Comparative Analysis of Pension Plans in Western European Countries, Russia and the U.S. with Emphasis on Trends for Future Development of Russian Pension System

Dmitry A. Yarushkin, MBA

Dr. Thomas Bergmann, Ph.D.

Department of Marketing & Management

University of WI-Eau Claire

Abstract

The objective of this paper is to consider the superannuation schemes presently being used in Great Britain, Switzerland, Germany, France, Italy, Scandinavian countries, Russia and the U.S. and to develop recommendations on theoretical and practical application of Western experience when creating a new superannuation scheme in the Russian Federation.

All of the countries included in this study have one or more benefits plans available for retirees going by names such as pension systems, pension plans, or social security. The purpose of this research is to study the wide variety of retirement benefits available in those countries with the intent of drawing recommendation to improve the Russian Federation’s pension system.

Retirement benefits include wide variety of items, all of which are considered as part of the social security package. The paper is divided into three sections. The first one considers principles of social protection in Western countries and provides a retrospective look on development of this system from ancient times until modern days. Retirement insurance, in particular, is examined to provide the reader with knowledge of various European pension systems. The second section analyzes the U.S. pension plans. The American system has been studied because, first, the U.S. pension plans have succeeded in creating a high level of benefits for an ordinary American pensioner. Second, Russian’s proposed reform of the private retirement insurance, is largely based on the decentralized model adopted in the U.S. The third section provides detailed information about the superannuation scheme of the Russian Federation, as well as the ways and methods to reform it at its present stage.

INTRODUCTION

The present paper considers the superannuation schemes presently being used in Great Britain, Switzerland, Germany, France, Italy, Scandinavian countries, Russia and the U.S. and proposes recommendations on theoretical and practical application of Western experience when creating a new superannuation scheme in the Russian Federation.

The paper is divided into three sections. The first one considers principles of social protection in Western European countries and provides a retrospective look on development of this system from ancient times until modern days. Retirement insurance, in particular, is examined to provide the reader with knowledge of European pension systems. The second section analyzes the U.S. pension plans. The American experience has been studied because, first, the U.S. pension plans have succeeded in the creation of high level of benefits for an ordinary American pensioner. Second, Russian’s proposed reform of the private retirement insurance, is largely based on the decentralized model adopted in the U.S.

The third section provides detailed information about the superannuation scheme of the Russian Federation, as well as the ways and methods to reform it at its present stage. Particular attention has been paid to private retirement insurance, as this kind of retirement insurance has recently become of topical importance. The Russian pension scheme needs reforming. Transition from administrative command to market economy has opened up new vistas in providing of retired citizens with old-age pensions, in particular, through the system of private pension funds (hereinafter referred to as PPF) studied in this section. The PPF system has had a social call both from individuals and organizations, which allows its further development and wider spread in the future, in spite of its present difficulties.

This paper is the first to collect and analyze a variety of information both on various European and American pension plans and on the present status and methods to reform the superannuation scheme in the Russian Federation. The paper has been worked upon for four years and involved both U.S. and foreign publications. In addition, the research has made use of the author's two-year experience in the Principal Financial Group, which provided an opportunity to look at the American pension plans from inside.

In addition to the American experience, the paper has included the materials received while working in Telecom-Soyuz, a Russian PPF. Communication with the administration of the fund, access to unpublished materials, and participation in the conclusion of contracts added essential materials to the research and contributed to its practical nature.

The author is especially grateful to the administration of Telecom-Soyuz, a private pension fund, and Russian North-West PPF Association for their assistance in preparation of the present paper.

SECTION I. THEORY And PRACTICE of SOCIAL Security IN WESTERN EUROPEAN COUNTRIES

1. Social Security and Social Insurance

Maintenance in old age, disability or survivor's pensions as well as other arrangements of the same kind make up the most important part of the course of human events. A civilized society solves this problem not only at an individual level, but also at the national scale. The latter is realized through a number of ways, including reduced rates of pay for goods and services, tax privileges, etc. The complex of various forms of maintenance in old age or in the event of disability is called social security. (1)

The principal form of organization and law for social security in countries with a developed market economy is social insurance, characterized by a thoroughly developed and mature mechanism of evaluation of actual need in social protection, clear dissociation of its specific kinds and sources of funds. (2)

As a socioeconomic category, social insurance is a “system of relations on distribution and re-distribution of national income through special insurance funds formed of premiums paid by working citizens and employers and of governmental subsidies” (Fedorova, 1997, p. 8).

