The Basic Manual of
Social Security:
theory AND VALUATION
Mario Arturo Ruiz Estrada
Social Security Research Centre (SSRC)
Center of Poverty and Development Studies
Faculty of Economics and Administration
University of Malaya (UM)
[E-mail]: marioruiz@um.edu.my
Evangelos Koutronas
Social Security Research Centre (SSRC)
Faculty of Economics and Administration
University of Malaya (UM)
[E-mail]: evangel_gr@um.edu.my
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 CONTENT
Page
Chapter I
Introduction 3

Chapter II
Overview of Social Security 5
Evangelos Koutronas

Chapter III
Social Security Theory 22
Evangelos Koutronas

Chapter IV
The Quantitative and Qualitative Evolution of the Social Security Research 48
Mario Arturo Ruiz Estrada and Evangelos Koutronas

Chapter V
Pensionomics 56
Mario Arturo Ruiz Estrada and Evangelos Koutronas

Chapter VI
Public Pension Reforms: Policy and Outcomes 64
Evangelos Koutronas

Chapter VII
How Productivity Can Affect Pension Plan Systems Performance? 81
Mario Arturo Ruiz Estrada, Evangelos Koutronas, and Donghyun Park

Chapter VIII
How Inflation and Exchange rate Affects Pension Plan Systems Real Value:
The Case of Malaysia 97
Mario Arturo Ruiz Estrada, Alam Khan, Marcin Staniewski

Chapter IX
The National Social Protection Fund:
The Multi-Pillar Employees Provident Fund 114
Mario Arturo Ruiz Estrada, Evangelos Koutronas, and Donghyun Park

Chapter X
The Evaluation of ASEAN-Members Social Security Plans Performance
from 1990-2017 130
Mario Arturo Ruiz Estrada and Evangelos Koutronas

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CHAPTER I
Introduction
This monograph is divided into ten chapters. The first chapter presents a general
description of each chapter respectively. The second chapter introduces the basic
principles of social security. Its objective is rather to provide a brief outline of the
concepts and the principles as well as the description of the established institutional
framework. In particular, it presents the institutional structure of social security as well
as its basic blueprint along with its recent developments. The taxonomy of pension
arrangements is presented by giving emphasis on its legal status, format, type of
arrangement, and type of coverage. The third chapter places the development of social
security in a historical context. A particular emphasis is given to the history of European
social security systems, which shaped social security systems worldwide. To complement
the historical analysis, this chapter introduces the theoretical approaches and concepts
have emerged in the social security field. The traditional classification of welfare states
is being addressed through a path-dependency perspective. Finally, the welfare states are
described briefly under cultural, social, economic, and political prism, pinpointing their
deficiencies and mapping their patterns.
The fourth chapter examines the evolution of social security research from a theoretical
and empirical perspective. This is done through an extensive review and analysis of
publications from the Journal of International Social Security Review published by Wiley
within a 50-year period (1967-2017). It was observed that at a different period in time,
the social security research focused on different national and international issues that
invoked different social welfare programs and pension systems approach (public or
private) to facilitate the explanation of its final socio-economic impact into different
social groups in the same country or region respectively. The fifth chapter explores the
concept of pensionomics as a prospective tool for pension evaluation. This chapter
suggests a paradigm shift: a multidisciplinary synthesis of differing perspectives in
evaluating pension overall performance based on past work on pension evaluation,
incorporating non-economic variables with significant impact on economic growth and
social development. This chapter suggests a new analytical tool called “Pensions
Consistency (PC) Index” that identifies the level of consistency as well as the strengths
and weaknesses within any pension system. The new conceptual framework focuses on
building inter-sectoral and holistic policies able to respond to the new multidimensional
dynamic environment.
The sixth chapter examines the impact of welfare reforms on the sustainability of public
pension schemes. This chapter reviewed past and current literature and practices of
various countries to evaluate the effectiveness of reforms used from the aspect of
structural and systemic parameters focusing on sustainability and distributive
impartiality. This theoretical review concludes that there is no ideal pension scheme but
there are reforms that have shown to be beneficial to the sustainability and distributive
impartiality of pension systems and such reforms should be applied in combination to
suit the economic dynamism of each individual country. The seventh chapter formulates
an analytical framework to analyze whether pension growth can be a determinant of
economic growth. The Pension Scheme Performance Evaluation Model (PSPE-Model)
intends to study the performance of pension schemes from a macroeconomic perspective.
The PSPE-Model tests whether the marginal optimum national pension system coverage
critical point based on the national productivity growth performance is simultaneously
determined by the efficient coordination of private and public pension system programs
coverage and the national productivity level. The model investigates the marginal
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optimum national pension system coverage critical point of two Asian countries, Japan
and Malaysia.
The eighth chapter explores how inflation and the exchange rate can affect the real value
of any pension plan system in the long run. In our case, we focus on the specific pension
plan system of the Employees Provident Fund (EPF). Nonetheless, we use a new model
that is entitled “The EPF Real ↑alue Box –EPFR↑ Box”. The EPFR↑ Box facilitates the
graphical visualization of the inflation/exchange rate impact on the Employees Provident
Fund (EPF). In essence, the EPFRV Box is applied to the Employees Provident Fund
(EPF) of Malaysia to evaluate the impact of inflation and exchange rates on the Malaysian
EPF real value from 1980 to 2030. Finally, the main objective is to apply the EPFRV Box
to extend the significance of the impact of inflation and the exchange rate on any pension
plan system (in this case EPF) beyond mere theory, using them as practical instruments
to solve retirement and pensioner’s problems. The ninth chapter formulates a
comprehensive pension fund framework for enhancing system capacity to manage
economic and social risks. The National Social Protection Fund (NSPF) attempts to
quantify the informal sector, incorporated under a unified national protection scheme.
The new protection mechanism consists of two sub-funds: The National Integral Social
Security Fund (NISSF) and the National Education Fund (NEF). NISSF encompasses all
economically active Malaysian population, including the informal workforce, whereas
the NSPF captures the economically inactive young population. Simulation findings
indicate that education, health, and income redistribution can improve the livelihood of
the vulnerable population groups in Malaysia.
Finally, the tenth chapter proposes a new model based on a group of indicators to evaluate
the social security plans performance of ASEAN-members (Singapore, Malaysia,
Indonesia, Thailand, and the Philippines). The first section presents a general review of
all possible indicators applies in the evaluation of social security plans performance.
Secondly, we present a new indicator, “The Social Security Plans Performance Index
(SSPP-Index)” is intended to offer policymakers and researchers an additional analytical
tool to study the coverage, efficiency, effectiveness, trend, and future of any social
security plan as a whole. The SSPP-Index can be applied to the study of any social
security plan and not constrained by geographical area or development stage of the social
security plan on the study. The SSPP-Index is a simple and flexible indicator. The third
section summarizes the results on the ASEAN-Members social security plans
performance under the application of the SSPP-Index.

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Chapter II
Overview of Social Security
By Evangelos Koutronas

2.1. Introduction
Social security is widely acknowledged as a vehicle for sustainable and economic development.
The vast majority of developed and developing societies around the world has employed some
level of welfare mechanisms to avert, administer, and surmount situations that inimically affect
peoples’ well-being. Although the concept of social security is generally associated with income
maintenance and support programs, it does not only refer to programs established by statute, but
it has also a broader meaning, including the concept of social protection and volunteerism.
Furthermore, social security is seen as a driver of economic growth: it enhances labor
productivity; fosters smooth consumption, and; creates a stable economic environment for
investment and innovation. The social security aims to protect the population from situations that
cause loss or reduction of sources of maintenance, preventative, or remedial health protection; to
ensure employment and retention of capacity for work; to indemnify decent standards of living,
and; to secure peoples’ active participation in economic and social life (International Labour
Organization, 1999). United Nations Universal Declaration of Human Rights Act 1948 attested
social security as a human right, and accordingly, the International Labor Organization (ILO) set
minimum standards for social security in the International Labor Convention of 1952.
Social security aims to also strengthen social cohesion, enhance growth and equity,
redistribute income from the strong to impoverish segments of the population, and pursue social
justice to all (Pieters, 1998). Social welfare policy appears in the form of welfare programs –
benefits and services – to meet individuals and groups’ basic needs. These needs include
employment, income, health, education, and housing, which are strong indicators of social
progress. Social welfare transfer programs concern with the allocation of resources to those who
identified poor or vulnerable with the objective the alleviation of social hardship, addressing
social exclusion and reducing economic uncertainty. Income redistribution can take place through
the processes of fundraising, insurance contributions or direct or indirect taxation, and through
the allocation of benefits. The principles of fairness and equality, the access to appropriate health
treatment, and the equitable distribution of wealth are hallmarks of a stable and harmonious
society with positive interactions, exchanges, and the networks between individuals and
communities.
The presence of social security also affects peoples’ economic behavior in the context of
saving, productivity, and retirement. The effect of social security on peoples’ saving behavior is
threefold. People tend to save less for retirement when they feel the presence of a “safety net”
decreasing thereby their expectations about how much they need to save (wealth substitution
effect) (Aaron & Reischauer, 1998). Contrary, people tend to save more during their productivity
period in an attempt to accumulate savings sufficient to lead to early retirement (retirement
effect). Finally, people also tend to save more prone to higher social security taxes in
consideration of encasing future expected costs of having children (bequest effect) (Rosen &
Gayer, 2008). Although social security has a positive impact on saving and income distribution,
it may have an adverse impact on labor supply. Unemployment benefits serve as one of the main
economic stabilizers that tend by their design to offset fluctuations in the economic activity.
However, long-term unemployed individuals often confronted with the unemployment trap
dilemma: a situation in which the opportunity cost of returning to work is considerably
significant, so benefits create a perverse incentive not to work. Individuals who drop out of the
welfare system may become more detached from the labor market and put less effort into

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searching for a new job. Alongside with the labor market distortions, this may decrease the
employment rate in the future, exactly the opposite effect of the one intended (Walker, 2005).
Pension arrangements provide a complex set of incentives for retirement. The provision
of welfare benefits entices workers to retire before retirement age than they otherwise would have
(Gruber & Wise, 1999). Payroll taxes, the level of benefits earned, and the offsetting actuarial
adjustment distort individuals’ labor supply incentives (Gordon, 1982). In addition, the tendency
toward earlier retirement is also positively correlated with the impressive developments in health
and life expectancy; the growth of income combined with an increasing demand for leisure;
technological advancement; and the expansion of social insurance programs implies that people
tend to appreciate more leisure time (Boskin & Hurd, 1978). This chapter focalizes on the main
ideas of social security, the most important theoretical and empirical work as well as flaws and
recent developments. The chapter begins with the description of the established institutional
framework. In particular, it presents the institutional structure of social security as well as its
basic blueprint along with its recent developments. In the following section, the taxonomy of
pension arrangements is presented by giving emphasis on its legal status, format, type of
arrangement, and type of coverage.

2.2. Overview of Social Security

2.2.1. Social Security Architecture

The institutional structure of a welfare system comprises three basic mechanisms: social security,
social welfare, and healthcare.
1) Social security covers the granting of financial resources (insurance benefits) authorized by
special bodies (insurance agencies) to persons who are subject to them (insured), is exposed
to income-reduction risk or costs-increase risk (insurance risks) and have completed the
predefined working period and financial contribution conditions (time insurance, insurance
contributions).
2) The social welfare covers the administration of non-contributory income benefits, non-cash
benefits and social services via designated agencies (welfare carriers) to persons who are in
distress and unable to cope with their own resources.
3) Healthcare covers the granting of benefits-in-kind and health services via specialized bodies
with gnomon the maintenance and promotion of population health (Kontiadis, 2008).

