwin, 1986. Mertn Robert C. , Zvi Bdie, and Alan Marcus.
Person Plan Integration as Insurance Against Social Security Risk. Issues in Person Ecnmics. Chicago: University f Chicago Press, 1987 Mitchell livia S. and Robert S. Smith. "Person Funding in the Private Set.
Review f Ecnmics and Statistics, May 1994 Myers Robert. Chile's Social Security Reform, After Ten Years. " Benefits Quarterly 8 (Third Quarter 1992) Myers Robert J. Concepts f Balance Between ASDI and Private Person Benefits. In Dan McGill, ed. , 1988 Pesand James E. The Government's Rle in Insuring Pensin's.
The Person Research Council, Philadelphia, 1996 Person Research Council and Richard D. Irwin, Social Security and Private Person Plans: Competitive r Complementary? Hmewd, IL: , 1977 Raymond Schmitt, Future f Pensin's in the United States. , ed. 1993. Turner Jan A.
and David M. Rajnes. Private Person Systems in Eastern Europe. Ut gff Kathleen P. The PBGC: A City Less in the Ecnmics f Federal Insurance.
The Person Research Council, Philadelphia, 1996 Jack L. VanDerhei, Search fr a National Retirement Income Policy. , ed. 1987.
Free research essays on topics related to: trust fund, retirement income, social security reform, des nt, retirement benefits
Research essay sample on Social Security Reform Retirement Income