Social security is an element of social policy and provides protection of reproduction of human and social capital assets against the most serious of socioeconomic risks. The human capital assets are investments into the person or his physical, educational, or material potential. Social capital assets are social assets of a person, such as social interconnections (ex. friendship), labor relations, and social standards.

2. Background

Social protection of a population has always been one of the most important functions of the state. Since ancient times, the powers-that-be have been helping destitutes and disabled in the event of emergency. In the Middle Ages, churches and monasteries hosting free hospitals and asylums supported this activity. Craft unions and merchant guilds, as well as municipalities of big cities, aided members of their communities.

Social protection of populations was not always systematic and permanent. Assistance was rendered through various channels and included such forms as free medical treatment and material support of widows and orphans, and allocation of money, clothes and food to people who were homeless. The goal of this assistance was determined not only by the Christian goodwill traditions, but also by the pure economic necessity. The situation when European countries were depleted by epidemics and wars made each governor take care of his population, as its preservation and accrual was the source of tax and revenues.

When capitalist industrialization began, the former craft union forms of social security lost their importance. The first forms of social insurance as fundamental forms of organization and law of social security appeared in the second half of the 19th century in Europe, their nature being that of collective insurance. Appearance of trade unions maintained the rights of employees in the face of the government and employers made social security transform into collective self-help and self-insurance by establishment of mutual benefit societies, sick-leave funds, and redundance funds.

At first, social insurance was developed to provide protection only to working citizens and to cover the risk of reproduction of the labor-power. Later, as the role of the human factor in production increased, the sphere of the influence of social security was essentially expanded and spread over the whole cycle of human life.

The initial practice of social security showed three possible ways to organize this system:

1. Introduction of social security from below, in the framework of settlement of disputes between employees and employers. That practice was typical in England, where social security of workers was provided by trade unions. Responsibility for collection and distribution of funds rested with employees, employers, and trade unions. Trade union committees managed the funds.

2. Introduction of the institution of social security from above in the framework of state legislation. Adoption of special state laws was the way to introduce social security in Germany. The social reforms of 1883 carried out by Bismarck included the first law in the history of social security -- health insurance law. In 1889 insurance of substandard lives and old age became into existence. Those kinds of insurance used to be provided by sick-leave funds, companies' benefit plans, and credit unions.

Contributions for social insurance were fixed by law and paid by the employer and the employee in the ratio of 1/3 and 2/3 respectively.

3. The third way to arrange social insurance can be called mixed, because its organization involved both state authorities and trade unions. In 1893, the city council of Bern, Switzerland, established a redundance fund. A committee consisting of employers, trade-union members, and city-council members managed the fund. Membership in the society was voluntary. (3)

3. Social Insurance

3.1. Kinds and Models

At present, social insurance in most industrialized countries is represented by

· old-age, disability, and survivor's insurance;

· health insurance and maternity care;

· accident and occupational disease insurance;

· unemployment insurance, and

· family allowances.

The mechanism, through which specific functions are implemented within each of these spheres, as well as the structure and the equity ratio, depends directly on the model of the regulation of social relations adopted in each specific country. By now, countries with market economies have developed several models of social protection for their citizens differing in the ratio of public and private capital in their activity:

- centralized model, also known as social-democratic, where the predominant role in the social protection of a population is played by national insurance, which is compulsory and universal. Examples of this model are Scandinavian countries, Great Britain, and Italy.

- decentralized model, also known as neo-liberal. Here the problems of social security are solved mainly at the level of direct relations between employers and employees fixed as a rule in collective contracts, while the state functions as an arbiter, that it observes and guarantees that the parties maintain their obligations. Countries using this model are the U.S., Japan, and Germany.

- intermediate model, also known as neo-conservative. Here public and collective social insurance are of nearly equal importance in the coverage of socially significant risks. As an illustration, one can refer to the experience of France and Switzerland.

3.2. Basic Principles of Organization and Contents

Social practice has developed four institutions to protect the welfare and life of a person. In developed countries today, they exist in parallel and supplement each other. They are

· public social security,

· national social insurance,

· collective social insurance, and

· personal insurance.