The organizational structure of social security combines elements of retirement reserves,

retirement age support, and welfare services into a single system. Pension savings comprise the
cornerstone of social security. They are compulsory savings schemes funded by employers’ and
employees’ providing to beneficiaries’ pension benefits upon retirement. These retirement
schemes may be arranged directly by public agencies and employers and indirectly by third
parties such as employer associations, insurance companies, or trade unions. Occupational
pensions or self-employer pensions take the form of deferred compensation, which usually tax-
benefit employee. Insurance company pensions are individual retirement plans; the participation
can be mandatory or voluntary, and; the individual accounts are managed by an under-contract
private fund manager. The individual is liable for the selection as well as the management of his
retirement plan. Labor unions, the government, or other organizations also fund pension savings
through payroll taxes (pay-as-you-go), thereby today employee contributions pay current retiree
allowances. Old-age benefits are based on the notion of insurance principle. This source grants
benefits to individuals with partial or permanent loss of productive capacity due to various
contingencies, such as accidents, illness, reaching a certain age, etc. Benefits are ordinarily
ascribed for finite or infinite (lifetime) period of time. Semi-autonomous agencies usually

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provide analogous types of benefits. Similar to the public pension savings, insurance benefits are
based on employers, employees, and government contributions.
Pension systems inherently incorporate contributory characteristics to a non-contributory
component. Benefits are delivered to low earners or those with no or limited employment
histories, who have reached old age with unmet financial obligations, and survivors who left
without any form of financial support after the beneficiary’s death. Social assistance programs
use supplementary benefit mechanisms, equally to minimal/maximal allowances and acquisition
of pension rights, aiding needy beneficiaries. Social assistance programs primarily include
unemployment, family allowance, and survivor benefits. Unemployment benefits provide
compensation to individuals who are involuntarily out of employment. Family allowance benefits
are given to families of minor children as reimbursement for child support. They can take the
form of regular cash payments to families with children, including education stipends, birth
endowments, parenting support and child health services, and supplementary welfare subsidies.
Survivor benefits are usually given in the form of cash payments to a spouse at any age (or for
women until remarriage); to a spouse with incapacity; and to orphans. Social assistance programs
are usually financed from general revenues managed by semi-autonomous agencies under
authorized public body supervision.
The social security system mechanisms should be inter-independent; they should pursue
their objectives while keeping their operational autonomy, but at the same time to function as
parts of a centralized system. How are organized and interlinked these basic mechanisms are in
every welfare state is a result of social, economic and demographic characteristics enriched with
the cultural traditions and political practices of each State.
Pension plan designs vary considerably within and across regions demonstrating a vast
spectrum of views (Palacios & Pallares-Millares, 2000). The welfare state classification in
various models facilitates to subsume the social security system institutional set-up within a
broader regulatory and legislative framework. The main criteria used to identify the institutional
organization of each type of welfare state are: the organizational nature and structure (central,
segment, public, private); the population coverage (universal, means-tested, employer-liability);
nature of benefits (pension, social assistance, health care), and; the methods of financing (direct
and/or indirect taxation, member contributions, mixed financing) (Antonen & Sipila, 1996).

2.3. The Institutional Design of Social Security

Most of the countries worldwide exhibited noticeable diversity in social security
architecture with respect to objectives, scope, coverage, and benefits. They implemented
comprehensive social security systems with pension, healthcare, and assistance services
concentrated into a single framework. In particular, the single-pillar model is usually non-
contributory publicly managed scheme that ensure a subsistent level of protection to the entire
population bandwidth. However, government seldom met scheme’s financial requirements.
Economic development was harmoniously coexistent with the expansion of social
security. After the twenty-five-year period of sustained economic growth, a general slowdown of
economic activity followed. In association with shrining contribution bases and growing
beneficiary populations, the new economic landscape puts increasing pressure on the fiscal
sustainability of social expenditures. Recession highlighted not only the centrality and strengths
of social security systems, but also their weaknesses: uneven benefit distribution to its members;
mismatch between contributions and benefits discouraged employment; employers and/or
employees often evade contributions and still got qualified for benefits; generous welfare benefits
have fostered early retirement directly affected to the further decline of labor participation rate;
systems growing deficits strained public finances; capital mismanagement reduced national
savings; failure to index benefits to inflation and protect beneficiaries purchasing power loss, and;
political intervention led to unsustain strategies (World Bank, 1994). The aforementioned

7
deficiencies entail considerable consequences on the sustainability of social security systems.
Social security mechanisms have fallen short of meeting their objectives. Furthermore, the new
complex environment emerged new risks (demographic factors, labor mobility, climate,
technological developments) and new needs (health care, pensions). These conditions require a
dynamic and diversified welfare system where individual needs are met effectively and efficiently
by implementing tailored policies closely related to their specific context. Governments have
been oriented at designing multi-pillar pension schemes replacing the Paleolithic single-pillar
models. The segmentation of the social protection organizational structure into several
autonomous administrations entails the coverage of certain professional groups. They provide
wide diversified benefits to their members from of limited coverage and voluntary, efficient
supplementary benefits for family transfers and wealth supportive policies. They are primarily
funded by their members’ contributions and secondarily by government subventions.
Furthermore, multi-pillar designs show higher flexibility than single-pillar designs and thus are
more suitable to address the needs of the targeted population while being robust enough to
withstand major macroeconomic shocks, such as economic, demographic and political volatility
(Chlon, Gora, & Rutkowski, 1999; Holzmann & Hinz, 2005; Rutkowski, 1998).
All pillars encounter different types of risk in level and magnitude. In finance literature,
the Capital Asset Pricing Model (CAPM) (Sharpe, 1964) and the Modern Portfolio Theory
(Markowitz, 1952; Roy, 1952) suggested that a well-diversified portfolio reach Pareto-optimality:
highest level of return for a given lowest possible level of uncertainty. Accordingly, a multi-pillar
system would attain intra- and inter-pillar optimal risk and desired return based on asset
diversification. Indeed, empirical findings for OECD countries support the diversification
argument (Thompson, 1998). Moreover, the expose of public pension funds to political and
regulatory risks turned employees to seek “safe net” alternatives in the private sector institutions
(Chlon et al., 1999; Gora & Rutkowski, 1998). Many countries have expanded their single-pillar
systems well beyond the basic redistributive function of non-poor segments of the population.
However, government bodies failed to consider the adverse side effects of this strategy would
cause, including high participation rates, tax payment irregularities, and distortions in labor
market mechanisms. Notional Defined Contribution (NDC) plans, alternatively are designed to
circumvent those negative externalities. Mimicking pay-as-you-go pattern, NDCs maintain the
contributions-to-benefits ratio fixed while the level of benefits varies with life expectancy (Gora
& Palmer, 2001).
In 1987, the Geneva Association introduced its “Four Pillars” Research Program with the
primary objective to identify potential problem-solving approaches to pension financing. The
four-pillar concept was established on a three-pillar framework: the first pillar includes a
mandatory pay-as-you-go public component; the second pillar consists of a privately-managed
occupational scheme, and; the third pillar encloses a personal savings account. However, more
emphasis was given to the introduction of the fourth pillar - the phased retirement: a prior-to-
retirement employee is offered the option to smooth his employment-to-retirement status: a
gradual decrease of his full-time employment status to part-time employment status, and then
shifts to full retirement in exchange additional income supplement from the three existing pillars
(The Geneva Association, 1988). In the 1994 unofficial report, World Bank presented a three-
pillar pension scheme. The three-pillar model dissociates pension, savings, and insurance
functions into three self-funded pillars. The first pillar operates as a safety net, providing a basic
support for everyone. It is a mandatory, publicly managed, tax-financed program that provides
mean assistance to beneficiaries living at the subsistence level. The second pillar emphasizes on
savings. Second pillar pensions are voluntary individual accounts, privately managed, fully-
funded, defined-contribution schemes supported by employer and/or employees. The primary aim
of this program is to ensure complement pension benefits to those individuals that seek a
satisfactory source of income additional to the basic pension benefit the first pillar provides.
8
Finally, the third pillar is voluntary, privately managed program. It has savings or life insurance
feature funded via fixed contributions made by employers and, or employees for a certain period.
Due to the voluntary character of the program, government usually offers tax incentives to those
who participate on this voluntary pension scheme. Although →orld Bank’s three-pillar pension
scheme set the benchmark for pension reform, only few countries worldwide would condition to
launch a three-pillar scheme as in the case of Switzerland, Australia, Argentina, Chile, Uruguay,
Bolivia, Hong Kong, and Kazakhstan, whereas limited number of countries seem prone to
proceed on three-pillar scheme reform (World Bank, 2006).
According to Vittas (1993), there is no right or wrong pension system. Social security is
a result of social, economic, and demographic characteristics enriched with the cultural traditions
and political practices of each state. However, the three-pillar scheme can provide insightful
connotations regarding how diverse approaches can synchronize to serve diverse policy goals or
functions. In 2005, →orld Bank’s conceptual framework expanded to five-pillar scheme taking
into consideration all existing scheme patterns and shaped a homogeneous pension framework
with proposed reform options (Holzmann & Hinz, 2005). The fourth pillar comes with voluntary
arrangements (e.g. retirement savings, invalidity, or bereavement; employer-sponsored; defined-
benefit or defined-contribution) that are indispensably pliable and discretionary in nature. The
fifth pillar is referred to all non-contribution support, informal (family), or formal (healthcare,
housing, and poverty programs). An outline of the →orld Bank’s five-pillar system is given in
Table 1.

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 Table 1. The World Bank's conceptual framework

 Elderly vulnerability and poverty prevalence in absolute terms and relative to

I. Inherited System

 Existing mandatory and voluntary pensions systems

other age groups

 Existing social security schemes

 Existing levels of family and community support

Initial Conditions II. Reform needs

Modifying existing schemes in the face of fiscal unsustainability, coverage gaps,

aging and socio-economic changes assessed against the primary and secondary
evaluation criteria below

III. Enabling environment



Demographic profile


Macroeconomic environment


Institutional capacity
Financial market status

 Protection against the risk of poverty in old age

 Consumption smoothing from work to retirement
Core Objectives of
Pension Systems

 Zero-pillar – non-contributory social assistance financed by the state, fiscal

 First-pillar – mandatory with constitutions linked to earnings and objective of

conditions permitting
Modalities for

 Second-pillar – mandatory defined-contribution plan with independent

achieving replacing some portion of lifetime pre-retirement income
objectives

 Third-pillar – voluntary taking many forms (e.g. individual savings, employer

investment management

 Fourth-pillar – informal support (such as family), other formal social program

sponsored; defined-benefit or defined-contribution)

(such as health care or housing), and other individual assets (such as ownership
and reverse mortgages).
 Adequacy
 Affordability
 Sustainability
Primary Evaluation
 Predictability
Criteria
 Equity
 Robustness

Contribution to output and growth through:

Secondary
 Lowering labor market distortions
Evaluation Criteria
 Contributing to savings
 Contribution to financial market development

Source: Holzmann et al., 2005

Apparently, the pension system can be organized in numerous ways, with

alternative allocations of functions to different institutions in the system. Although the
type and level of reforms required at which a multi-pillar scheme should adopt varies, all
economies face imminent problems within their old age systems. However, there is no a
suitable solution for all pension systems. Welfare reforms will be ideally conceptualized
if policymakers act with gnomon country’s objectives and national characteristics. The
accession of a multi-pillar solution carries complex challenges, including basic
macroeconomic and financial prerequisites essential for a multi-pillar reform. In addition,
governments need to elaborate a fiscally feasible plan to address transition costs. Multi-
pillar scheme devolvement may hide financial shortfalls, sufficient to undermine fiscal
stability due to lack of legislative support and precise refinancing assessment.
Governments face a formidable challenge to streamline system and processes, optimizes
revenue cycles and minimizes expenditures first before launching a multi-pillar platform.
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The scope of social security administration embodies the delivery of services and benefits
which are conducted in a responsible and accountable manner. System’s operations and
oversight responsibilities encompass those related to assurance and accountability. The
social security system principal objective is to deliver the promised welfare benefits and
services to beneficiaries. The aforementioned goal is achieved with administrative
efficiency: optimum use of resources, the use of sound investment practices, and the
promotion of better governance, fiduciary responsibility, transparency, and
accountability (Ross, 2004).
Social security systems are exposed to a wide range of uncertainties with some to
retain their risk properties in a perpetual state of change (Gillion, Turner, Bailey, &
Latulippe, 2000). A social security scheme should remain financially sustainable by
minimizing, monitoring and controlling all scheme specific risk factors, including
demographic, business, operational, liquidity, liability, economic, investment,
catastrophe, and political risks (OECDa, 2011). A well-designed social security system
should have certain characteristics: broad-based, affordable, actuarial, robust, and
sufficient (Park, 2010), and; certain desired properties: providing social insurance and
contributions relating to benefits, increasing the incentives to work, and reducing
inequities across demographic groups (Blahous, 2000); and certain principles: it should
cover all populations with no exceptions; the level of benefits should be in balance with
the level of contributions paid; welfare contributions should be withheld from employee
salaries or wages; social security schemes should be financially independent; social
security schemes should redistribute wealth from those who have to those who need it;
pension benefits should be adjusted over time in terms of current wage and inflation, and;
the social security scheme should be compulsory (Advisory Council on Social Security
(ACSS), 1997; Ball & Bethel, 1997).

2.4. Taxonomy of Pension Schemes

Lindbeck and Persson (2003) identified a three-dimensional taxonomy of pension
schemes. The classification is determined by the degree of funding, the degree of actuarial
fairness, and the degree of financial viability (see Figure 1). The categorization considers the
coordinate points I–V in the figure. The position I in the graph depict a pay-as-you-go pension
scheme, which is solely tax-financed and non-actuarial. The position II alternatively refers to a
fully funded, quasi-actuarial pension scheme. In position III and IV, depict the same pension
schemes, but they are actuarially fair. The notional defined contribution (NDC) system is
classified as a quasi-actuarial system (position II in the figure), while a provident fund lies in the
position IV.

