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Good pension program should help those who really need it
By Greg Cusack |
November 2, 2011, Wednesday
|
Print Edition
Print Edition
I found the article "Pensions Needed as Elderly Population Soars" in the October 12 issue of The Shanghai Daily quite interesting.
Its discussion of the challenge presented by the declining ratio of workers to retired persons was concise and clear.
However, I had anticipated that there would be specific suggested reform steps in a concluding paragraph or two, but there were none.
As noted, the challenge is similar to that faced by many nations, including the United States, Japan, and Europe.
Prior to the institution of Social Security in the 1930s, thanks to the leadership of President Franklin D. Roosevelt, the lot of elderly persons in America could often be harsh.
Among men 64 and older, the poverty rate in 1939 is estimated at 78 percent, and for women, 77.5 percent. (From a 1987 study by Eugene Smolensky, Sheldon Danziger, and Peter Gottschalk)
Today the rate is below 10 percent, and Social Security's monthly payments are the primary reason. Despite this success, the program's long-term sustainability is under attack today by right-wing reactionaries who argue that it is "too costly to maintain" and that individuals or - even more laughably - individual states should "take over" the responsibility of funding Social Security.
The article in The Shanghai Daily notes that China's program, begun in 1997, is based on a "defined benefit" formula, so that when persons retire (at 60 or 65, depending on the sector), employees receive a predetermined monthly income based on tenure, salary and age regardless of how their investments have performed. This last feature is the reason why such a program structure has proven superior over time.
I salute China for recognizing that properly providing for the elderly in their post-work years is a justice-based requirement of any responsible state, and for choosing a pension model which delivers substantive returns, and not just the illusion of a secure retirement.
Not only is this the compassionate, "right" thing to do, but it is also a means whereby the unique contributions of elderly persons can continue to be of service to the larger community.
In my own sadly troubled country, there are some angry voices claiming that we "cannot afford" Social Security. What I find astounding, aside from the selfishness of such arguments, is that there is no recognition that there is a cost to not providing for the elderly, too!
Wise leaders understand that - in the long run - the cost of an adequately funded pension program is going to be less than the accumulation of ad hoc emergency responses to the demands of the elderly poor for housing, food, and medical assistance.
If I may, I respectfully recommend two suggestions with regard to your pension plan.
First, rather than a pure defined benefit plan which uses all of a person's wages as one of the ingredients of determining eventual benefits, I recommend adjusting that formula to give greater payout "weight" to those of greater need (at or below the poverty line, for example), and significantly lesser proportionate payments to those less in need of pension supplements in retirement.
To use US dollars in an example: someone whose lifetime average wages are US$25,000 a year or less is clearly going to need a replacement ratio of nearly 100 percent, while a person whose lifetime average wages are US$125,000 will "need" a lesser replacement ratio.
The latter individual is one who most likely has accumulated significant private reserves for retirement, while the former has had little or no "surplus" by which to provide for the future.
The Social Security program in the United States operates like this. While this kind of program will cost significantly less than a pure defined benefit program, it will achieve the legitimate justice goals of the state.
Second, I think it most likely that your pension program will have a greater chance of success if it is national in character and not dependent upon individual provinces or communities.
That there will likely remain considerable variation in income and living standards among the various locales in China, just as is in the United States, is a coherent argument for a national program. A national program also can more easily accommodate citizen mobility from one city or province to another.
I offer these thoughts with the hope that they might be of some assistance in continuing your admirable commitment to the well being of all of your citizens, whatever their age or income.
The author, a former college teacher and member of the Iowa State House of Representatives, retired from the Iowa Public Employees' Retirement System in 2004 after 17 years as its benefits administrator.
Its discussion of the challenge presented by the declining ratio of workers to retired persons was concise and clear.
However, I had anticipated that there would be specific suggested reform steps in a concluding paragraph or two, but there were none.
As noted, the challenge is similar to that faced by many nations, including the United States, Japan, and Europe.
Prior to the institution of Social Security in the 1930s, thanks to the leadership of President Franklin D. Roosevelt, the lot of elderly persons in America could often be harsh.
Among men 64 and older, the poverty rate in 1939 is estimated at 78 percent, and for women, 77.5 percent. (From a 1987 study by Eugene Smolensky, Sheldon Danziger, and Peter Gottschalk)
Today the rate is below 10 percent, and Social Security's monthly payments are the primary reason. Despite this success, the program's long-term sustainability is under attack today by right-wing reactionaries who argue that it is "too costly to maintain" and that individuals or - even more laughably - individual states should "take over" the responsibility of funding Social Security.
The article in The Shanghai Daily notes that China's program, begun in 1997, is based on a "defined benefit" formula, so that when persons retire (at 60 or 65, depending on the sector), employees receive a predetermined monthly income based on tenure, salary and age regardless of how their investments have performed. This last feature is the reason why such a program structure has proven superior over time.
I salute China for recognizing that properly providing for the elderly in their post-work years is a justice-based requirement of any responsible state, and for choosing a pension model which delivers substantive returns, and not just the illusion of a secure retirement.
Not only is this the compassionate, "right" thing to do, but it is also a means whereby the unique contributions of elderly persons can continue to be of service to the larger community.
In my own sadly troubled country, there are some angry voices claiming that we "cannot afford" Social Security. What I find astounding, aside from the selfishness of such arguments, is that there is no recognition that there is a cost to not providing for the elderly, too!
Wise leaders understand that - in the long run - the cost of an adequately funded pension program is going to be less than the accumulation of ad hoc emergency responses to the demands of the elderly poor for housing, food, and medical assistance.
If I may, I respectfully recommend two suggestions with regard to your pension plan.
First, rather than a pure defined benefit plan which uses all of a person's wages as one of the ingredients of determining eventual benefits, I recommend adjusting that formula to give greater payout "weight" to those of greater need (at or below the poverty line, for example), and significantly lesser proportionate payments to those less in need of pension supplements in retirement.
To use US dollars in an example: someone whose lifetime average wages are US$25,000 a year or less is clearly going to need a replacement ratio of nearly 100 percent, while a person whose lifetime average wages are US$125,000 will "need" a lesser replacement ratio.
The latter individual is one who most likely has accumulated significant private reserves for retirement, while the former has had little or no "surplus" by which to provide for the future.
The Social Security program in the United States operates like this. While this kind of program will cost significantly less than a pure defined benefit program, it will achieve the legitimate justice goals of the state.
Second, I think it most likely that your pension program will have a greater chance of success if it is national in character and not dependent upon individual provinces or communities.
That there will likely remain considerable variation in income and living standards among the various locales in China, just as is in the United States, is a coherent argument for a national program. A national program also can more easily accommodate citizen mobility from one city or province to another.
I offer these thoughts with the hope that they might be of some assistance in continuing your admirable commitment to the well being of all of your citizens, whatever their age or income.
The author, a former college teacher and member of the Iowa State House of Representatives, retired from the Iowa Public Employees' Retirement System in 2004 after 17 years as its benefits administrator.
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