Public social security is a typical form of solidary social support of population implemented by the state at the expense of tax revenues into the budget. The state determines independently by the decisions of its authorities who, in what amount, and on what conditions is to draw social assistance and support.

Systems of national and collective social insurance are mixed forms of material protection of a population combining social solidarity in distribution of assistance and financial independence in organization of insurance funds at the expense of employees' and employers' contributions. National insurance is provided by special state financial intermediaries created by legislative or executive authorities and accountable to them. Any insurance company having an appropriate license obtained from the state may provide collective social insurance. National insurance covers the whole population or particular social groups selected by state authorities on the basis of social risks they are subjected to. Collective social insurance is much narrower than national one and limited by personnel, trade union, or place of residence.

Personal insurance is contrary in principle to the first three. It serves as a protection of the welfare of an individual at the expense of his personal contributions for social insurance arranged by insurance companies and receipt of insurance indemnity or the amount at risk equivalent to the contributions paid.

3.3. Functions

The main function of social insurance is sponsorial -- provision of insurance protection on attachment of socially significant risks.

1. Economic functions of social security are those of saving and investing. The function of saving lies in funding social assistance with the incoming insurance funds. The function of investing provides the drawing of income from the investment of temporarily idle funds.

2. As a social risk management system, social insurance has important regulating and restricting functions in the social sphere (such as development and coordination of special public welfare programs aimed at the improvement of protecting a population).

3. Social insurance not only functions as indemnification of the attached risks to the population, but also finances measures on obviation and preventive maintenance of potential damage.

4. Retirement Insurance

4.1. Kinds

Retirement insurance as a kind of social security can be compulsory (national) and supplementary (private). Compulsory retirement insurance in different countries equals 25-80% of average earnings (thus, an average American gets “a national federal pension of $900 and at the same time $800-$1,500 from private funds” per month (Yakyshev, 1994, p.3), while in Sweden, almost the whole amount of the pension is paid by the state).

According to classification by L. Rzanizina, national pension schemes in developed countries can be divided into three types:

1. “universal, i.e. covering the whole population and funded mainly from the federal budget,

2. connected with employment, gearing retirement insurance and its amount to the length of the previous working career and funded through social insurance,

3. social, their provision being closely geared to the amount of family or private income and aimed at maintaining the level of survival” (Rzanizina, 1992, p. 14).

At present, most industrialized countries have universal or combined pension plans that include the first two or even all three types of pension schemes. Some countries – U.S., Switzerland, France -- combine the national pension scheme with private ones. (4)

The schemes connected to employment include mostly the persons referred to as aggregate manpower. It covers almost all hired adults, although several groups of employees -- teachers, police officers, military personnel, people engaged in public organizations -- in some countries have independent superannuation schemes.

Social pension schemes are mainly for the poorest layers of populations and are intended to provide them with minimum guaranteed income. Such schemes are provided in Belgium, France, Great Britain, and New Zealand. (5) Austria, Finland, and several other countries have put the principle of social pensions into the basis of their universal pension plan for the whole population of the country.

An appropriate administrative authority on an individual basis determines amounts and kinds of benefits within the social pension plan after thorough investigation of the livelihood in possession and the daily wants.

The factor, which determines a person’s eligibility for an old-age pension, is a certain age and a certain length of paying contributions to the pension fund. In many cases there is also an additional requirement of refusal from employment as a source of livelihood, i.e. retirement.

4.2. Sources of Funds

The most widely spread sources of funds for pension schemes are deductions from earnings paid by employees themselves, social insurance benefits made by employers at the amount of certain percentage of the payroll, and grants from the government. Practically all pension schemes acting on the principle of social insurance are funded from two sources, and about half of the existing schemes uses all three of them.

Grants from the government are most often funded by the general budget, but sometimes they can be financed by special taxes -- excises. Public funds can be used in different ways: for maintenance of administrative authorities of pension schemes, to cover deficit, etc.

4.3. Management of Schemes

In most industrialized countries, responsibility for direct management of pension schemes rests with different kinds of semi-independent agencies headed by boards formed of three parties: representatives of insured citizens, employers, and government. Ministers or special governmental departments carry out general supervision over the appropriate bodies. In some countries, such as Austria, New Zealand, Canada, Great Britain, Switzerland, Portugal, Norway, and Denmark, federal authorities (ministries or departments) directly manage pension schemes. (6)

5. Summary

1. Various forms of social protection were provided since ancient times. Recent forms of social security appeared in Europe in the middle of the 19th century and became standard in the 1950-60s.