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 III IV

VII VIII

II
I
Degree of Actuarial Fairness

V VI

Figure 1. Dimensional taxonomy of social systems

Source: Lindbeck and Persson (2003) in Lindbeck, Diamond and Valdes-Prieto (2006) Conceptualization of Non-
Financial Defined Contribution Systems. Pension Reform: Issues and Prospects for Non-Financial Defined
Contribution (NDC) Schemes. R. Holzmann and E. Palmer. Washington D.C., The World Bank.

Intuitively, the vertical axis refers to the level of funding, how a pension fund is
associated with increased national savings. As we move away from position I, the level of funding
decreases up to narrow funding. However, the position I is characterized as quasi-funding due to
market distortions. On the horizontal axis, the level of actuarial arrangements refers to the level
of the individual’s contributions are linked to his or her future benefits. As we move away from
position I, the level of actuarial fairness increases. However, position II is characterized as quasi
funding. The third dimension refers to the speed of structural and actuarial reforms. In position
V, a pay-as-you-go pension scheme is fully adjusted to structural reforms faster than actuarial
adjustments (quasi actuarial). Optimal positions are considered positions VI and VIII where
pension schemes are fully structured and actuarial adjusted. It should be noted that all three
dimensions are considered continuous variables (Lindbeck, Diamond, & Valdes-Prieto, 2006).
Pension systems can be generally arranged by (i) its legal status (public, private); (ii)
format (occupation, personal); (iii) type of arrangement (defined-benefit (DB), defined-
contribution (DC), hybrid, Provident Funds, Notional Defined-Contribution (NDC)); (iii) the
financing method (“pay-as-you-go” (PAYGO), fully-funded (FF)); and (iv) the type of coverage
(flat rate, universal, means-tested)

2.4.1. Public vs. Private Pension Schemes

Public pension plans comprise the backbone of social security. Public pension
plans are pay-as-you-go in nature, but some pensions are financed according to the
principle of partial funding or have been replaced by private pension plans. Most public
pension funds provide a defined-benefit component as part of public employee’s overall
compensation. These plans generally provide an income supplement or substitute in the
context of retirement, disability, and survivor benefits. Public plans function in a similar
way with those defined-benefit pensions in the private sector. Pensions in the public
sector are primarily financed by employee and employer contributions. These
contributions are usually invested in public financial instruments, so the pension fund is
financed in a secondary level through investment earnings that coming from interest
payments, dividends, capital gains.
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 Private pensions are mainly defined-contribution plans and defined-benefit plans.
A defined-contribution plan provides plan members with a predetermined level of
pension income prior retirement, which depends on the amount credited to employees.
Conventional wisdom indicates that the existence of a private “safety net” is justifies in
principle social security’s (senior support, family assistance, and invalidity insurance)
key role. Private systems have a direct impact on social security with the introduction of
alternative welfare designs and indirect impact on the preservation and betterment of
living standards. Private pension administration does not fall under the supervision of
government authorized bodies. Private pension plans may be managed by the employer-
sponsor, or other private financial intermediaries, such as a pension fund or financial
institution. The use of private pension plans sufficiently complements or even substitutes
the conventional public pension plans. Indeed, some countries are now positioned to
deliver exceptional and tailor-made pension solutions for public sector employees.
There are two main differences between public and private pensions. Public
pension benefits are typically indexed to inflation, virtually non-existent feature in private
plans. This effect can be mitigated by automatic adjustments to the pension in the
Consumer Price Index (CPI); a fixed rate adjustment to the pension regardless of the
actual inflation rate; and annual rate adjustments to the pension at the rate of inflation. In
addition, several segments of the public sector employees, in particular, public safety
officers tend to exercise earlier their retirement rights compared to private sector
counterparts. Benefit reductions for early retirement are substantially less than actuarially
fair resulting overall higher pensions for retirees throughout their retirement horizon.
Consequently, public sector employees incline to retire at an earlier age than private
sector workers do (Ponds, Severinson, & Yermo, 2011).

2.4.2. Personal vs. Occupational Schemes

Occupational pension plans commonly referred to as social insurance systems
linked to an employment or profession. Employers, and/or other involved parties such as
labor, profession, and industry associations are entitled to establish occupational pension
plans for their employees or professional groups, collectively or personally. Pension plan
management lies to the founder or a third party like a pension fund or a financial
intermediary. In the latter case, the plan founder may retain the supervision mechanism
regarding fund’s operability.
Occupational pension plans provide pensions and other services (unemployment,
sickness, maternity, or work injury) based on the period of employment or self-
employment. The level of contingent benefits is usually linked to the level of
contributions and the paid period. Occupational pension plans are voluntarily financed
on solely or to a greater extend from contributions made by the sponsor, plan members,
or both whereas for certain categories pension contribution have a compulsory character.
There are two categories of occupational schemes: Mandatory and voluntary
occupational pension plans. In the mandatory pension plans, employers have the statutory
duty to participate in a pension plan and employees will ordinarily be required to join.
Voluntary occupational pension plans, alternatively are considered as substitutes for the
public social security system providing similar benefits. These plans are categorized as
voluntary, regardless of the employers have to keep up with sponsoring these plans if
they want to remain partly exempted from welfare contributions and taxes. Individual
13
participating contracts are unrelated to any employment relationship. Personal plans are
individual investment arrangements with the primary purpose to provide supplement
benefits. As in the mentioned types above, pension plans are solely managed by a third
party, such as a pension fund or a financial intermediary. The individuals exercise
personal control over the participation and the investment arrangements. The employers
solely contribute to personal pension plans; in certain instances, restricted membership
may apply.
Personal pension plans have also been divided into mandatory and voluntary
pension plans. In the mandatory personal plans, individuals are usually required to opt in
a customized pension plan of their choice, or a standardized-type pension plan. In the
voluntary personal pension plans, individuals opt out their contribution right. Personal
pension plans created to complement to basic social security benefits are also classified
under this category.

2.4.3. Defined-Benefits (DF) Pension Schemes

A defined-benefit pension scheme provides pre-specified benefits typically based
either on the absolute monetary value or estimated on the employee’s earnings history
(percentage of the final salary under which the pension is estimated by considering the
average of last past years of salary, usually last 5, multiplied by a factor know as accrual
rate), tenure of service and age. Employees are encouraged thereupon to review their
pension arrangements by estimating their desired retirement income on how many years
of service are required for retirement. The guaranteed pension benefits are funded through
employer contributions, investment earnings and, employee contributions. The pension
benefits at retirement are generally monthly annuity payouts (i.e., a series of monthly
payments made over the employee’s lifetime). Replacement rate determines the level of
pension benefits given each time, so investment risk is spread across members of different
ages, who pay different contribution rates, and over different time horizons. Defined-
benefit pension plan allows part of benefits to be transferred to a beneficiary’s spouse if
death occurs either before or after beneficiary’s retirement (Muralidhar, 2001).
Defined-benefit pension plan overall provides generous benefits to its members,
which makes defined-benefit pensions extremely expensive for both public and private
funds. Potential imbalances can be absorbed by the state budget, but this is unbearable
for the employer that is why most companies have scaled back or switched, to a defined-
contribution plan instead. However, the emergence of a funding gap comprises one of the
fundamental underlying concerns that a non-government defined plan has to encounter
(Asad-Syed, Muralidhar, & Van Der Wouden, 1998). In addition, different interest rate
and salary assumptions can have a substantial effect on pension contributions given
plan’s characteristics. Employees are exposed to the risk of low final wage – wage cuts,
involuntary employment termination (prior to retirement), and early retirement – and may
compel to pay an implicit fee to the defined-benefit pension plan (Godoy & Valdes-
Prieto, 1997).

2.4.4. Defined-Contributions (DC) Pension Schemes

A defined-contribution scheme is a type of retirement plan, in which, the amount
of the employer’s contribution is specified. Employer contributions assorted by employee
contributions, a predetermined share of his earned pretax income. Future pension benefits
14
fluctuate with investment earnings. Defined-contribution pension scheme allows
employees to withdraw or rollover their assets when they change employment. The
account may experience investment gains or losses, so only the initial contributions are
guaranteed. Therefore, the pension income level remains uncertain because it solely relies
on portfolio’s investment performance: asset portfolios exhibit substantial heterogeneity
across individuals, even with identical contribution histories due to their diverse risk
preferences. In contrast with defined-benefit plans, DC plans are not insurance-type
plans. Defined-contribution plan finite time horizon falls in with individual’s lifetime and
does not allow room for bequests. In addition, the variability of terminal outcome renders
annuities expensive exposing beneficiaries to longevity risk (Modigliani & Muralidhar,
2004).
Typically, individual accounts are managed by an independent financial
institution while employees keep watching over investment decisions, including
management fees and operating expenses. In the pension phase, deferred taxable income
accumulated and earned within the account is not realized until withdrawal from the
beneficiary. Members typically have control over the decision-making process; however,
plan sponsor also retains to a certain extent the fiduciary duty over investment allocation
techniques (including the asset selection, portfolio diversification and administrative
providers). Upon retirement or permanent termination of employment, the plan sponsor
is no longer liable for pension plan activities. Overall, studies showed that defined-
benefits plans have the tendency to outperform defined-contribution plans due to lower
structure fees and preeminent investment management (Orszag & Stiglitz, 2001).

2.4.5. Hybrid Pension Schemes

Hybrid pension schemes combine defined-benefit and defined-contribution plan
features. In general, these plans maintain a parallel structure where the defined-
contribution component and the defined-benefit component are addressed to employee
and employer, respectively. In hybrid pension schemes, the risk is shared between the
employees and the employer. Employees typically face investment risk and conversion
risk when they retire as well as wage growth or inflation risk. Employers on the other
hand, usually bear the contribution risk in attempting to maintain the agreed level of
benefits. The hybrid approach based on defined-benefit characteristics offers tax
incentives for employees to participate, whereas allowing them to convert their defined-
contribution accounts to lump sum or rollover into an IRA or even an annuity (Broeders,
Chen, & Rijsbergen, 2011).
Another type of hybrid design is the “cash balance” approach. Under this design,
individual accounts are established for employees and credited with a set percentage of
the employee’s pay plus interest at a rate established by the plan. The amounts accumulate
over time and, at retirement, either are paid in front or with the use of correspondent
annuity, at the election of the employee. Private hybrid plans are typically financed solely
by the employer, whereas public hybrid plan funding lies to both government and
employees (Eitelberg & Crane, 2008).

15
2.4.6. Provident Funds
Provident funds, a variant of defined-contribution plan, are “publicly
administered mandatory occupational retirement savings schemes” (Dixon, 1996).
Contributions deducted from the employees’ earnings are accompanied mostly by level
equivalent employers’ contributions. A publicly managed account set for each individual
where accumulated contributions are conservatively invested offering a modest rate of
return. Under a provident fund, the beneficiary will receive a single cash lump sum equal
to his accumulated contributions in addition to interest without offering any side benefits
like other type of programs do, irrespective of the plan’s type (defined benefit or a defined
contribution). However, pre-matured withdrawals in certain circumstances can be made
prior retirement to finance housing needs, medical treatment, marriage expenses, higher
education, or other contingencies. Upon retirement, entitled members are encouraged to
convert their cash benefits into an annuity or pension monthly payments.
Provident funds operate mainly in former British colonies of Central and
Southeast Asia (Saunders, 2001). Despite the fact that most of Asian social welfare
systems are outdated, provident fund’s type is considered the most successful social
security model. However, there are three major drawbacks: (i) individuals are allowed to
make in-between withdrawals, or borrow from their accounts without a repaying penalty
and interest; (ii) individuals bear the investment risk, unable to choose their investment
policies and, therefore, bear the level of risk as given; and (iii) the strict investment
regulation limits fund management to apply conservative investment policies that may
lead to fund’s underperformance (Bateman & Piggott, 1997; Thillainathan, 2004).

