Recent System Reforms in Australia and China Pension Systems - Case Study Example

Table of Contents Introduction 2 Basic Information about Australia & China Pension System 2 The Australian System 3 The China System 5 Recent System Reforms in Australia 7 Recent System Reforms in China 9 Challenges ahead for Australia’s & China’s System 11 Recommendations 12 References 13 Introduction Countries based on their needs and requirements have developed a pension and retirement system which is according to the world requirements. The pension and retirement benefits are which different nations use are similar to each other with little existing between them. This is primarily due to the fact that all pension and retirement benefit system aims towards matching the international needs and standards which has thereby ensured that the people are able to benefit in a similar fashion. This paper looks to evaluate the pension state system of both Australia and China. While looking to compare the state pension system emphasis has also been given on the retirement benefit plans and based on an overall analysis recommendations is provided. This will thereby help to improve the state pension system and will develop a framework through which better objectives can be achieved. This will thereby ensure that the citizens of the economy are compensated properly and will help to fulfil the different needs of the ageing population. Basic Information about Australia & China Pension System Australia’s retirement and pension system is regarded as one of the best system in the world because it has achieved a very high individual saving rate and ensured wider coverage at a very low rate of interest. Despite, having such high growth rates the Australian system has shortcoming as it is dependent on contribution plan which increases the weakness as the shortcoming of those plan has an impact on the overall plan. Its government plans for ole age pension has been well tested and provides different benefits to the elderly but has an impact on the workers contribution account which thereby impacts the overall phenomenon of carrying and developing new pension and retirement plans (Chomik, and John, 2012). China on the other hand is undergoing a transformative process where it is witnessing changes in all directions which have thereby altered the manner in which different pensions and retirement plans are being developed. The population of China is ageing quickly which has stressed the need and importance of developing new and better pension and recruitment schemes which are free from different shortcomings. The pension system of China has undergone tremendous changes. Since, 1997 China has witnessed a change in the pension system as the burden which was primarily on the government is shared now by the state, employer and the employees. This has resulted in a shift from the PAYGO financing to a combination of PAYGO financing and funded systems. This has thereby transformed and is a continuous process which will thereby help to develop strong and better reforms which will thereby ensure that the ageing people are provided with sufficient finance so that they are able to take care of their different necessities. The Australian System When comparing the Australian pension and retirement scheme and system to other industrialized nations it is identified that Australia has a low public spending on old age pensions which matched with a high individual saving rate and continuous increase in the retirement savings. The prime reason for the success of Australian system is that it has been developed based on the following three pillars which has contributed towards an improvement in different areas and are as The Means Tested Age Pension: The strongest pillar for the success of Australia system is the government’s age pension system which was introduced in 1908 and is funded from the general revenue. The scheme provides details pertaining to people who fall below the prescribed limits with consideration to income and assets that the person has. Through the scheme singles can benefit around 28 percent whereas married couples can benefit around 41% but only when the threshold limit for is not crossed. To qualify for the pension scheme the individual should be above 65 years of age (Munnell, 2012). The present scheme shows that nearly half of the retirees benefit the full sum which slowly decreases as time passes. This has helped to bring a change and develop a process through which the pension and retirement scheme has developed and strengthened Australia’s system. The Mandatory Retirement Saving Program: The second pillar is the “Superannuation Guarantee” program which was started in 1908. The program requires that people contribute 9% of their earnings which will ensure a tax advantaged return for people between the ages of 18 to 70 when they earn over a specified limit. The returns from the superannuation fund are very high which has thereby resulted in over 90 percent of the Australian population who have deposited funds in superannuation fund. The popularity and growth of the fund has resulted in the value to pass Australia Gross Domestic Product (Munnell, 2012). The superannuation program provides an opportunity for an individual to choose from the program which they would like and thereby has multiplied the opportunity and has ensured that the ageing population are able to ensure better retirements and pension funds for the future. Voluntary Saving: The final pillar which has contributed towards the Australian’s system is the voluntary saving which provides additional contribution to the superannuation fund through a process called “salary sacrifice” which provides a tax advantage to people indulging into those practices. Only, 20% of the Australian look to invest in it and most of the people look towards the upper end of the income distribution so that advantage of the sacrifice program can be taken (Munnell, 2012). This has thereby ensured that the ageing population are provided with a high return so that they can ensure that the ageing population can be able to get proper finance for the future The China System The pension system of China has been developed and formulated based on different dimensions and pillars so that overall process through which better management of finance is achieved. The different economic factors which has contributed towards the strengthening of the pension system in China are Impressive economic growth which has helped to reduce poverty but also increased inequality due to the difference between income that exist (Farrell, and Grant, 2005) Improvement in the unemployment level as changes in the SOEs have ensured that more and more people are employed which has thereby strengthened the economy and ensure more disposable income for the people (Farrell, and Grant, 2005) Increase in migration of people to urban areas for search of job which has thereby strengthened and ensured