2. Social security in industrialized countries is a state priority and is provided both at the national and at the individual level.

3. Four systems of protection of human welfare and life exist in modern countries, all of them existing in parallel and supplementing each other:

· public social security,

· national insurance,

· collective social insurance, and

· personal insurance.

4. Social protection is implemented by mechanisms differing from country to country and depends on the extent of participation of public and private capital in their functioning. The majority of countries fit the following three models of social protection of their citizens:

· centralized model (Scandinavian countries, Great Britain, Italy),

· decentralized model (U.S., Japan, Germany), and

· intermediate model (France and Switzerland).

5. Retirement insurance as a component of social security can be compulsory (public) and supplementary (private). Public retirement insurance can be in its turn subdivided into social, universal, and connected to employment.

SECTION 2. PENSION PLANS IN THE U.S.

his section analyzes development of the pension plans in the U.S. The American experience has been examined, first, because the American pension plans have succeeded in creating a high level of benefits for an ordinary American pensioner. The reasons include high percentage allocations for superannuation, investment of the funds raised, and minimization of expenses on pension scheme management. Those aspects should be studied and introduced in Russia in due time.

Second, the author worked in the pension department of the Principal Financial Group for two years, to get both practical experience in this field and to have a first-hand look at the U.S. pension plan.

Third, Russian’s proposed reform of the private retirement insurance, is largely based on the decentralized model adopted in the U.S. American private retirement insurance already has more than a century of history. To disregard the experience and knowledge accumulated would be a waste of time and effort, while avoiding American errors would mean learning from their mistakes.

The main feature of the American pension plan is an elaborate legal system going into the smallest details of the whole plan from the moment of raising funds up to their payment to pensioners. This rigid structure provides social guarantees to pensioners, because in practice it deprives insurance companies of any possibility to perform risky transactions, left alone the transactions pursuing criminal purposes.

Though the American system is not an absolute reference standard, some of its components, such as employer-financed pension plans, are worth consideration and application on the Russian ground.

At present, the U.S. practices three major pension plans: compulsory federal (public), employer-financed pension plans, and individual retirement accounts. Let us consider them in more detail.

1. Federal Plan

The national federal social insurance covers “95% working people” (Social Security Administration, 2000). The scheme was founded during the Great Depression to provide some financial support to pensioners. During the last 60 years the scheme has grown in rank providing higher pensions and other kinds of benefits such as Medicare. To draw a social insurance benefit, the employee must pay contributions to the scheme for at least ten years.

Contributions for social insurance amount to a total of “12.4% of gross wages (up to $76,200 for 2000) divided into two halves to be paid by the employer and the employee. (Supplementary 2.9% of earnings are allotted to provide medical benefits for pensioners)” (Social Security Administration,2000). An average pension provided by federal social insurance is $930 per month (Social Security Administration, 1999). The federal public social insurance is managed by the Social Security Administration. There are also several categories of pensioners, such as former federal employees and army pensioners enjoying other governmental programs.

2. Employer-Financed Pension Plans

At the time of this writing, nearly half of the working people in America are covered with various types of employer-financed pension plans. This scheme includes private companies as well as the federal government, governments of state and local (municipal) authorities providing pensions to their employees. These pension plans are voluntary.

The first pension plan in the U.S. was founded by American Express in 1878. At first, employers looked at the pension plans as a gift to their employees for their services to the company (Long Service and Good Conduct), so the employees had no legal rights. In those years, the plans were extremely informal and often consisted of simple statements that the employer was expected to pay certain amounts to those of his employees who had met certain service requirements. As a rule, the employer did not create a special fund to secure his pension liabilities, and the text of the plan was carefully formulated to release him from responsibility.