2.4.7. Notional Defined-Contribution (NDC) Schemes

Notional defined-contribution (NDC) schemes are new varieties of programs
byproduct of the new pension reforms (Feldstein, 2002). NDC plan has defined-
contribution and pay-as-you-go characteristics (Cichon, 1999). However, NDC account
differs from the traditional pay-as-you-go scheme in terms of structure: the individual
account is established for each member is notional (virtual) rather capitalized; it may be
described as an unfunded defined-contribution scheme.
NDC program adopts pay-as-you-go method of financing (payroll taxes), which
means that welfare contributions are used directly to pay current retirees, but what people
have to pay in is fixed, rather than what they will get out in the future. The actual money
involved is paid out again straight away to fund today’s pensions, but contributions
records exist only as a series of individual claims in the books of pension fund’s
headquarters. Pension plan credits accumulated contributions to the notional account
balances each year. Just as it would in a defined-contribution system, the notional sum of
money in each person’s account grows on its own, through being pegged to changes in
the earnings base. Upon retirement, the NDC accumulated account is converted into an
annuity proportional to the notional assets. The strongest point of notional defined-
contribution scheme is flexibility. The promised rates of return reflect the pay-as-you-go
structure of the fund rather than being market-based. The annuity rates are based on a
formula, which automatically adjusts payments to change of fundamentals (life
expectancy, contribution rates) offsetting the actuarial balance of the fund. Beneficiaries
can check the balance of their notional accounts regularly. These distinctive features
provide an incentive for beneficiaries to postpone their retirement (Gray & Weig, 1999).
16
Besides, the political environment has been reluctant to occasional modifications in pay-
as-you-go programs, so the existence of an inherent stable system is beyond any doubt
appealing and plausible (Inter-American Conference on Social Security (CISS), 2005).
While pay-as-you-go schemes have redistributive characteristics, the notional
defined-contribution schemes are designed not to. The premium payments are invested
in debt instruments to finance public expenditure rather than on private markets to boost
economic activity. The absence of the redistribution feature constrains beneficiaries to
their past contributions including interest earned. As a result, private savings will
experience a downward trend. Overall, it will have negative implications for low income
employees who will become worse off under a notional defined-contribution scheme than
under pay-as-you-go scheme (Williamson, Shen, & Yang, 2009).

2.4.8. Pay-as-you-go Pension (PAYGO) Schemes

Pay-as-you-go pension systems are types of pension arrangements and based on
inter-generational transfers. In particular, wage taxes and welfare contributions of current
workforce support current pensioners. In anticipation of future contribution cash flows,
the state does not have to proceed on asset accumulation; the benefits simply paid as they
become due. The latter applies only if current benefits match current contributions. The
majority of public welfare systems is primarily pay-as-you-go. The underlying motive
for having a pay-as-you-go pension is relied upon an efficient contribution mechanism
and in inter-generational transfers. Theoretically, it is possible for every generation to
obtain higher benefits than contributions paid given that the welfare rate of return exceeds
the market rate of return indefinitely (Samuelson, 1958). This assumption holds as long
as the economy experiences sustain technological progress, constant population growth,
and excessive capital accumulation (Aaron, 1966). Empirically, sustain economic growth
seems unattainable, so pay-as-you-go’s role focuses on intergenerational transfers of risk
and wealth.
The source of financing is subject to demographic, economic, and political risks
resulting fund revenues to experience high volatility (Feldstein & Liebman, 2002). If the
fund begins running a deficit, the dependency ratio (number of retirees / number of labor
force) increases. Pension liability can be assessed either by (i) an upward shift in
contribution rates; (ii) a decrease in benefit rates; (iii) increases retirement age limits; (iv)
advance-side income taxes; or (v) some mixture of these four factors. This raises concerns
regarding the fairness of the system since some generations will be better off at the
expense of others receiving higher pension benefits. Only fully-funded plans are in a
position to circumvent inter-generation trajectories (Wilson & Ho, 2005).

2.4.9. Fully-Funded (FF) Pension Schemes

Fully-funded pension schemes are generally, but not necessarily privately
managed defined-contribution arrangements and rely upon private savings. Tax-based
contributions are invested in financial assets or any other form of entitled investment.
Upon retirement, beneficiaries are entitled to receive their accumulate contributions plus
the expense deducted, after-tax investment gains. The beneficiaries may accordingly
decide to make scheduled withdrawals, purchase an annuity from an insurance company,
or opt out for a mixed solution. The terminal level of benefits is subject to heterogeneous
economic parameters, such as financial markets, interest rates, and inflation. Fully-
17
funded schemes introduced to offset pay-as-you-go schemes’ inefficiencies (World Bank,
2006). First, macroeconomic shocks can create disparities in the distribution of
distribution of wealth between generations leading to economic inequality among
individuals and groups within the society. Fully-funded schemes efface inter-generation
transfers, and minimize pension’s exposure to demographic risks. Secondly, pay-as-you-
go schemes are funded from tax levies, so potential financial imbalances will emerge a
vicious circle of tax increases. Fully-funded scheme dissociates financing from tax
burden and diversifies investment risk. The accumulated contributions are invested in
financial instruments to build up a fund that will be sufficient not only to pay benefits but
also to meet any potential predicaments. Finally, fully-funded schemes stimulate
economic growth by channeling funds into capital markets, which provide avenues for
effective and optimal allocation of funds for long-term investment purposes (James,
1996).
It is often asserted that fully funded systems are isolated from demographic risks.
The aforementioned assumption holds if the rate of return on the funds is not subject to
demographic risks. Certain occupation pension schemes can be subject to demographic
risks: occupational DB pension schemes with fixed annual premiums (continuation
premiums) on common accounts (instead of individual accounts) with an on average
older population that uses prospective mortality tables (instead of fixed mortality tables)
bears a serious longevity risk (Stevens, 2001). Indeed, Brooks (2000) shown that baby
boomers are vulnerable under the FF system. Simulation findings shown that a downward
trend of interest rates due to longevity affect significantly pensioners’ wealth. In general,
a fully funded pension scheme is viable, as long as the market values of assets equal the
actuarial present value of promised retirement benefits (Novy-Marx & Rauh, 2009).
Hence, actual funding ratios (pension assets to liabilities) are less than 100 percent,
implying that continue maturity of the pension fund will not result in higher levels (Bohn,
2010). In the United States, pre-financial crisis funding ratios were over 80 percent, many
state and local pension funds are now seriously underfunded (Munnell, Haverstick, Sass,
& Aubry, 2008).

2.4.10. Flat Rate Schemes

Flat rate or basic schemes are a type of defined benefit plans, whereby pension benefits paid either
by the same amount to every beneficiary, or based on working history of the individual without
considering past earnings.

2.4.11. Universal Schemes

Universal programs offer fixed comprehensive pension compensations to entire
population regardless of income, employment, or other means. Universal program
objective is to reduce social inequalities, including population groups in the informal
sector. These programs are usually funded from fiscal budget. Universal programs
embodied financial assistance to elderlies; temporary or permanent disabled employees;
secondary beneficiaries (survivors) and orphans; poor families (family allowances). In
most of the countries who adopted multi-pillar schemes, the second pillar, generally
builds on the preexisting universal programs. Although universal program funding lies
solely to fiscal budget, some program types merely included pay-as-you-go financing

18
features. Universally available schemes can be broadly sub categorized as mandatory or
voluntary.

2.4.12. Means-Tested Schemes

Means-tested plans are defined-benefit plans aim the poor retiree population who
live at subsistence level or have special needs in the form of social assistance and support.
The value of benefits is usually limited to the unemployed beneficiaries who satisfy
certain criteria considering income from other sources, such as a supplementary income,
assets, and family resources. Most of the countries have developed analogous programs,
which vary in size and type. These programs work as safety nets, benefiting everyone
during recession periods, especially those who experienced career discontinuities. The
administration of means-tested programs is usually enacted by local public agencies.

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21
Chapter III
Social Security Theory
By Evangelos Koutronas

3.1. Social Security at a Glance

There is no country in the world without any form of social security. Some
systems are still in their infancy, others well-established, but in the end, all are
conditioned to economic, demographic and cultural characteristics of each country. In
developed countries, social security systems initiated to accomplish three objectives:
fight poverty; provide social assistance, and; promote social cohesion. Despite certain
commonalities, social security systems exhibit substantial differences among developed
countries in regard to the objectives, scope, coverage, benefits, and role of the public and
private sectors in the welfare landscape.
In developing and less developed countries, social security systems initially
adopted elements of the traditional European social security models, particularly Latin
American countries during the inter-war period. However, social security systems have
significantly deviated from the original blueprint by giving emphasis to their
socioeconomic and political complexities. Modern welfare schemata were introduced by
other countries of Latin America as well as in many states of Asia, Africa, and the
Caribbean. A summary of social security systems across regions is shown in Table 1.1.

Table 1.1. Types of mandatory systems for retirement income in the world

Flat Earning Mean Occupationa Individual

Contine Univers Provide
Rat s- s- l Retirement Retirement
nt al nt funds
e related tested Schemes Schemes

Europe 16 39 25 2 0 2 4
America 3 34 17 2 1 1 6
Asia
and
Pacific 11 24 14 5 12 3 4
Africa 0 38 4 3 4 1 1

Initial data were taken by International Labour Office (2010). The above table was
developed by the Author.

The majority of countries provides old-age benefits through defined-benefit

programs (flat rate, earnings-related, means-tested) based on social insurance
fundamentals. European welfare systems follow generous redistribution policies that go
beyond the government budget. The welfare systems in the American continent are
mainly oriented towards define-contribution programs. The less generous social policies
rely primarily on private sector in terms of funding and provision of services. An
22
increasing number of countries in Latin America provide individual retirement programs.
Asian welfare systems are characterized by a mix of public and private interventions,
along the three dimensions of provision, finance and decision. East Asian welfare systems
have pointed toward a socially inclusive welfare state while maintaining their
developmental credentials. All countries in Southeast Asia developed national mandatory
savings plans known as provident funds. In Africa, coverage is limited to those working
in the formal sector with the vast majority of the population located in the informal sector
remain uncovered.
Most of the systems developed worldwide have demonstrated considerable
variation in welfare provisions. These can be categorized in terms of period and benefits
distribution and addressed to different occupations and categories of employees. These
may be characterized in contingencies that are designed to facilitate the transition state,
such as employment injury benefits, employment sickness benefits, and maternity
benefits, and unemployment benefits; and contingencies that are designed to
accommodate assistance to vulnerable segments of the population, such as child support
grants, family allowances, survivor allowances, and invalidity allowances. The latter
contingency programs still remain at a very embryonic stage. In general, empirical
findings have shown that there is a trade-off between income redistribution programs and
economic growth. Countries that experienced sustained economic growth inclined to
support extensive welfare policies. Although social policies have a direct impact on social
welfare, they monopolized government agenda, undermining thus state fiscal capacity in
the long-run. In less developed countries, social security is limited in terms of services
and coverage. Public sector usually receives the lion’s share of social welfare programs,
while large segments of the population have limited or no access to social assistance and
healthcare services. Mandatory pension schemes serve as a benchmark for social security
architecture but varied significantly when it comes to the provision of benefits
(mandatory, voluntary). The highest old age coverage is found in North America and
Europe, the lowest in Asia and Africa. A summary of social security programs across
regions is shown in Table 1.2.

23
 Table 1.2. Types of social security programs in the world

Old age
Disabilit Sickness and maternity Wor
Family
y k
Unemployme
Countr Cash
Injur nt Allowance
y and Benefit Cash Benefits
y s
s plus Medical
Survivor for Care
s both

Europe 44/44 44 44 44 44 44
Americ
36/36 32 22 35 12 15
a
Asia
and 46/48 25 25 43 21 16
Pacific
Africa 42/44 10 19 35 4 24

Initial data were taken by International Labour Office (2010). The above developed was
developed by the author.

The majority of countries with well-established social security systems, most of

the population has full access to welfare benefits and services, while social assistance
plays only a supplementary role offering side- income and benefits support to the
minority groups who are welfare excluded. Despite the fact that most of the world’s
population has access to health care services, sickness and maternity benefits,
approximately one third lack of fair and equal access to any health facilities or services.
Basic security in the event of unemployment exists in approximately 40 percent of
countries listed. In Europe, this number is twice as high, while Africa exhibits the lowest
proportion (International Labour Organization, 2010).
European and American countries have extended coverage. The programs have
commonly designed to cover wage and salary workers against loss of income due to work
injury, and then old age and, less commonly, disability. In Asia, the implementation of
similar programs has come via the institutional form of provident funds. Most provident
funds provide coverage for wage and salary workers in the government and private sector.
A few funds have exclusions based on the worker’s earnings or the size of the firm. Funds
that exclude employees with earnings above a certain level from compulsory coverage
may in some cases give them the option to affiliate or continue to participate voluntarily.
Africa are at different stages of creating comprehensive and inclusive social security
systems. Coverage on the continent however, is much lower compared to the rest of the
world.

