Transcript Defined Contribution Plan

Pension Reform: What Can
the United States and
Australia Learn from Each
Other?
by Jon Forman
Alfred P. Murrah Professor of Law
University of Oklahoma
www.law.ou.edu/faculty/forman.shtml
University of Oklahoma College of Law
Half-baked Lunch
July 6, 2011
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People
 Population (May 2010 est.): 22.3 million.
 Annual population growth rate: 2.1%.
 Religions (2006 census): Catholic 26%, Anglican 19%, other
Christian 19%, other non-Christian 1%, Buddhist 2.1%,
Islam 1.7%, no religion 19%, and not stated 12%.
Languages: English.
 Education: Years compulsory--to age 16 in all states and
territories except New South Wales and the Northern
Territory where it is 15, and Western Australia where it is 17.
Literacy--over 99%.
 Health: Infant mortality rate--4.7/1,000. Life expectancy-males 78.7 yrs., females 83.5 yrs.
 Work force (10.8 million): Agriculture, fishing and forestry-3.25%; mining--1.6%; manufacturing--9.1%; retail trade-10.7%; public administration, defense, and safety--6.2%;
construction--9%.
Source: U.S. Department of State, Background Note: Australia (2011),
http://www.state.gov/r/pa/ei/bgn/2698.htm.
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Koala
Platypus
Kangaroo
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Government
 Type: Constitutional monarchy: democratic,
federal-state system.
 Constitution: Passed by the British Parliament on
July 9, 1900.
 Independence (federation): January 1, 1901.
 Branches:
 Executive--Queen Elizabeth II (head of state, represented
by a governor general); the monarch appoints the
governor general on the advice of the prime minister.
 Legislative--bicameral Parliament (76-member Senate,
150-member House of Representatives). The governor
general appoints the prime minister (generally the leader
of the party which holds the majority in the House of
Representatives) and appoints ministers on the advice of
the prime minister.
 Judicial--independent judiciary.
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Government, cont.
 Administrative subdivisions: Six states and two
territories.
 Political parties: Australian Labor, Liberal, the
Greens, the Nationals, and Family First. The
Australian Labor Party currently forms the
government.
 Suffrage: Universal and compulsory 18 and over.
 Central government budget (revenue): FY 20102011 (estimate): $A321.8 billion (U.S. $290
billion).
 Defense: A$25.7 billion (U.S. $23.13 billion) or
approx. 2% of GDP for FY 2010-2011.
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Principal Government
Officials
 Governor General--Quentin Bryce
Prime Minister--Julia Gillard
Deputy Prime Minister--Wayne Swan
Treasurer--Wayne Swan
Foreign Minister--Kevin Rudd
Defense Minister--Stephen Smith
Trade Minister--Craig Emerson
Ambassador to the United States--Kim Beazley
Ambassador to the United Nations--Gary Quinlan
Australia's national
gemstone is the opal.
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Political Conditions
 A written Constitution
 Parliamentary Government
 Voting
 In 1855, Victoria introduced the secret
ballot.
 For all citizens over the age of 18 it is
compulsory to vote in the election of both
federal and state governments, and failure
to do so may result in a fine or prosecution.
Australian Government, Australia’s System of Government, http://www.dfat.gov.au/facts/sys_gov.html
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Economy
 Australia enjoys one of the highest standards of
living in the G7.
 GDP (2009-2010 estimate): A$1.2 trillion (U.S.
$1.1 trillion).
 Inflation rate (year to March 2010): 2.9% per year.
Reserve Bank official interest rate (May 2010):
4.5%.
 Exchange rate (2010): U.S. $1 = A$1.11 (average
for 2010 of A$1 = U.S. $0.90).
 The unemployment rate was expected to fall from
its early-2010 level of 5.3%, down to 5% in late
2010-2011, and 4.75% in late 2011-2012, around
levels consistent with full employment.
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Economy, cont.