Essential growth of pension plans in the United States began about 1915, and by 1925, about 4 million employees were covered with 400 plans. Pension plans grew slowly until the end of 1940s, when they began to increase in kinds, number, amounts, and coverage of employees. By “1949, 6.2 million employees were covered with pension plans” (Harbrecht, 1959, p. 6). By that time, many pension funds had based their work on thorough actuarial calculations and founded trust funds to support pension liabilities. The majority of earlier funds had been founded simply as “reserves of balance sheet accounts” in the companies' books. When the trusts were created for employees, the majority of the reserves were invested into the company's own securities; practically in all cases representatives of the trusts had plenary powers in investment policy, which resulted in many imprudent investments. “In 1928, only 41 of 108 companies had trust funds, while 67 of the rest had them only on paper, i.e. in their books” (Harbrecht, 1959, p. 7).

By the end of 1958, about 16.5 million employees were covered with all kinds of private pension plans, two-thirds of which were agreements reached by negotiations between employers and trade unions. According to the data of the Statistical Reporting Service of the U.S. and Spectrem Group, there were more than 863,000 private pension plans in 1999, in comparison to 900,000 private pension plans in 1987 and 500,000 plans in 1974. Today, more than 109 million people in the U.S. are covered with various kinds of pension plans. See graph 1 and 2.

Graph 1. Growth of plans 1925-1999.

Graph 2. Growth of plan participants 1925-1999.

2.1. Creation and Development of Legal Base for Pension Funds

After introduction of the income tax in 1913 and up to 1921, enterprises could look at their pension liabilities accumulated during the current year as usual business costs. The amounts invested into pension funds could be deducted from the gross income. However, the income from contributions for retirement insurance was subjected to the same taxation as any other income. At the same time, the pensions drawn were also subjected to taxation. Employees' income, at the rate of their employer's contribution into their pension, was also subject to taxation during their work.

The plan could be interrupted at any time. The law stipulated that if the worker left, he was no longer qualified for a pension. Under those circumstances, employers were not interested in prospective funding of future pension liabilities.

The first provision favorable to pension trusts was included in the Income Act of 1921. The Act granted pension trusts a remission of income tax and granted workers a remission of the tax on current contributions made by employers into the trust for the benefit of the employees. The progress gained in 1938 was fixed in the Income Act of 1942 that changed the conditions of the pension tax completely. It contained more definite terms of settlement of employees' benefits and methods of allocation of pension amounts.

Those gradual measures on the liberalization of tax laws were a great incentive to create pension plans. As corporate excess profits tax amounted to “82% during and after the war, many companies concluded that they could provide pension plans at the cost of about 18 cents per dollar to their employees” (Guide Book to Pension Planing, 1996, p. 1324).

2.2. Employee Retirement Income Security Act (ERISA)

In 1974 when ERISA was developed, it was intended to protect the federal tax authority and interests of the members of private pension plans and their beneficiaries. It improved the equal nature of these plans by introducing new compulsory requirements, such as correlation of future payments to employees with their service terms, the minimum standards of funding the plans by employers, and compulsory insurance of payments of the saved-up amounts to the members of the pension plan in case of its interruption. ERISA was major legislative effort to regulate the pension sphere in the U.S. (7)

2.3. Composition of the ERISA

The ERISA comes in four sections. The first one protects the employees' rights and lays down the conditions of:

· participation and plan-funding rules,

· the fiduciary's responsibility for management of the money and the plan,

· furnishing the member of the plan with information by the employer,

· management of the pension plan.

The second section contains amendments to the Tax Code of 1954.

The third section lays down various conditions connected to jurisdiction, management and implementation of the ERISA.

The fourth section establishes Pension Benefit Guaranty Corporation (PBGC) and creates the scheme of mandatory insurance payments of the saved amounts to the members of the pension plan in case of its interruption.

2.4. The Pension Benefit Guaranty Corporation

The Pension Benefit Guaranty Corporation (PBGC) was established as a federal government corporation to encourage the growth of defined benefit plans[1], provide timely and uninterrupted payment of benefits, and maintain pension insurance premiums at the lowest level necessary to carry out the Corporation's obligations.

PBGC takes responsibility for paying benefits to current and future retirees when a pension plan runs out of money, when a company liquidates and has an underfunded plan, or when PBGC must end a plan to protect its participants. It guarantees basic benefits including normal and certain early retirement, disability, and survivor benefits.

PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over.