24
3.2. Social Security in a Historical Context
The idea of social protection was driven by the need to protect the emerging
working class during the industrial revolution. Bismarck's work-based earnings model in
the 1880s and Danish’s universal flat-rate model in 1891 instituted to provide limited
coverage and meager benefits to disabled workforce. The German Chancellor enacted
sickness insurance bill in 1883, followed by the accident insurance bill in 1884, and old
age & disability insurance bill in 1889. There were three main features in the German
social security scheme: compulsory insurance; self-financing autonomous pension
institutions; and the accrued distributed benefits should be proportionate with the income
levy. The Danish model on the other hand was based on the principle of Universalism or
citizenship rather than social insurance contributions. Based on the 1803 Poor Law, the
1891 law enacted to reform the current welfare state and to enhance it with the
introduction of old-age assistant law and the sickness insurance law. The citizenship
principle was given more emphasis to the individual rather to the family. Most social
rights like pension and insurance were directly linked to the individual, whereas social
assistance and mutual aid subsidies were associated with the family level. These
government subsidies were means-tested benefits available only to registered members,
who met certain requirements. Following their footsteps, several European countries
created analogous social pension schemes the ensuing decades: for example, British Old
Pension Act (1908) and Insurance Act (1911), Swedish compulsory old-age pension
(1925), and Swiss Act (1935) (Gordon, 1988).
During World War II, country after country conceptualized the need to develop a
comprehensive social security system. Britain represented its own variant of the welfare
state as an alternative to the German model. In contrast with the German model, the
Anglo-Saxon social security model maintained the flat-rate distinctive feature (Veit-
Wilson, 1992). The Beveridge Committee’s report envisioned a universal social security
system that ensued full employment and run through public institutions of social
protection. All employees would be eligible for flat-rate insurance benefits independent
from loss or reduction in income provided entirely by the state (flat-rate contributions) as
well as of flat-rate pensions that would ensure a minimum income and medical treatment
(Gordon, 1988).
In general, the German social security model was adopted in principle by most
continental European countries whereas the flat-rate and mean-test approach were
favored by the British Commonwealth and Scandinavian countries, respectively. Many
scholars believed that the decentralized organizational structure of the Bismarckian
model seemed to be more effective and efficient compared to the centralized, unified
Beveridgean model because its less exposure in operation and fund-contribution risk.
Although the Anglo-Saxon type of social security characterized by lower level social
spending compared to other European countries, it was progressively driven to adopt
selective social benefits and to partly privatization under the weight of a recession. In
practice, the benefits Beveridgean model provided were relatively close to the poverty
level, while the Bismarckian model provided usually a decent standard of living (Conde-
Ruiz & Profeta, 2003). Despite of the fact that Scandinavian countries adopted the Danish
model, their social-democratic welfare states provided versatile universal services with
greater ability to deal with income inequalities (G. Esping-Andersen, 1990; G. Esping-
Andersen, 1999).
25
 Until the First World War, social insurance initially had been incorporated to
social welfare programs as a supplemental component, whereas now social insurance
programs were seen as positive alternatives to social assistance programs. During the
interwar period, social security extended to branches of unemployment and occupational
disease. The insurance for self-employed established in the 1950s. After the Second
World War, most developed countries experienced a twenty-five-year period of sustained
economic growth. Governments allocated a significant part of their budgets for welfare
expansion, in a context where public expenditure and aggregate demand were seen as key
ingredients of the economic growth strategy. The systems in the 1960s became more
comprehensive and generous based on the above growth conditions as well as on the
conditions of low interest rates, high wage growth rate, and high birth rate (Gordon,
1988).
However, the stagflation along with 1970s energy crisis slackened most of the
developed economies, which in conjunction with the reduction in pensionable age no
average and the increased longevity put the welfare state’s future to uncertainty. The
1980s marked by the prevalence of neoliberal economic policies proceeded to partly of
fully privatization of social security schemes, which followed by a phase of skepticism
about their effectiveness in 1990s. Growing criticism with regard to the development
deficiencies, those policy blueprints produced led eventually to new debates worldwide
(Gordon, 1988).
Since the middle of the 1970s, these models have been in crisis and under reform.
As the pension systems reached their maturity, they faced productivity as well as
demographic pressures; the growing level of pension expenditures will not fully be
covered through tax financing in the near future. The full financial impact on public
finances was not immediate observable until the first generation begun to retire.
Governments initially proceeded to program improvements, however, the challenge
remained: how to prolong the current pension systems’ financial life while maintaining
their efficiency. Reformers emphasized the need of a new social model. The financial
challenges pension systems faced were still strong and it was time for the policy makers
to set the foundations of a new social model.
3.3. Theoretical Framework of Social Security
The concept of the welfare state is thoroughly studied by Titmuss (1958); Esping-
Andersen (1990); Palme (1990); Ferrera (1996); Korpi & Palme (1998); and Gough
(2004). The taxonomy of welfare states has initially been identified by Titmuss (1958)
into three different regimes: the residual welfare model, the institutional-redistributive
model, and the industrial achievement-performance model. In the residual welfare model,
the state's role is limited to ensure a safety net, and intervene when the free market
mechanisms and family are unable to meet a minimum level of decent living conditions.
Based on the philosophy of laissez faire, the model applies selective mechanisms of
residual cover after control of incomes and needs of the beneficiaries. The institutional-
redistributive model on the other hand, aims at universal coverage of needs, irrespective
of the mechanisms of the free market. The criterion for welfare state intervention does
not constitute the working performance, but the existence of an emergency. Finally, in
the industrial achievement-performance model, the social needs are covered based on
productivity and work performance following the principle of meritocracy and
professional status.
26
 Using a series of complex criteria that combine both how and the extent of
awarding benefits and the relationship of each social security system in the market, and
the effects of the process of social stratification, Esping-Andersen (1990) distinguished
three types or worlds of the welfare state which show several similarities with Titmuss
models. The liberal Anglo-Saxon model provides selectively minimum benefits; it
provides means-tested assistant and mainly welfare services. It corresponds to Titmuss’s
residual model with the exception here the state takes care of welfare. United States,
Canada, and the United Kingdom welfare pension schemes are characteristic paradigms.
The conservative-corporate model focuses on the profitability of the market and the
commercialization, like the liberal model, but maintains distinctive differences in terms
of social status. In contrast with the liberal model, the role of private insurance is limited,
while great emphasis is given to traditional family standards. There are also diacritical
differences in their regulatory framework and distribution and benefits. Diacritical
differences are also depicted to the regulatory framework as well as compensatory
benefits. It corresponds to Titmuss’s industrial achievement-performance model.
Germany, France, Italy, and Austria welfare pension schemes are characteristic
paradigms.
Finally, the third world welfare state is the social-democratic, found in the Nordic
countries. Under the universal coverage doctrine, the state guarantees full employment,
and social services to the middle class, an established class devoted to the public system.
Its main characteristics: general taxation financing, social services policies, and low grade
of normativity. The socialistic social welfare concept guarantees a satisfactory standard
of living for the entire population, regardless of status of employment, or the level of
income while acts proactively in terms of family support. This model matches with the
institutional-redistributive model which Titmuss (Kontiadis, 2008). Kvist (2000)
distinguished the role of social protection in the society and the interaction of the three
pillars of social security (state, market, and family). In pre-social security era, people
relied mainly upon their families. Social assistance was intricately linked with the idea
of Good Samaritan including communities, communions, businesses and financial
institutions to help them in an emergency. People at that time were self-sufficient
achieving a level of livelihood security. They gathered, hunted, herded, and cultivated
their own food, made their own clothing, assembled their own tools, weapons, and build
their own shelter. In modern times, human capital accumulation has been the prerequisite
for industrial and economic growth. The high demand for labor opened labor market to
the female population. The increasing commodification of women had as a result the
gradual de-familiarization of family security. The state stepped in to cover this gap with
the introduction of social security. State subsidized familiarization with the provision of
family assistance programs (childcare, daycare, maternal and parental leave, child
support, etc.). A summary of welfare state operations is shown in Figure 2.2.
Decommodification is the fundamental concept in the Esping-Andersen’s welfare
state theoretical framework used to appraise social welfare detached from the market
mechanisms that capitalism dictates (Kontiadis, 2008). The commodification of labor
constrains to a great extend the potential development of labor power because it is used
as a mean of exchange rather as a source of service. This can be corrected via syndicalism
that gives power to labor class. Therefore, decommodification of labor became the
principium of social democracy (Huo, Nelson, & Stephens, 2008).
27
 Figure 1.1. The operations of welfare.

Source: Kvist, 2000

The decommodification concept as a fundamental objective of social protection,

though seems to be highly debatable attracting widely converging volumes of critical
commentary on theoretical as well as on empirical level (Orloff, 1993; Room, 2000). The
decommodification of labor concept refers to the labor force as a whole and does not
capture human development and skill investment, ignores individual needs in terms of
autonomy and satisfaction, and fails to take into account other individual characteristics
such as religion, ethnicity, and gender. Furthermore, the welfare state model
identification and country allocation between them seem to ignore the monadic
geographical, demographic, social, economic, cultural, or any other national patterns of
each country, thus render this attempt misleading. Finally, it overstates the major
components of the welfare programs like health, education, and housing that does not
confront with the welfare state patterns or with the national social policies (Gough, 2005).
The recognition of the social security concept as a human right is inherent to all
people just like other fundamental rights. Commodification characteristic contradicts
social welfare’s holistic approach. It is more likely addressed to individual welfare.
Broome (1991) and Sen (1991) related welfare with utility: welfare simply satisfies
individual desires, needs, and preferences for security. The maximization of individual
welfare is subject to individual budget constraint. Social welfare on the other hand,
intends to satisfy the overall good of the society. The maximization of welfare is subject
to both minimum and equality constraints (Hamlin, 2007). Diverse classifications may
therefore be performed as separate mechanisms of the social security system. For
example, the categorization on four types of social security systems, with regard to the
question of whether their main aim is to guarantee a minimum income for all citizens
who have reached the age of retirement (J. Palme, 1990). Based on this criterion, Palme
distinguishes the following models: the targeted model, the voluntary-subsidized model,
the corporatist model, and the basic security model. Palme used similar features on his
model classification with those of Titmuss and Andersen models. Korpi & Palme (1998)
finalized the model by adding a fifth model, the encompassing model.

28
 This model encompasses all citizens, unrelated with income status, into a
sufficiently comprehensive social welfare package of benefits that solely supervised by
the state. This universal coverage of the population with contribution elements created
the “redistribution paradox”; the new system favored low-income beneficiaries compared
to middle and high-income counterparts (Bergh, 2004). The scientific debate regarding
the welfare state models went beyond Esping-Andersen’s three worlds, identifying at
least another three models that showed up later on: the welfare State, under a special
regime transition countries of Eastern Europe, which was called post-communist
conservative corporatism (Deacon, 1992; Sapir, 2006); family-oriented, Confucian
model of Japan and the newly industrialized countries of Eastern Asia (G. Esping-
Andersen, 1994); and the South European template (M. Ferrera, 1996).
At the turn of the twentieth century, welfare state deadlock and retrenchment were
seminal for the evolution of new dynamics in the social reform context, emphasizing the
significance of former social policies as well as the role of involved parties in the welfare
state (Pierson, 1994). The path-dependence theory argues that welfare is an integral part
of the society, so any partial or total structural, economic, political, and technological
system transformation is directly linked with the society’s transformation. The archetype
of this theory is that set of decisions taken for any given circumstance was limited by the
decisions taken in the past, even though past circumstances are no longer relevant
(Bianco, Gerali, & Massaro, 1997; Pierson, 2000).
According to Gough (2004), the traditional welfare classification should leave
behind. Regions adopted the same welfare model, however, countries’ socio-economic-
political development through time shows significant signs of divergence from the initial
pattern. Investigating one hundred one welfare schemes worldwide, he pinpointed the
following cross-regional patterns in terms of state education and health expenditures,
private health spending and the combined international inflows of aid and remittances:
1) Actual or potential welfare state regimes: welfare systems mimicking the
Bismarkian welfare model. This model was adopted by continental a few Eastern
European countries, Latin American countries in the south, the African states of
Algeria, Tunisia and Kenya and Thailand from Southeast Asia.
2) More effective informal security regimes: welfare systems close to the Beveridgean
welfare model. This cluster consisted by countries, mainly from Southeast Asia –
including China and Sri Lanka – with the remained countries of Latin America and
some countries from the Middle East.
3) Less effective informal security regimes: welfare systems prone to Beveridgean
welfare model, but with below-average functions in terms of spending, protection
and benefits. In this category was comprised by South Asian and certain sub-
Saharan African countries.
4) Externally dependent insecurity regimes: welfare systems with poor organizational
structure. These systems are heavily dependent on subsidies and external aid. This
cluster includes the sub-Saharan African states with available data.

