JODI DICENZO, Behavioral Research Associates, LLC
Email: jdicenzo@behavioralresearchassociates.com
PAUL FRONSTIN, Employee Benefit Research Institute (EBRI)
Email: FRONSTIN@EBRI.ORG

This paper considers the lessons learned in the evolution of 401(k) plan design, where the objectives are a high level of participation, a high level of worker contribution, a diversified approach to investing, sufficient asset accumulation to enable retirement, and not outliving one's assets. The analysis looks specifically at lessons learned with respect to offering workers choice, financial incentives, and more information and education. This is compared with the early evolution in consumer-driven health plans (CDHPs), where the evolution is still being driven solely by the market and not by legislation or recent empirical behavioral research (the RAND empirical health behavioral research experiments of the late 1960s are still used as the touchstone today). Finally, lessons are offered about how benefit-plan design can help to optimize workers' decisions. A thoughtful analysis of this topic provides sponsors of employment-based 401(k) plans and CDHPs an opportunity to consider how these lessons may be applied to the design of these plans now.

No judgments are made about the appropriateness of CDHPs or 401(k) plans. Nor does the discussion address many of the important issues in health care, including who should make the decisions related to rationing health care - the Goliath issue that few are willing to address. This paper attempts to offer innovative thoughts, based on what is known about human behavior, for incremental improvement in benefit programs designed to balance the needs of employers and their workers, with an eye toward cost control and worker well-being.

EMMA AGUILA, RAND Corporation
Email: eaguila@rand.org

Many countries are including personal retirement accounts (PRAs) as part of their social security systems. PRA systems boost private savings at the macro level by converting a government financial liability into private wealth. At the micro-level, however, crowding-out effects on household savings could be offsetting some of this increase in private savings and may lead to inadequate preparedness for retirement. The author tests this hypothesis by using the Mexican social security reform of 1997 as a natural experiment, because only part of that system was changed from pay-as-you-go to PRAs. She finds that social security reform with PRAs does indeed crowd out household savings and recommends strengthening voluntary savings for retirement along with social security reform.

ERIK MEIJER, RAND Corporation
Email: meijer@rand.org
ARIE KAPTEYN, RAND Corporation, Institute for the Study of Labor (IZA)
Email: kapteyn@rand.org
TATIANA ANDREYEVA, Yale University
Email: tatiana.andreyeva@yale.edu

It is widely believed that health plays a major role in retirement decisions. The most important problem in including health in retirement models is the lack of availability of a good measure of health at the individual level in existing data sets. This problem is exacerbated when a model spanning multiple countries is desired, because self-reports on health may not be comparable across countries. Arguably, physical measures are less influenced by cultural and linguistic differences than self-reports on general health or even on health conditions. The authors develop a cross-country measurement model for health in which the relations between functional limitations, self-reports, and physical measures like grip strength are used to construct health indexes. Comparability across countries is achieved by using the physical measurements to define the measurement scales, and allowing other parameters to vary across countries to account for cultural and linguistic differences in response patterns. The usefulness of the health indexes is then investigated by including it in some simple retirement models.

MUHAMMAD RAHMAN, Indiana University Bloomington
Email: murahman@indiana.edu

In this paper, I analyze consumption, aggregate savings, output and welfare implications of five different social security arrangements whenever there is demographic uncertainty. Following Bohn (2002), I analyze the effect of an uncertain population growth in an extended version of a modified Life-cycle model developed by Gertler (1999). Population growth dampens savings and output under all arrangements. Pay-as-you-go-Defined Benefit system appears to fare better than all other alternatives, falling short of the private annuity market with no pension system. But social security in general increases social welfare, with Fully Funded systems faring the best. Thus there appears to be a clear trade-off between growth and social welfare. The social security system also reduces the volatility of the economy.