PBGC protects the retirement incomes of about 43 million American workers in more than 40,000 defined benefit pension plans. Since 1974, according to the PBGC’s web site, some “472,000 workers and retirees in 2,665 terminated pension plans” have come to rely on PBGC for their retirement income. The Corporation pays monthly benefits according to the provisions of each individual pension plan up to the limits set by law and which are adjusted yearly. For plans ended in 1999, workers who retire at age 65 or older can receive up to $3,051.14 a month. PBGC paid $848 million in benefits to retirees of terminated pension plans in fiscal 1998. (8)

2.5. Governmental Bodies Regulating Private Pension Plans

In the U.S., there are three governmental bodies implementing the rules of private pension plans. A fourth one takes an active part in the issues of pension policy.

The Department of Labor regulates the articles of the plans, rights of members and member’s access to information.

The Internal Revenue Service supervises execution of the plans, percentage of the employees covered by plan, maximum and minimum contributions and benefits, entitlement of the employees to participate in the plan, etc.

The Pension Benefit Guaranty Corporation is a governmental insurance company paying pension benefits to the members of pension plans, when the latter are closed and have no funds.

The Securities and Exchange Commission is involved in the process by supervising the investments and minimizing their risk.

2.6. Kinds of Pension Schemes (Plans)

To determine the type of the plan and the level of benefits and features provided by the plan, it is necessary to answer the following questions:

· Can the company afford expenses to establish and maintain the plan?

· Will the establishment of this pension plan help the sponsor to attract and keep employees?

· Does a competitor have a similar pension plan?

· Considering governmental restrictions, is this undertaking worthwhile?

Pension plan establishment can result from negotiations between trade unions and an employer, or from the good will of the employer. The features of the plan are different in each case.

In defined contribution pension plans, the sponsor introduces exact amounts to be distributed afterwards between the members according to the rules. Actual payments to the member are based on the contributions made during his/her employment, as well as on the income from the investment of those contributions.

There are three kinds of defined contribution pension plans: (9)

· profit-sharing pension plan. The sponsor's contribution is limited to a certain ratio of current yield or net profit. This contribution is distributed between the members by the specified formula.

· deferred-pay pension plan. The members are allowed to reduce their salaries and use the saved amounts as a contribution to the plan. The part of the member's wages used as a contribution to the pension fund is excluded from taxable yearly income. Many sponsors encourage members to take care of their own pensions by also making contributions.

· accrual pension plan. The sponsor makes a contribution to the plan at the amount necessary to provide the member with a benefit after his retirement. The amount of the benefit is based on the data of insurance statistics. However, the member draws the pension equal to the amount of annual contributions and the accrued income. It can be larger or smaller than the sponsor's initial contribution, as the whole of the investment risk in this case falls on the pension plan member.

In Defined-Benefit pension plans, the sponsor undertakes to provide exact amounts of pension benefits on behalf of the participating employees. To provide the payments promised, the sponsor makes contributions calculated on a statistical basis. Unlike the defined-contribution pension plans, the member knows that after his retirement he will draw a pension and that the investment risk falls on the sponsor.

A Multi-Employer pension plan is arranged for employees of several employers. This plan is established by negotiations between a trade union and an employer and is managed by an independent fiduciary council equally representing the sponsors and the trade union. The benefit of the member of a multi-employer pension plan is based on service as a whole, not on the length of service for one sponsor.

General and reference pension plans are developed by banks, insurance companies, brokerage houses, and law firms. These plans fit all the above-mentioned schemes and are easily adapted by the sponsor, whose only job is to select a particular plan among those submitted by the developer. If the sponsor wishes to create a pension plan with non-standard features, the pension lawyer or adviser will prepare an individually developed plan. When establishing the plan, the sponsor is obliged to follow certain legal rules.

An individual or an organization becomes a plan trustee to carry out service functions. Requirements to pension payments are established by the plan trustee. It is he/she who determines the amount of the pension. The trustee's duties also include:

· investment of the pension plan assets,

· selection of the insurance company, and

· determination of investment funds for the members to place in their account.

However, the trustee has no right to distribute the funds among the members.

Employer-financed pension plans enable the increase of pensions in a wide range (from $50 up to $5,000 per month depending on the sum entered in the individual account). The pensioner has a right to draw any amount from his account. However, if the annual amount exceeds $20,000, he has to pay a higher tax and, as a rule, a fine to the federal government and insurance company. Under force-majeure circumstances, that is, if the money is necessary for an expensive medical treatment, for example, a pensioner has the right to draw the required amount without being fined.