 Australia's economy is dominated by its services
sector, yet it is the agricultural and mining sectors
that account for the bulk of Australia's exports.
 Australia's comparative advantage in the export of
primary products is a reflection of the natural
wealth of the Australian continent and its small
domestic market; 21 million people occupy a
continent the size of the contiguous United States.
 Since the 1980s, Australia has undertaken
significant structural reform of its economy and
has transformed itself from an inward-looking,
highly protected, and regulated marketplace to an
open, internationally competitive, export-oriented
economy.
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Key economic reforms
 unilaterally reducing high tariffs and other protective
barriers to free trade
 floating the Australian dollar
 deregulating the financial services sector
 reducing duplication and increasing efficiency
between the federal and state branches of
government
 privatizing many government-owned monopolies
 reforming the taxation system, including introducing
a broad-based Goods and Services Tax (GST) and
large reductions in income tax rates.
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A Strong Economy
Australian Government, Budget Overview 4 (2011),
http://cache.treasury.gov.au/budget/2011-12/content/download/Overview.pdf.
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Getting back in the black
Australian Government, Budget Overview 8 (2011),
http://cache.treasury.gov.au/budget/2011-12/content/download/Overview.pdf.
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Australian Government, Budget Overview, Budget Statement 1, at 1-13 (2011),
http://cache.treasury.gov.au/budget/2011-12/content/download/bp1.pdf.
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Australian Treasury, Pocket Guide to the Australian Tax System 9 (January 13, 2011),
http://www.treasury.gov.au/contentitem.asp?NavId=&ContentID=866.
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Source: Congressional Budget Office, Fiscal Policy Choices,
http://www.cbo.gov/ftpdocs/112xx/doc11277/CBOPresentation-NABE_3-8-10.pdf
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Past Political Achievements
 A Universal Pension System
 Goods and Services Taxation
Sydney
Opera
House
Australia's national
floral emblem is
the golden wattle.
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A Universal Pension
 1986—industrial agreements for 3
percent of payroll contributions
 1992/1993—superannuation
guarantee legislation, mandating 3
percent contributions to individual
retirement accounts
 Higher levels phased in, reaching 9
percent in 2002/2003
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Goods and Services Tax
 Broad-based consumption tax that
replaced all sales taxes
 10% tax on most goods and services
 John Howard, Liberal party Prime
Minister
 Passed in 1999
 Began operation 2000
Tasmanian
Devil
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Two Basic Types of Pensions
 Defined benefit plans
 Defined contribution plans
 Also, hybrid plans
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What is a Defined Benefit Plan?
 Employer promises employees a
specific benefit at retirement
 To provide that benefit, the employer
makes payments into a trust fund
and makes withdrawals from the trust
fund
 Employer contributions are based on
actuarial valuations
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Defined Benefit Plan
 Employer bears all of the investment
risks and responsibilities
 Typical plan provides each worker
with a specific annual retirement
benefit that is tied to the worker’s
final average pay and number of
years of service
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Defined Benefit Plan
 For example, a plan might provide
that a worker’s annual retirement
benefit is equal to 2% times years of
service, times final average pay
 B = 2% × yos × fap
 Final-average-pay formula
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Defined Benefit Plan
 Worker with 30 years of service
would receive 60 percent of her preretirement earnings
 Worker earning $50,000 would get
$30,000-a-year pension




B = $30,000
= 60% × $50,000
= 60% × fap
= 2 percent × 30 yos × $50,000 fap
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What is a Defined Contribution
Plan?
 Individual account plan
 Employer typically contributes a
specified percentage of the worker’s
pay to an individual investment
account for the worker
 Owned by employee
 Benefits based on contributions and
investment earnings
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Defined Contribution Plan
 For example, employer might
contribute 10% of annual pay
 Under such a plan, a worker who
earned $30,000 in a given year would
have $3,000 contributed to her
account
 $3,000 = 10% × $30,000
 Benefit at retirement based on
contributions, plus earnings
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Defined Contribution Plan
 Money purchase pension plans
 401(k) and 403(b) plans
 allow workers to choose between
receiving cash currently or deferring
taxation by placing the money in a
retirement account
 Profit-sharing plans & stock bonus
plans
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What is a Hybrid Plan?