better opportunities for the future (Farrell, and Grant, 2005) Rapidly ageing population which has stressed the need and importance of having a proper state based pension system and retirement system so that the ageing population get the required finance at the appropriate time (Farrell, and Grant, 2005) The different macro and micro economic factor has thereby helped to develop the pension system based on the following pillars A Social Pool (DB Scheme) & an Individual Account (DC Scheme): The social scheme is a PAYGO model which is financed by the employer and is around 20% of the wages that the employees receive. The individual account scheme is funded by the employee themselves and makes up to 8% of the wages that the employee receives. The payment for the individual account is made on a monthly basis which is spread over 120 months after keeping in mind the interest rate, retirement age and salary level (Leckie and Yasue, 2005). The pillar had ensured and provided an opportunity through which the ageing population is able to use and manage their finances so that maximum advantage and benefit can be taken in the future. Enterprise Annuity: This scheme is also termed as a voluntary or supplementary scheme and ensures that both the employer and the employee contribute towards the superannuation fund. The contribution made by the employer can be treated as cost but has been fixed at 4% (Leckie and Yasue, 2005). The investment made in the superannuation finds through the state pension scheme is diverted in different direction like equity funds, direct investment, market investments and so on. Voluntary Complimentary Pension Scheme: This scheme provides a voluntary opportunity for the households to invest in different superannuation funds so that the finances can be managed and the people are provided with appropriate and better returns in the future (Leckie and Yasue, 2005). This scheme is voluntary and depends on the employee and their household which thereby requires that the manner and working style determines the manner investment will be made in different superannuation schemes. Recent System Reforms in Australia Both the Australia and the China’s remuneration and pension system are constantly witnessing a change with new reforms being formulated. The new reforms has helped to fill the void and gap which was present in the older system and has thereby provided an opportunity to reduce the risk and increase return so that safety of the funds can be ensured. Australia has been effective in achieving key goals of the remuneration system and has been able to develop a framework through which better services have been provided. A discussion of the recent reform system for Australia is as follows Strengthening Investment Defaults: Different superannuation funds provide the opportunity of selecting default investment and employees looking to invest in those superannuation funds for their future are ignorant about it and accept it as it is provided. To ensure that the investment of the people are made in the correct funds and there is simplicity, transparency and comparability requires that from 2014 employers will have to take the responsibility of directing the employees regarding the manner in which the designated funds is chosen. This will help the employees to understand the manner in which their finances are being managed and will thereby provide an opportunity to have a look at the manner in which the funds are being managed. This will require the creation of “My Super Product” which will consist of a diversified portfolio of different funds, the fees that will be charged and provide an opportunity to make a comparison with funds so that the employee is able to understand the manner in which funds will be used. These products have become prominent after July 2013 and by 2017 it is imperative that all the funds are moved away from default investment (Australian Bureau of Statistics. 2010). This would thereby ensure that the risk and return for the investment will be identified and will provide an opportunity through which the safety of the funds can be ensured. Standardizing Risk Disclosure: Investment has risk associated with it and many employees find it difficult to understand the risk they are undergoing. To deal with the issue the regulatory body and industry regulators have identified a process through which the risk factor will be notified. The regulatory board has proposed the need and requirements of highlighting the different risk that different funds have and should be provided with a comparative analysis so that the employee is able to understand it clearly. The format shows the negative returns which different investment has received so that the employee is able to understand the manner in which their money is growing (Greenwood, 2008). This has resulted in confusion and therefore making a comparative analysis and highlighting the different funds and the risk associated with those funds will help to reduce the risk and provide a framework through which employees will be able to understand the different risk they are facing. Improving Financial Advice: Most plans requires that the employees are provided complete and correct advice about the different investment avenues. Despite, having people explaining it there exist some gaps which results in the lack of complete understanding and has increased the risk for the employees as their investment which is made for retirement can be lost (Agnew, Hazel and Susan, 2013). The Australian Securities & Investment Commission has thereby proposed that they set up an advice committee which will look at providing complete and correct information to the employees so that they are able to understand about their future pension and retirement schemes through which the risk level will be reduced The Australian governing body has thereby looked towards making changes and has developed reforms which will thereby help to strengthen the remuneration and pension scheme and provide with an opportunity to ensure maximum returns for the future. Recent System Reforms in China Similarly like the different reforms which Australia has witnessed with regard to the pension and remuneration system China has also undergone a lot of changes with different reforms and strategies being formulated so that the overall risk reduces. This will thereby help to ensure that the returns improve and people when they retire are able to have sufficient finance to fulfil their necessities. Some of the changes which has been witnessed in China’s remuneration and pension system are as The introduction of the EA regulation in 2004 in China has helped to make required reforms so that the funds can be managed under trustee model. The funds which are released under the EA trustee model aims to follow the following Social security bureau which looks at managing the funds from the perspective of the employee so that the future pension and retirement