3. Individual Retirement Account

If the person is self-employed or works for an organization having no pension plan, there are some other opportunities to save for old age. Any employee can open an individual retirement account (hereinafter referred to as IRA) at a bank, brokerage office, or insurance company. Contributions to this account will accrue on a tax-free basis (up to $ 2,000 per annum) until the employee retires. If the employee is not covered with an employer-financed plan, the contribution (or part of the contribution) to the IRA will be considered as the amount reducing the annual tax.

Opening an IRA (about 20% of working people have one) provides the depositor with the following choices:

· to open the account at a financial institution,

· to determine the amount of the contribution (up to $ 2,000 per annum),

· to determine the investment risk of the contribution (as a rule, the finance company offers three kinds of contributions to the investor: high risk, risk, and low risk. If the person has less than 5 years before retirement, the company offers him/her a low risk contribution; from 5 to 10 years, a combination of risk and low risk; from 10 to 15 years, a combination of all three risks).

Having decided on a choice of investment risk, the depositor in most cases has no authority over where his/her contribution will be invested (in what securities, bonds, etc.). The amounts and rules of pension payments to IRA holders are similar to the amounts and rules of payments to the members of employer-financed pension plans. Pension plans have a system of tax privileges, thus, under certain conditions, the sponsor's contribution to the pension plan reduces the sponsor's income tax by the amount of the contribution. The income drawn from this contribution is tax exempt, which enables its net capitalization. The pension benefit is only taxable at the moment of payment.

4. Summary

1. The U.S. provides a well-balanced, three component pension plan: compulsory federal (public), employer-financed pension schemes, and individual retirement accounts. In addition to comprehensive performance of its own role, each component also supplements the other two.

2. The federal pension plan covers 95% of working people. An average pension is $930 per month. In addition to the federal plan, half of the working population in America is covered with employer-financed pension plans. They enable a wide range of pensions, amounts from $50 to $5,000 per month (depending on the amounts entered in the individual account). IRAs covering about 20% of working people also enable a wide range increase of pensions depending on the amounts entered in the individual account.

3. The importance of supervision and regulation of pension plans has been declared by the federal government since 1974. That year, ERISA was adopted, unifying and compiling various enactments and statutes into a consolidated legislation on retirement insurance, thereby contributing to the strengthening of the federal tax authority, free circulation of the pension capital over the territory of the country, increase of its yield, and therefore increase of social guarantees for the members of private pension plans.

4. Wide spread of private pension schemes. More than two thirds (about 109 million) working people in the U.S. are covered with various kinds of private retirement plans, which shows that not only employees, but also employers are interested in the development of this component of retirement insurance.

5. Variety of kinds and forms of private pension plans. This variety enables the maximization of employees' desires with minimization of employers' expenses, which, for example, are regulated by tax privileges for contributions to the retirement account.

6. Payments of the pension amounts to employees in the event of bankruptcy of the pension trust are fixed by legislation, thereby strengthening social guarantees for members of private pension plans.

SECTION III. SUPERANNUATION SCHEME OF RUSSIA. WAYS AND METHODS TO REFORM IT.

1. Operation of the Superannuation Scheme in Russia and the Necessity of Reform It.

Retirement insurance has become a top socioeconomic priority in Russia during the period of transition to a market economy. Its social importance is determined by the vital interests of almost 39 million elderly persons, disabled and survivors. Table 1 represents the quantitative structure of various groups of people drawing pension ("Pensionnuje fondu", N1, 1998, p. 7):

1970

1975

1980

1985

1990

1991

1992

1993

1994

1995

1996

1997

Total number of pensioners

(in thousands)

22,513

24,684

27,417

30,291

32,848

34,044

35,273

36,100

36,623

37,083

37,827

38,286

Old-age pensioners

14,155

16,813

19,540

22,522

25,659

27,131

28,390

29,021

29,095

29,011

29,081

29,076

Disabled pensioners

3,865

3,487

3,469

3,462

3,514

3,385

3,363

3,562

3,910

4,270

4,542

4,734

Pensioners due to the loss of head of the family

4,033

3,926

3,864

3,694

2,792

2,574

2,473

2,420

2,423

2,482

2,464

2,461

Pensioners, who qualify by the number of years worked

124

107

135

197