 “Hybrid” plans mix features of defined
benefit and defined contribution plans
 For example, a cash balance plan is a
defined benefit plan that looks like a
defined contribution plan
 Another common approach is to offer a
combination of defined benefit and
defined contribution plans
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Goals for a Pension Plan
 First, ensure that every employee
earns a meaningful retirement benefit
 and that long-time employees are
guaranteed an adequate income
throughout their retirement years
 Second, have a minimum of work
disincentives for employees coming in
and out of service
 Third, be affordable and well-financed
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“Four Pillars” of Retirement
 (1) Social Security: 95% of workforce
 (2) Employer DB and DC plans: 48%
 (3) Employer retiree health: 33% in
large firms and 7% in small firms.
Medicare: 95%
 (4) Personal savings subsidy
programs: 17% in IRAs & Keoghs
Only Half of Americans Have
Pensions
 U.S. has a voluntary pension system
 In 2006
 Just 78.6 million (50 percent) worked for an
employer (or union) that sponsored a retirement
plan
 Just 62.3 million (39.7 percent) participated
 Coverage is greater for
 white-collar workers, full-time workers, union
workers, workers at larger firms
 older workers, whites, highly educated workers,
higher-income workers
Stresses on the Retirement
System
 Longer life expectancies; lower avg. retirement age
 1945: @65: 12.0 for men, 15.5 for women; retire at 68
 2005: @65, 17.0 for men, 19.7 for women; retire at 63
 2035: @65, 18.8 for men, 21.4 for women; retire at ?
 Lower ratio of workers to retirees
 1945: 41.9 workers/retiree
 2005: 3.3 workers/retiree
 2035: 2.1 workers/retiree
 Unsustainable growth in lifetime benefits relative to
lifetime contributions
 Fewer one-earner households, more two-earner
and single households
Australia’s Future Tax
System Review
 In 2008, the Australian Government established
Australia’s Future Tax System Review panel
to examine Australia’s tax and transfer system
and make recommendations to position Australia
to deal with its demographic, social, economic
and environmental challenges.
 The Review Panel prepared detailed background
reports, received more than 1,500 formal submissions,
and held a two-day conference in June 2009.
 In December 2009, the Review Panel delivered its final
report to the Australian Government.
 In May 2010, the Government released the report,
along with an initial response.
 Will Australia’s Parliament soon enact
comprehensive tax and pension reform?
Source: http://www.taxreview.treasury.gov.au/Content/Content.aspx?doc=html/home.htm
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IMPROVING NATIONAL SAVINGS
AND SUPERANNUATION ADEQUACY
 The Government will increase the
superannuation guarantee (SG) rate
from 9 to 12 per cent over time.
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Superannuation
 GOVERNMENT CONTRIBUTIONS FOR
LOW INCOME EARNERS
 A new superannuation contribution of up to
$500 will be provided by the Government
for workers with income up to $37,000.
 CATCH-UP CONTRIBUTIONS FOR
OLDER WORKERS
 The Government will allow individuals aged
50 and over with total superannuation
balances below $500,000 to make up to
$50,000 in concessional superannuation
contributions.
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Conclusion
 Let’s see if the Australia experience
can help us do better in the US.
Emu, the unofficial national bird
Echidna
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About the Author
 Jonathan Barry Forman (“Jon”) is the Alfred P.
Murrah Professor of Law at the University of
Oklahoma College of Law, teaching tax and pension
law and the author of Making America Work
(Washington, DC: Urban Institute Press, 2006). He
was the Professor in Residence at the Internal
Revenue Service Office of Chief Counsel for the
2009-2010 academic year.
 Jon can be reached at [email protected];
www.law.ou.edu/faculty/forman.shtml.
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