can provided with the safety of funds and ensure better return Many regions looks towards managing the funds through the local social security bureau which will thereby be aimed at ensuring that the safety of funds and finance can be achieved Industry funds which will be managed by the industry and based on the different needs and requirements the employer will look at deciding the manner in which the funds will be used Buying the products directly from the insurance industry so that complete and correct information can be provided to the employer so that better remuneration and pension schemes can be provided The funds in China are thereby managed through the trustee model so that the different investment can be treated as tax preferable options. This has increased the role of the local authorities and regulatory body to provide complete and correct information both to the employer and the employee so that the risk and return understanding can be identified (Bateman, 2013). This will thereby help to ensure that the funds which are invested in different directions ensures that the employees get appropriate pension and retirement funds. The regulatory board has proposed the need and requirements of highlighting the different risk that different funds have and should be provided with a comparative analysis so that the employee is able to understand it clearly. This will help to ensure that the employees are able to manage their finance and funds effectively and based on the risk appetite determine the manner in which their future investment will be directed. Challenges ahead for Australia’s & China’s System One of the challenges which both Australia and China’s pension system is facing is the manner in which the population is ageing. This would thereby increase the difficulty level as by 2050 both the countries will have more number of people retiring and the present system and infrastructure will find it difficult to ensure the safety and required finance for the employees (Bateman, 2010). The difficulty will further increase as it will tend to put increased financial pressure on the government and other fund managing agencies which would thereby make it difficult to manage the return and risk and requires identification of strategies so that better balance can be achieved within the system. The second area is being optimistic after knowing the manner in which the future will have an impact on the state pension and remuneration system. This will require by ensuring that a relative small change of about five percent is made to contribution rate so that more and more funds can be collected through which the required infrastructure can be developed. This has to be matched by a slight decrease in the benefits which the present pension system provides (Munnell and Steven, 2006). This has to be matched by the life expectancy so that overall aspect has to match with the current situation and is able to identify the manner in which the overall benefit will increase. Recommendations The present pension and remuneration system of both China and Australia is highlighting improvement and the development and strengthening of reform has ensured that overall aspect is improved. This would require that the present system looks towards the following so that both the economy is able to highlight better returns for the ageing population Improvement in the regulatory body control over different funds and management so that the employees and the employer are well informed about the different scheme and risk. This will help in proper evaluation of the different options and based on which the people can choose their pension and retirement schemes. It is important optimistic after knowing the manner in which the future will have an impact on the state pension and remuneration system. This will require by ensuring that a relative small change of about five percent is made to contribution rate so that more and more funds can be collected through which the required infrastructure can be developed (Bateman, 2011). This has to be matched by a slight decrease in the benefits which the present pension system provides. This has to be matched by the life expectancy so that overall aspect has to match with the current situation and is able to identify the manner in which the overall benefit will increase Strengthening and development of better reforms which helps to look at the different angels and direction so that an overall framework through which the funds will be used is decided. Conclusion This paper shows the pension state system of both Australia and China by comparing the state pension system emphasis has also been given on the retirement benefit plans and based on an overall analysis recommendations is provided. This will thereby help to improve the state pension system and will develop a framework through which better objectives can be achieved. This will thereby ensure that the citizens of the economy are compensated properly and will help to fulfil the different needs of the ageing population. It requires working and strengthening the present system and developing a process through which the employees are better informed and strategies are developed keeping in mind the future. References Agnew, J., Hazel B. and Susan, T. 2013. “Superannuation Knowledge and Plan Behaviour.” JASSA: The Finsia Journal of Applied Finance Australian Bureau of Statistics. 2010. Measures of Aus­tralia’s Progress: 2010. Table on Housing: Levels of Home Ownership. Canberra, Australia Bateman, H. 2010. Retirement Income Provi­sion in Australia. In Pension Insurance for Mi­grant Workers Research Report. Chinese Ministry of Human Resources and Social Services: 400-22. Beijing, China. Bateman, H. 2011. “Structuring the Payout Phase in a Defined Contribution (DC) Scheme in High Income Countries: Experiences of Australia and China.” Prepared for the ERIA Social Pro­tection Project Workshop (March 5-6, 2011). Bateman, H. 2013. “A Study of Multi-Pillar After-Retirement Income Support Systems: Australia and New Zealand.” UNSW Australian School of Business Research Paper No. 2013ACTL13 Chomik, R. and John, P. 2012. Pensions, Ageing and Retirement in Australia: Long Term Projections and Policies. Australian Economic Review 45(3): 350-361. Farrell, D. and Grant, A. 2005. Addressing China’s looming talent shortage, McKinsey Global Institute Greenwood, C.L. 2008. Challenges for pension reform and public pension fund management in Asia, speech at the Global pension Summit, February 28, Suzhou Leckie, S. and Yasue P. 2005. Fund management opportunities in China’s pension market, Pensions, an International Journal, 10, 317–330 Munnell, H. 2012. 401(k) Plans in 2010: An Update from the SCF. Issue in Brief 12-13. Chest­nut Hill, MA: Center for Retirement Research at Boston College Munnell, H. and Steven A. 2006. Social Security and the Stock Market. Kalamazoo, MI: W.E. 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