Furthermore, a common notion existed amongst gender scholars that a gender

approach requires a rethinking of the welfare state and its history (Lewis & Ostner, 1994).
Under this perspective, citizenship and civil society play a catalytic role in the policy
formation process (Hobson, 1997; Miller, 2006).
29
3.4. Welfare States
Despite the fact that most countries followed a similar pattern on their welfare
structure, there was a considerable diversity in the way welfare policies implemented
reflecting on the level of their socioeconomic development. These differences also depict
the sociopolitical and cultural complexities regarding the roles of individuals, families,
local communities, employers, financial markets, and the state. Therefore, a general
social model anaphora will be somewhat inaccurate. In fact, social welfare literature
underlined the need to categorize social security based on the countries different political
prevailing systems (regimes) in place of welfare programs content. The dividing lines
amongst states go beyond the role of the state, family, and basic social protection. Even
the complementary role of welfare provisions at different levels – universal benefits,
occupational benefits, and means-tested benefits – is perceived differently from country
to country.
The majority of the social welfare schemes can be characterized as defined-
benefit, however, certain countries chose a mixed welfare strategy consolidating defined-
contribution element with that of defined-benefit. For instance, in the British employees
can opt out of the basic social security program replacing the earning-related program
with a private personal account with defined contribution characteristics. Alternatively,
Italy and Sweden have launched an additional pay-as-you-go defined-contribution plans,
named notional account plans. Furthermore, Sweden announced the operation of a
mandatory funded individual account in replacement of its defined benefit program where
employees can actively participate in investment process. Iceland, Ireland, Norway, and
the Netherlands provide a universal-type benefit programs that are related to work
experience while Denmark pension programs are not based on having worked (Turner,
2001).
Each of the welfare states can be identified signs of divergence in the context of
social spending, social security coverage, and the labor market formation and regulation.
For instance, Nordic (Denmark, Sweden, Finland and The Netherlands) welfare schemes
are based largely in the development of universal, mutual provision of benefits. Labor
unions shape to a greater extend the arrangements of employee compensation and
benefits. Anglo-Saxon (Ireland and the United Kingdom) welfare schemes rely on a more
residual motive of social assistance characterized by anemic collective bargaining power
in compensation as well as in coverage. Continental (Austria, Belgium, France, Germany,
and Luxembourg) welfare schemes exhibit analogous features with those of the Nordic
countries. Welfare systems are heavily subsidized in the provision of pensions and
unconditioned benefits. Active labor market arrangements are less prominent in the
formulation of the economic policy than those in the Nordic welfare states; trade union
decision-making power remains strong in collective bargaining agreements despite the
low participation rate. The Mediterranean (Greece, Italy, Portugal, and Spain) welfare
schemes correspond to a synthesis of the aforementioned European welfare systems. The
Southern European welfare systems are also heavily subsided, but in contrast with the
continental counterparts, they concentrate to the provision of pension benefits and less to
unconditional benefits. Employment protectionism and early retirement outline the labor
market landscape. Finally, the Central-Eastern Europe (Poland, Hungary, Former
Czechoslovakia (now Czech Republic and Slovakia)), Baltic (Estonia, Latvia, and
30
Lithuania) and the Balkans (Former Yugoslavia (now Serbia, Croatia, Bosnia and
Herzegovina, Montenegro, Kosovo and FYROM), Romania, Bulgaria and Albania)
welfare schemes are comprehensive social security systems organized in a highly
centralized government-run system. Communist welfare systems were characterized by
cheap but poor welfare services, high subsidies literally in everything and minimal market
mechanisms. Communist welfare systems are funded from the public budget and from
compulsory deductions from industrial and agricultural enterprises. The communist
party-state exerted increasing control over labor unions, so collective bargaining was
virtually non-existed. Figure 2.3 summarizes the welfare states.

3.5. Nordic welfare Model

The Nordic welfare state regime is referred mainly to Finland, Denmark, and
Sweden, due to their membership of the European Union, but also includes Norway and
Iceland. Nordic countries economic model comprises a distinct set of institutions,
covering the State and local government, involved parties, and market forces. In contrast
with most of the European countries, Nordic countries adopted the Danish welfare model.
However, after the World War II, their diacritical differences under social, economic,
political, geographical, and natural resources context lead to their own economic and
social models. Nordic countries developed comprehensive social welfare schemes,
compulsory work injury insurance, employment programs, and unemployment benefit
societies perfectly aligned with the “social-democratic model” (G. Esping-Andersen,
1990). The primary aim of the state is to provide satisfactory standards of living for the
entire population regardless of employment or income of the recipient, enhancing
individual autonomy. Social services, solely supported from the fiscal budget, are
extended from childcare and education up to unemployment benefits and continue
vocational training, while the private heavily invests on research and development. In
contrast to other welfare systems with homologous scopes, the Nordic model is given
emphasis on maximizing employee participation; enhancing gender equality; promote
egalitarianism; redressing income redistribution; and using expansionary fiscal policy
(Torben et al., 2007). The Nordic welfare model developed from the beginning family
programs with emphasis on leave schemes, family allowances, and child care subsidy
programs, enhancing the redistributing income particularly to multimember and single
parent families. These policies resulted to the anodic trends of female labor force
participation rates, however, those interventionist policies measures aimed to eliminate
distortionary effects of tax-free household work (Lindbeck, 2002). Nordic countries
launched child services such as aid for mothers, public support for kindergartens, day
nursery, and after-school centers, cash benefits for children, free medical examinations
for children and pregnant women. Other family services include family income-tested,
birth grand, single parent, orphan, adoption benefit, guardianship allowances and study
supplements (International Social Security Association (ISSA), 2011). Since the 90s
crisis, there has been a gradual decrease on benefits value due to inflationary pressures
(Kvist & Grene, 2011).
Nordic health care systems are inherently linked with their social security systems
as well as states’ philosophy. Health services are provided to those who need them
regardless of their financial capacity; free medical treatment to all citizens. Medical
treatments including hospitalization and medication are free of charge (although general
31
practices in Iceland and Sweden are private). Co-payments exist on pharmaceuticals and
on dentists as well as on some special treatment like glasses or special therapies.
Healthcare services are primarily provided by the public sector and secondarily with the
active participation of private sector via for-profit and/or non-profit providers,
outsourcing and new hybrid forms of Public and Private Partnerships (PPPs). State
university hospitals have the main responsibility for clinical research (Torben et al.,
2007). The pension schemes in the Nordic countries consist of the constitution-right-
related primary pension and income-related secondary pension. The primary pension is a
fixed-type of allowance that guarantees a satisfactory level of living standards. The
secondary pension on the other hand is a variable-type of allowance varies between
pensioners in different income brackets. The level of pension benefits will be calculated
in proportion to its rates and age limits. The pension level and retirement age vary
between Nordic countries. Furthermore, there is a means-tested housing allowance other
kinds of means-tested supplements aimed to low-income families (Ehnsson, 2008).
In terms of unemployment, Nordic unemployment programs consist of two parts
– a general basic insurance (basic amount) and a complementary income related
insurance. For an individual to be entitled to benefits, he must be actively seeking
employment and be willing to travel long distances to work, relocate, or retrain.
Unemployment insurance is payable to an applicant who fulfills certain conditions.
Certain conditions need to be met by the beneficiary to receive the unemployment
allowance (The Nordic Council, 2011). The main difference between the benefits level
in the unemployment compensation benefits and sickness insurance programs is the
income ceiling. Unemployment benefits typically amount to only a fraction of
employee’s previous income. It is common sense that unemployment insurance benefits
will be downward adjusted accordingly. This benefit gap consequently led to the
development of alternative private insurance programs, which was virtually non-existed
in the 1990s and now are increasing (M. Palme & Svensson, 2007).
Since the 1990s, a series of pressures have shaken the Nordic social welfare
structure facing strong challenges to increase demand for services, adjust their
foundational assumptions, and change their institutional structure. Yet reforms do occur,
and most Nordic countries are now engaged in an ongoing process of step-by-step reform
towards pension system sustainability without losing their commitments to system equity
and effectiveness (Alestalo, 2000; Eirtheim & Kuhnle, 2000; Goul Andersen, 2000;
Kautto, Heikkila, Hvinden, Marklund, & Ploug, 1999; Timonen, 2000). A reassessment
of benefit reforms, outlay cash flows and petitioner trends nevertheless come to the
conclusion that the Universalism concept in the Nordic welfare model is not as strong as
it used to be.

3.6. The Anglo-Saxon Model

The Anglo-Saxon welfare state regime (Great Britain, Ireland and extent to Canada,
United States, Australia, and New Zealand) corresponds to Titmuss’ residual model. The
Anglo-Saxon model does not considerably differ from the Nordic counterpart. The
distinction between Nordic and Anglo-Saxon welfare state is the size of welfare benefits.
The Nordic model has launched a welfare system that provides generous benefits,
whereas the Anglo-Saxon model retained its residual characteristics (flat-rate benefits).
Health care and social services are funded through various forms of taxation, whereas
32
pensions are funded through the pay-as-you-go system. However, taxation is low in
Anglo-Saxon regimes (Soede, Vrooman, Ferraresi, & Serge, 2004). The Anglo-Saxon
welfare state is associated with labor deregulation where firms have a protagonistic role
on wage bargaining. Labor markets are competitive indicating the presence of precarious
employment relationships. The Anglo-Saxon model prescribes flexibility through
retraining, relocation, and informational exchange between work-seekers and employee-
seekers. However, an anemic economy that built on unstable foundations is unsustainable
in the long run and discordant with poverty alleviation (International Labour
Organization, 2008).
The low-pay, low-skill jobs limited to low levels of social-security contributions.
In Canada, Ireland, and New Zealand have flat rate pension schemes; there is almost
no bond between pension benefits and contributions. Australia and the United
Kingdom have significant means-tested public schemes; the bond between pension
benefits and contributions is weak. United States pension scheme consists of basic
contribution component and an earnings-related component calculated according to
a progressive formula; the link between pension benefits and contributions fall in
between (Dethier, 2007). As a result, the Anglo-Saxon model features a lower level of
expenditures than the other welfare state models. The reduction in social benefits
dissociates state pension policy with average income turning middle class to seek
insurance and health care services in the private sector, provisions that are taken for
granted in other welfare state models (Rhodes, 2000).
Social security spending in Australia and New Zealand had traditionally been very low,
where employment standards had established the foundation for the unofficial welfare
state instead (Schwartz, 2000). The significant increase of healthcare spending in the
United Kingdom was compared relatively low with Continental and Nordic counterparts.
The Irish welfare system followed in British welfare system’s footsteps; however, it was
in a process of constant review the last thirty years, driven by the varying levels of success
in country’s financial transition from being middle-income economy to an advanced
economy. Despite the public spending on social policy, United States suffer from
coverage gap and cost problems. The U.S. social policy relies primarily on private sector
in terms of funding and provision of services. Lack of political and administrative
capacity to make the necessary cost-containment measures drove health care cost sky
high leaving a low-income individuals and families with no coverage. In contrast to the
United States, Canada has the political and administrative capacity to contain health care
costs (Dethier, 2007). The challenge facing the Anglo-Saxon welfare states is primarily
political rather financial. Middle-class population does not expect to become dependent
on social assistance, so they have no self-interested motive to pay higher taxes, nor to
bear the cost of private provisions for expected contingencies. As long as the middle-
class population will not acknowledge social security as a human right and not as a
necessary evil, the future of the Anglo-Saxon welfare states will remain uncertain.

3.7. Continental Model

The continental welfare state model (Belgium, France, Germany, Luxembourg,
the Netherlands, and Austria) is positioned between the Nordic, Anglo-Saxon and
Mediterranean welfare regimes. It is considered a conservative-corporatist model
enriched with family traditions (Kersbergen, 1995). Similar to the Southern European
33
model, the continental model has been described as a male breadwinner model, where
social protection is differentiated by occupational classes, benefits mirror earnings, and
there is a broad support for social security systems. Social programs are occupation-
oriented supporting the male breadwinner model.
The wage-setting process is dominated by centralized bargaining arrangements
and generous compensation options. Although the continental model provides generous
benefits, the feature of Universalism does not exist due to full employment doctrine and
the active participation of the private labor market. For instance, emphasis is given on
promoting families with children centered services without any commitment in periods
of economic uncertainty – in case when one or both parents lose their jobs.
Unemployment benefits are based on welfare and state funds. The primary objective of
the system is to maintain a satisfactory standard of living. Continental welfare regimes
focus on sustaining rights and benefit differences between various groups, whereas the
Nordic welfare regime focuses on reducing income differentials. Employment became
the hallmark of the Continent welfare model on the basis of social transfers. The primary
source of funding for social transfer programs are the employer and employee
contributions. The Continent model has been less successful than in the Nordic model in
redistributing welfare as the tax system contains antithetical features (negative income
tax). Social partners are actively engaged in the collective bargaining agreements. The
institutional integration of social policies and practices bear the imprint of a corporatist
system. The Achilles heel of most Continental welfare states lies in their chronic inability
to stimulate employment growth. Similar to Southern European welfare model, the
Continental welfare model is characterized by a high share of expenditure on old age as
a result of labor participation rates and early retirement. Job stagnation is directly related
to high welfare contributions and relatively strict labor framework (G. Esping-Andersen,
1996; Scharpf, 1997). Maximizing labor performance through vocational training and
education may increase productivity, but it will also increase early retirement. High
contribution rates will discourage less productive employees to stay. As a result,
governments will need more funds to subsidize early retirement requiring further
productivity, thereby initiating another iteration of a virtuous cycle (Hemerijck &
Eichhorst, 2009). This inactivity trap enhances the existing 'insider-outsider' disparity and
social exclusion, especially in a heavily regulated market environment (M. Ferrera, 2000;
Guillen, 2001).
Continental welfare models are also experiencing demographic challenges. The
impact of changing of the demographic profile on welfare schemes is a matter of financial
sustainability, putting many of the idiosyncratic characteristics of the continental social
policy design in question. In the economic sphere, it has a negative impact on economic
growth, household behavior, labor markets, pension benefits, state revenues and
redistributing income. In the social sphere, it affected health care, family cohesion and
functioning, living arrangements, housing and migration. In the institutional sphere, the
shift from a corporatist to a highly competitive economy had as a result the sharp decline
of labor unions. Despite the fact that social partners lost their influence in shaping labor
policy, the institutional environment has remained unchanged in the traditional male
breadwinner model. Most Continental welfare states shifted from a compliant to a more
aggressive social policy by reducing benefit replacement rates, changing labor-market
rules, and tightening administrative controls phasing out early retirement. Furthermore,
34
public policy oriented to consolidate the social policy budget with the increase of
contribution rates and welfare benefit taxes for the funding of the supplementary-type
benefits such as universal and means-tested assistance schemes, but also cross-
subsidizing social insurance. These changes passed to the labor market as well with the
introduction of flexible working arrangements (Hemerijck & Eichhorst, 2009). The
archetypal continental welfare state has got itself trapped in a vicious circle of higher
social expenditures, higher taxation, massive layoffs, increasing public debt, and deficits
away from early exit adjustment strategies. Instead, their social policies focused on
retaining high levels of employment and maximizing of the labor participation rate.

