C5 - Benefit Provision Flashcards
Benefits offered to individuals
- death benefits
- protection benefits
- permanent disability benefits
- temporary absence benefits
- permanent absence benefits
- subsidised healthcare
- family support
- savings
- subsidised goods and services
Situations benefits may be required
- compensation for activities carried out
- result of events that lead to a loss of income, increase in outgo or need for goods or services
Net replacement ratio
NRR = (net income in year after retirement) / (net income in year before retirement)
Reasons an NRR of less than 100% is acceptable
- loans and mortgages may have been repaid by retirement
- individuals may no longer need to save, particularly for retirement
- individuals may face lower costs, such as travel
- may have other benefits or subsidised prices
Legislation in provision of social security pension schemes covers:
- rights and obligations of the parties affected by the scheme
- contributions to be paid
- benefits payable
Compulsory membership of social security pension schemes
- all individuals in employment
- all residents of the country
Contingent events under a DB social security scheme
- retirement on reaching a particular age
- inability to work through ill health
- death
Why is it almost always impossible to go from an unfunded to funded approach
Payments would need to be made simultaneously for current recipients of the benefit and to be put aside for the next generation
Pros and cons of means testing state benefits
+ cost effective way of ensuring everyone has a certain standard of living post retirement
+ redistributive if those with greater wealth/income pay more taxes and those with lower wealth/income receive more benefits
- discourage self provision
- create poverty trap
- encourage people to squander existing wealth to meet means test earlier
- unfair to those who do provide for themselves and don’t receive state benefits
- may not be taken up by all those who are entitled to them
- complex to administer
How stuate can provide benefits
- flat monetary amount
- amount linked to earnings
Pros and cons of flat rate state benefits
+ Simple to pay
+ Can guarantee a certain standard of living to all
+ Provide a base level of pension on which to build other pension
- does not target resources to needy
- Benefit is unrelated to income so may not maintain living standards
Pros and cons of flat rate contributions
+ Simple to collect
+ consistent with flat rate benefits
- may not correspond directly with flat rate benefits
- unpopular
- needs to be reviewed due to inflation
- essentially a regressive tax, as they are a higher proportion of earnings for lower paid
Problems with benefits rated to final earnings
- could be abused by companies who could increase salaries just before retirement to increase state pension
- expensive, if main aim is to target the needy
- costs may be volatile due to abuse or unexpected salary increases in the economy
- state may feel it is not its role to provide final salary protection
Pros and cons of career average earnings linked benefits
+ can’t be abused by companies as much as final salary beneifts
+ delivers benefits broadly consistent with standard of living
- benefits devalued by inflation if prior earnings are not revalued up to retirement
- extra support for low career earnings
- expensive to provide for all
- complex
Thresholds and ceilings
- Threshold is a limit below which benefits/conts are not paid, allowing those who can’t afford to be excluded
- Ceiling is a limit above which benefits/conts are not paid, allowing state to redistribute resources
- limit on benefits but not conts is redistributive whereas a limit on conts but not benefits is regressive