LIYAN TANG, Imperial College London - Tanaka Business School
Email: l.tang@imperial.ac.uk
PAUL J.M. KLUMPES, Imperial College London - Tanaka Business School
Email: p.klumpes@imperial.ac.uk

Using simulated data and the expected cash flow (ECF) technique, Level 3 fair value estimates can be applied to estimate the Generational Imbalance (GI) measure arising from the unreported underfunded position of pay-as-you-go (PAYG) pensions incurred by a sample of Hong Kong listed Chinese SOEs. The GI measure helps examine the financial implications of including future cash flow estimates in current financial position for PAYG pensions as well as their enterprise and government sponsors. Positive GI figures imply net cash outflows over the period of funding current pension plan members and project net pension liabilities as an alternative measure of funded status at the end of the period. Pension underfunding imposes a funding burden on future pension plan members, a contingent claim against income of the SOEs or requires supplementary subsidies of the governments. The magnitude of GI is sensitive to the ECF estimates, the discount rate adopted in present value calculations, and the retirement age of pension plan members.

DAVID P. BERNSTEIN, affiliation not provided to SSRN
Email: spstat@yahoo.com

Current multi-pillar pension plans have adopted the same retirement age for the defined benefit (DB) and defined contribution (DC) components of the plan. This paper considers potential benefits obtainable from coordinating DB and DC benefits. The plan proposed here involves establishing an earlier standard retirement age for the DC component of the multi-pillar pension plan than for the DB component of the multi-pillar pension. Individuals who receive low returns on the DC pension plan are eligible for earlier non-standard disbursements from their DB pension plan. The lower standard retirement age on the DC component of the multi-pillar pension plan than on the DB component of the multi-pillar pension plan reduces costs of funding the DB plan while maintaining a lower overall potential retirement age for individuals. The possibility of non-standard early DB disbursements for retirees who realize low investment income reduces the instability of retiree income due to market fluctuations. A lower standard retirement age on the DC component of the multi-pillar pension plan than on the DB component of the multi-pillar pension plan provides an incentive for workers to delay retirement until reaching the standard DB retirement age. This work incentive does not increase costs for the DB plan.

WADE PFAU, National Graduate Institute for Policy Studies (GRIPS)
Email: wpfau@grips.ac.jp

Many countries are currently increasing the advanced funding of their public pension systems to improve their sustainability in the face of rapidly aging populations. When pensions are funded, the issue of asset allocation becomes of paramount importance. Through compound interest, the rate of growth for pension fund assets will have enormous implications for the level of pension contributions that will be needed to fund a desired level of benefits. Standard portfolio selection theory provides a fundamental justification for international diversification: by widening the pool of potential assets, investors can potentially increase returns while possibly even reducing risks through the selection of complementary assets with low correlations. Nonetheless, many emerging market countries have regulations that strictly limit the choice of investments for pension funds, in some cases excluding international assets entirely. This paper seeks to determine what economic theory suggests is the optimal asset allocation for public pension systems in emerging market countries, and in particular, what role international assets play in the optimal portfolios. We find that on average, about half of the portfolios of emerging market countries should be in world assets. The paper then quantifies the costs of prohibiting international diversification.

GIJSBERT J. VONK, University of Groningen
Email: g.j.vonk@rug.nl
ALBERTJAN TOLLENAAR, University of Groningen - Department of Administrative Law and Public Administration
Email: a.tollenaar@rug.nl

The boundaries between public and private social security change over the years. The Dutch social security system increasingly makes use of private arrangements. This privatization gives rise to questions regarding the protection of public interests. These questions are perceived very differently by the various disciplines. We have opted for a legal point of view. We will address the following question: 'Does the law provide a basis for defining the public interests of social security and if so, is it possible to identify a catalogue of these interests with reference to the law?'.

We answer this question affirmatively. An initial observation is that legal theory of fundamental socio-economic rights does constitute a suitable framework for defining state responsibilities in the welfare state. This proposition is worked out in paragraph 3 with reference to the modern method of differentiating the state obligations in the obligation to respect, the obligation to protect and the obligation to fulfill.

The next step is to clarify what should be respected, promoted or fulfilled. In paragraph 4 we introduce seven leading principles of social security, being one of the pillars of the welfare state. These principles go beyond legal reasoning and will meet some recognition also from an economical, historical or sociological perspective. The seven principles are formulated under the headings of: protection, inclusion, security, equality, solidarity, rule of law and good governance. After the concept of social security is thus unravelled it becomes possible to associate each of the seven principles with legal principles and requirements which are more clearly established in law. In this way the right to social security will be identified with a set of concrete legal standards. Examples of such deductive exercise will be presented in paragraph 5. The article concludes in paragraph 6 with a number of reflective remarks as to the appropriateness and relevance of the method we introduce in this paper.