3.8. Mediterranean Model

Nations referred to Southern Europe here are Italy, Greece, Spain, and Portugal,
which have been considered part of the “conservative-corporatist” model (G. Esping-
Andersen, 1990; 1999). Esping-Andersen (1990) included only Italy in his model,
although all southern European welfare states exhibit quite similar structural
characteristics. Current literature suggested the existence of a distinct Latin-rim model
(Leibfried, 1993) or a semi-peripheral welfare state (Marinakou, 1998). The southern
European model deviates from the continental European model in terms of effectiveness
and the scope of social protection (M. Ferrera, 1996). Recognizing a constitutional right
to welfare, their Bismarkian-type safety nets are based on a highly regulated
institutionalized system, strong regionalism and localism, occupational segmentation
(small family business), and a high level of family subsidiarity (Mingione, 2001). The
nations of Southern Europe have followed a specific path to modernization and still share
a number of common traits in their cultural backgrounds and political economies. There
are, of course, significant differences between the four countries of the region: the intra-
area variation is certainly greater than in the Nordic context, though probably lower than
in Central Continental Europe. It would be difficult to deny that the notion of “Southern
Europe” has not only a geographical, but also a substantive, cultural, and politico-
economic connotation. The Southern European economic model consisted of three main
sectors: the “regular,” which includes the core sectors of the economy, including public
sector and later on the large industrial enterprises; the “irregular” or “peripheral,” which
includes the agriculture and the small family business, and; the “informal”,
“underground” or “shadow” sector (Maurizio Ferrera, 2005; L. Moreno, 2000; Perez Diaz
& Rodriguez, 1994). The public sector has been characterized by bureaucratic
strangulation, closed professions, and protection of vested interests; it played therefore a
blocking role in respect of employment creating multipolar oppositions. The agriculture
and private sector on the other hand has provided a substantial number of low-
compensated jobs with minimum health care and pension coverage; construction,
building, retail trade, and later on tourism sectors have significantly contributed to the
economic development of each country.
The informal economy comprises the unregistered part of the economy where
economic activities circumvent the costs and evade the laws and administrative
regulations covering property relationships, commercial licensing, labor contracts, torts,
financial credit and social systems. The informal economy does not constitute an
autonomous part of the economy per se; it is rather well diversified, incorporated into
each sector of the formal economy creating a common link. The estimated size of the
35
informal economy in the Southern European countries is 24 percent of GDP on average:
Portugal 22.6 percent, Spain 22.6 percent, Italy 27 percent, and Greece 28.6 percent
(Schneider, 2002). The welfare development in Southern part of Europe has lagged
chronically behind. This is associated with the economic decline (with the exception of
North Italy and certain areas in Spain) positively correlated with insufficient social
expenditure and low GDP (Eurostat, 1994b). Despite the fact that Southern European
countries benefited from the United States’ Marshall Plan, a foreign assistance given to
European countries, certain reasons were culpable for their economic growth and
development slowdown: Portugal (1926-74) and Spain (1936-75) experienced protracted
periods of authoritative governance; Greece (1946-49) suffered from a civil war
following the end of →orld →ar II and a period of authoritative governance (1967-74);
Italy was one of the →orld →ar II defeated.
The Industrial transition gradually started in the early 1960s and 1970s, where the
economy of Southern European countries established industry standards to market and
business development compared with France, Germany, Belgium, or the Netherlands.
The slow pace of industrialization discouraged domestic and foreign investment, which
directly depend on how adaptation factors are to changing technological requirements. A
large part of the population, respectively decided to migrate to the industrial north.
However, those waves of migration allowed the smooth economic transition (Andreotti
et al., 2001). Family plays a prominent role in their socioeconomic structure where the
state intervenes only when the family fails (Ascoli, 1999; Laville, 1994). The guarantee
of secured employment with “good” jobs for all male breadwinners constituted the
paradigm which the Mediterranean welfare model was based on (Scharpf & Schmidt,
2000). Social rights are inherently associated with imbalanced benefit distributions
within the public sector and employment rights protected by the trade-union actions
creating strong opposition poles of “insiders”, “peripheral” and “outsiders”; their
increasing collective bargaining power had a deterministic role in the political agenda
(Luis Moreno, 1998).
Pension schemes are organized according to occupations and play a prominent
role in the provision of welfare. The healthcare system provided main treatment services
on the basis of an insurance system, a universal feature; the insufficient tax-funding
supported the strong interrelation of public – private partnerships (Andreotti et al., 2001).
They integrated into the national health services system funded by general taxation in the
past twenty years (Italy in 1978, Spain in 1986, Portugal in 1976 and Greece in 1983).
Some benefits (especially the disability pension) and services have been introduced to
get voters’ support of a governing party creating a clientele-type of relationship, which
become an integral part of their political cycle (Maurizio Ferrera, 2005). The
Mediterranean countries experienced uneven regional economic development during the
golden age, which exacerbated these idiosyncratic socioeconomic characteristics
affecting also the development of welfare states. Their high-regulated fragmented
institutions led to poor welfare integration characterized by several deficiencies in the
quality and delivery of services as well as to relatively inefficient use of public resources.
The long-term unemployed, the young who have not yet worked, selectively unemployed,
women with an unconformable working history, individuals employed on temporary
or part-time basis, early retirees, people incapable working for various reasons, low
income families, illegal immigrants, workers in the underground economy and others
36
have thus become social insurance outsiders failing to fulfill the narrow categorical
conditions required (Maurizio Ferrera, 2005). Primary health care services provided by
city health centers, district health centers, regional polyclinics, outpatient and dental
clinics, mental health centers, and local community institutions (primary health care
services, dental polyclinics, nursing homes and family planning centers). Secondary
health care is provided by public hospitals, insurance fund health institutions, or private
for-profit hospitals and clinics. Despite health care’s universal character, services
received in public hospitals are associated with the individual’s level of insurance
coverage or financial status.
It would constitute a prima facie paradox if the heterogeneity of labor market and
the disparity of healthcare have not been followed by an uneven distribution of welfare
benefits. There is a considerable divergence of public sector benefits with those of the
private sector, which is far below European Union average (Venieris, 1994). Childcare is
the only family assistance program that remained purposely underdeveloped due to
cultural reasons. Childcare remains to a large extent of family responsibility. Childcare
is mainly provided by women who keep the traditional housewife role, secondarily from
grandparents or third person (nanny, domestic servant) usually occupied by country
migrant women (Maurizio Ferrera, 2005). This disproportionate distribution of social
benefits among the active and retire part of the population has become the prominent
characteristic of the Southern European welfare model. In addition, southern welfare
systems adopted earnings-related and means-tested pension programs. The pension
schemes consist of a primary pension and income-related secondary pension. The
primary pension is a fixed-type of allowance that guarantees a satisfactory level of living
standards. The secondary pension on the other hand is a variable-type of allowance varies
between pensioners in different income levels. Certain requirements need to be met for
someone to be eligible for early retirement: the individual must have reached the age of
61 with 30 years of benefit contributions accompanied by documented proof of the
termination of their employment. In certain cases, survivor pension is also provided
(Arriba & Moreno, 2005).
In terms of unemployment, unemployment programs are contributory allowances
comprise mainly income allowance for ex-full-time employees as well as partial
allowance. To be eligible for benefits the individual must be registered with the relative
agencies. Certain conditions need to be met by the applicant to receive the unemployment
allowance. These conditions set high barriers to access in the unemployment benefit
program, leaving a large part of the active labor force unprotected (L. Moreno, 2000).
Southern European welfare systems have been upgraded by implementing universalistic
features in old-age pensions, education and healthcare. Furthermore, most Mediterranean
countries adopted conditional family assistance programs and anti-poverty policies with
notable addition the introduction of unpaid parental leave (maternity, paternity and
adoption). Government concern over chronically low birth rates has driven recently the
two countries with the lowest fertility rates, Italy and Spain, to some timid pro-natalist
policy measures.

3.9. Central-Eastern European Model

Central and Eastern Europe is a term describing former communist states (known
as transition countries) in Europe after the collapse of the Iron Curtain in 1989-90. The
37
post-war area found several central European countries and all Eastern European
countries, with the exception of Italy and Greece, incorporating into the Soviet model:
continental countries (Poland, Hungary, Former Czechoslovakia (now Czech Republic
and Slovakia)), Baltic countries (Estonia, Latvia, and Lithuania) and Balkans (Former
Yugoslavia (now Serbia, Croatia, Bosnia and Herzegovina, Montenegro, Kosovo and
FYROM), Romania, Bulgaria and Albania). It was an apolytarchic regime run under
centralized administrative planning, where state presence in the economic activity was
everywhere: the means of production, collective farming, and industrial manufacturing.
Pension schemes were occupational-type and employer and employee funded in nature,
but benefits opted to be universal in focus and flat-rate in scope. The pension scheme
financing had pay-as-you-go features and consisted of the public and the voluntary
component. The public component referred to all formal employees, while the voluntary
component referred to public sector key occupational groups such as police forces and
military personnel. High employment security, affordable housing provision, and the
food and service subsidies acted as an economic safety valve in the system. There were
deviations from the rule, though. A characteristic paradigm is the special privileges often
granted to public sector key occupation groups, such as miners and police forces. The
communistic nomenclature ensured special welfare privileges unofficially to its members
(King & Szelenyi, 2004).
Unemployment was officially non-existent. The system based on the assumption
of full employment, despite the fact some form of hidden unemployment did exist. All
citizens were constitutionally entitled of universal-type of benefits and flat-rate
occupation based pensions estimated by selecting the highest salary average over five
years within the final ten years of employment. Retirement age was 60 years for men and
55 years for women with eligibility for retirement minimum 20 years of service. Public
agencies provided additional cash and in-kind benefits for primary and secondary
beneficiaries, including subsidized recreational facilities and vacations and subsidized
loans (Williamson, Howling, & Maroto, 2006). Persistent high unemployment can be
also caused by a mismatch between unemployed and vacancies known as structural
unemployment. Structural unemployment may pertain to geographical location, skills,
and many other factors. The desirability of a place is based on its social, economic, or
environmental factors. Adverse social environment, underdeveloped capital and real
estate markets, and polluted environment can make relocation prospects unattractive,
especially if they are accompanied by high relocation costs. Next, high job training and
workforce development initiatives will act preventively to hire unsuitable employees (e.g.
research scientists, software programmers). Active labor market policies require flexible
employment regulation, including repositioning, job search assistance and retraining, for
the support of long-term unemployed. Besides, employees did not have any career or
monetary motivation; the underlying purpose is to intrigue the sense of accomplishment,
contribution, involvement, and satisfaction, to exert minimum performance with the
exclusion of recognition programs within public bodies as a symbol of loyalty to the state
(Cerami, 2008). The fully public and highly centralized Soviet health care system is a
model of regionalized care and primary intervention in the population-based polyclinics
providing free health care to all citizens. State policies strategically fostered primary care,
placing more emphasis on specialist and hospital care. Welfare programs provided
moderate support to the most vulnerable segments of the population: elderly pensioners,
38
veterans, infants and children, expectant mothers, multi-children families, and disabled
people. The effectiveness of the model has declined since the technological advances in
the health care did not follow by increasing healthcare expenditures leading to gradual
system deterioration (Cerami, 2008). Welfare program deficiencies had become subject
of political and social controversy. The state was the only welfare provider, so the
prohibition of private welfare restricted individuals from seeking alternative ways of
insurance and protection. Inflation had a detrimental effect on households that rely on
welfare (Williamson et al., 2006).
The Soviet health care system was characterized by chronic underfunding,
rudimentary infrastructure, inadequate medical supply and outmoded medical equipment,
undermined morale and underperformance, and consumer dissatisfaction. Budget
retrenchment on health care spending gradually caused functional inconsistencies. Health
care institutions scaled back their business plans for upgrading their medical facilities
and equipment. The facility maintenance management did not adhere to basic procedures;
their inventory systems were outdated. Inadequate spare parts led to mechanical
malfunctions and disuse of the most valuable equipment: undetectable defects, low safety
factors, abuse and natural failures. Health institutions also encountered shortages in
medicine supplies due to outdated distribution channels. These challenges coupled with
meager salaries had undoubtedly affected personnel morale introducing direct
disincentives to improve productivity and quality of care. In turn, consumer confidence
in the healthcare system had disintegrated with the existence of “gratuity” money to
become the status quo for receipt of services (Kornai, 1999). Bribery, unfortunately, was
rooted in the functions and structures of the communistic system captured all countries
across the region. The fall of the Berlin Wall was the genesis of democratic transition in
Central and Eastern Europe. Social policy and welfare systems consequently had
undergone a transformation trajectory towards to Anglo-Saxon welfare models in an
attempt to solve heritage and transition issues. The sudden state-led transition to a partial-
free market economy took place with patterns that repeated in almost all the former
centrally planned economies. The neo-liberal market policies were incompatible with
Soviet’s model deficiencies and created anomalies in the smooth phase transition of the
economy with direct and/or indirect impact on welfare. The high public sector
employment and agriculture benefits gradually started to decline with the development
of the private sector. Market imbalances caused inflationary pressures, which had a
deteriorating effect in pension purchasing power. However, the recalculation of pension
amount had not been analogously adjusted according to the new contribution
requirements. Pensions were still affiliated with the old system. Bulgaria, Russia, and
Ukraine kept minimum pensions at pre-communist levels, which in turn, it created a
funding gap: average pensions were higher than average wages. Moreover, low
replacement rates – approximately 40 percent in most of the former Soviet Union states
– and lack of formal indexation mechanisms conduced in setting an income ceiling.
The need to transform the old welfare schemes was immediately apparent: retain
financial sustainability of the social security system; provide satisfactory living
standards; market reestablishment and deregulation; and restored interrupted during
communism benefits. Early retirement policies were adopted during the first years of
transition, aiming to relieve labor market despite facing fiscal challenges. Several
countries adopted early retirement features with the introduction of invalidity pension
39
benefits. In Poland, disabled retirees were approximately 40 percent of all pension
population, while in Slovakia, Croatia, FYROM and Hungary they outreached 20 percent
of the whole (Cerami, 2008).
Undoubtedly, the existing and newly created welfare systems were failing to provide
adequate social protection to the population without taking into consideration the
socioeconomic landscape that has been eroded during the transition process. Several
countries (Croatia, Latvia and Poland) reconsidered their welfare policies proceeding to
comprehensive reforms while others (Hungary and Czech Republic) to partial reforms
with the introduction of voluntary occupational schemes. These programs are still in its
initial stage, so it’s premature to evaluate their performance. In general, the economic
reforms followed by hysteresis reforms in the welfare states ending up with minor
changes in their regulatory and legal framework. All countries in the region refused to
build a form of safety net for the vulnerable segments of the population who suffered
during the democratic transition period.
Pensions provide a paradigmatic case of reform sclerosis. The Central and Eastern
Europeans’ pay-as-you-go pension systems are at first glance the most difficult of welfare
programs to reform. To succeed, reform proposals must accommodate or bypass a host
of institutional veto points and oppose vested interests, the most vociferous of which is
the labor movement, the self-appointed defender of the pensions’ status quo in all Central
and Eastern European countries. The consequence has been a decade or more of reform
blockage, interspersed with occasional episodes of reform progress, but also, many
examples of failure sometimes provoking or accompanied by the collapse of the
government concerned.

3.10. Confucian Model

The East Asian welfare model (Holliday, 2000) primarily focuses on the social policy’s
positive outcome with regard to state economic development and secondary to the
welfare system’s institutional role. The welfare state is seen as having an important role
in supporting economic growth, political solidarity, social cohesion, and human capital
development (Goodman & White, 1998). Social policy is heavily concentrated on
education and healthcare as part of the nation’s long-term development plan (Gough,
2000). Welfare state operates within an economic and political environment that shares
common characteristics: (i) strict fiscal policy, (ii) relatively flexible labor markets and
(iii) subjective social policy (Aspalter, 2006). The countries of the region exhibit
comparable social, cultural, and political features with substantial diversity on certain
demographic and economic indicators: The region contains some of the world’s most
prosperous countries (Japan, Hong Kong and Singapore), some of its poorest (Cambodia,
Lao PDR, Mongolia, Myanmar and Vietnam), and various threshold countries (Thailand,
Malaysia and South Korea). In the life expectancy, educational attainment and income
context, UNDP’s Human Development Index indicate a vast discordance among East
Asian countries: Hong Kong, Singapore, and Korea are ranked between the twentieth and
twenty-sixth while the Philippines, Indonesia, and Vietnam are below the eightieth.
Consequently, population significantly differs among countries with populations
ranging from a few hundred thousand of Brunei to extreme cases of China and Indonesia
that holds the largest and the fifth largest populations, respectively in the world. District
deviations also extent to large scale allocation of resources in the sectors of urbanization
40
and industrialization, and demographics. Agriculture has a relatively minor impact
(Brunei, Hong Kong and Singapore), whereas in several countries, agriculture consist of
over 50 percent of the economic activity (such as China, the Philippines, Thailand and
Vietnam). The political landscape in the region is constantly evolving characterized by
democratic as well as dictatorial periods. The Confucian or Buddhist heritage countries
come across antithesis with the Islamic-dominated neighbors. This monadic amalgam of
social, political, cultural, and geographical asymmetries formulated the needs, challenges
and provisions for social protection for all countries in the region (Holzmann, Mac
Arthur, & Sin, 2000).
The concept of family comprises the cornerstone of East Asian welfare states with
exception of China’s. China established a pension system that corresponds to its socialist
ideology rather to Confucian values. In contrast, Hong Kong, Japan, South Korea,
Singapore, and Taiwan followed a more traditional style on the establishment of their
pension schemes (Chia, Kitamura, & Tsui, 2005). Despite the rapid socioeconomic
changes across East Asia, the welfare state still lack of providing sufficient
complementary social assistance and care treatment, and the underlying assumption of
family care responsibility remains (Chiu, 2004; Gadbury, Barham, & Bonnett, 2003; Low
& Choon, 2004).
East Asian countries vary considerably in the sphere of social security and
philosophy context: Brunei, Hong Kong, Indonesia, Philippines, Malaysia, and Singapore
launched a provident fund; China, Japan, Korea, and Taiwan established a multi-pillar
pension system. The provident fund systems in Brunei, Hong Kong, Indonesia, Malaysia,
and Singapore are compulsory personal retirement accounts administered in the public
sector with the notable exception of Hong Kong’s Mandatory Provident Fund (2000),
which bases upon de-centric private management (Asher, 2008).
What makes these defined-contribution character pension schemes different from
the pay-as-you-go schemes is that there are no inter-generational transfers: members pay
contributions for their own pensions into a designated savings account to withdraw later
upon retirement. There is no automatic indexation. However, welfare benefits and
services are limited to formal sector employees while social protection provided by local
community and families. In response to the economic crisis, Indonesia developed a
number of targeted support programs, including rice and fuel subsidies, and new cash
transfer programs. The Northeast Asian countries - China, Japan, Korea, and Taiwan -
established pay-as-you-go social insurance systems distinctively different from those of
European countries. Japan founded a privately administered pay-as-you-go pension
scheme in 1942 followed by a universal basic pension plan in 1959. Taiwan
correspondingly introduced an old-age scheme with universal characteristics in 1958
overdue updated with a defined-benefit occupational pension scheme in 1984. South
Korea alternatively introduced a universal pay-as-you-go pension scheme for formal
employees in 1989. Furthermore, financial institutions developed their own severance
allowance plans took usually paid as a lump-sum benefit. China eventually established a
pay-as-you-go pension scheme in 1949 funded solely by the state-owned enterprise
contributions. Defined-benefits were provided by enterprises (Dunaway & Arora, 2007).
In other countries of the region such as Thailand adopted a universal-type scheme,
including a universal health care program and income maintenance programs. Given the
emphasis on social assistance programs, Vietnam exhibited different kinds of models and
41
schemes (social insurance, provident funds) in an attempt to minimize the benefit
distribution gap among different segments of the population. As two of the poorest
countries in the region, Laos and Cambodia lack of well-established formal welfare
mechanisms. Finally, North Korea must be viewed as an exceptional case in East Asia; it
is considered the poorest country in the region suffering from chronic famine due to
widespread destruction of harvests and food reserves. The absence of a social security
system has weakened the role of social protection focuses to food distribution with the
passage of time putting the population in danger of hunger and starvation.
The Asian Crisis has caused economic turmoil that exposed the economic
problems of the troubled East Asian economies in 1997. Many countries forced to
substantially reorganize their welfare systems along with their changing socioeconomic
structures (Marshall & Butzbach, 2003). Social welfare systems that are inefficient to
serve vulnerable population groups need to be restructured and consolidated. Other
systems those are inadequate to face the increasing demands of rural as well as urban
populations for social protection needs to be extended and expanded. Governments
enacted fundamental welfare structural reforms in response to budgetary pressures,
projected increases in spending on health care, social services and public pension, and
social movements and social welfare advocates demands for better services.
Japan implemented a long-term care insurance and integrated old-aged care
programs. The expansion of health insurance and retirement benefits for targeted
population, followed by the introduction of unemployment benefits in South Korea and
Taiwan. Singaporean social security scheme is gradually revised to add new benefit
categories. The rapid economic growth Hong Kong experienced in the 1990s allowed the
government to gradual increase welfare expenditures throughout the years to support its
two large means-tested programs providing cash, food, housing, medical care, and social
services to poor and low-income individuals. South Korea transformed the severance
allowance, including a voluntary occupation plan and individual retirement accounts,
while in 2008 a basic pension was introduced for those who are excluded from the formal
welfare programs due to their income and other social status. Taiwan also introduced a
basic pension plan in 2007. All countries have incorporated old age, sickness, and work
injury programs to their welfare systems. Most countries also inducted certain health
protection mechanisms. As far old age benefits concern, several countries adopted
provident fund schemes that provide lump-sum form of benefits. Japan is the only notable
exception in the region that adopted a universal pension scheme. Only four countries have
an unemployment insurance system.
While they share certain common features, East Asian welfare systems are not
homogeneous. They exhibit substantial efficiencies and deficiencies relying heavily on
distinctive social, demographic, political and economic conditions perhaps more than
anywhere else. The East Asian welfare experience may adopt the recipe of developmental
welfare sacrificing social cohesion and equality in the name of economic prosperity. East
Asian welfare systems have been viable because they have developed within a diverse
and complex environment. With recent memories of poverty and degradation, the
economic context is still in the early stage of development. Full employment and young
population are the key ingredients of the state-directed growth economies. The political
landscape is dominated by political oppositions within a context of strong authoritarian
regimes. The weak social structure is characterized by hegemonic social relations and
42
gender inequality. Under the prism of the aforementioned challenges, it requires a more
fundamental rethinking of the meaning of economic development encapsulating the
structural transformation of social policy, underpinned by the norms of equality and
social solidarity.

3.11. Concluding Remarks

This paper provided an overview of the main ideas of social security, and the most
important theoretical and empirical work. A comparative perspective was given to
illustrate the variety of social welfare schemes in the developed and in the developing
world. In particular, it pinpointed their deficiencies, mapped their patterns on selected
welfare state systems across regions worldwide. Despite the social security system
asymmetry worldwide, there is a broad consensus on the necessity of restructuring
welfare. Numerous governments have undertaken pension reforms triggered by
exogenous as well as endogenous factors to correct funding shortfalls. Although efforts
toward consensus have been made, and widely accepted welfare initiatives exist,
policymakers have not uniformly agreed on a common ground for reform.

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47
Chapter IV
The Quantitative and Qualitative Evolution of the Social
Security Research
By Mario Arturo Ruiz Estrada and Evangelos Koutronas

4.1. Introduction
The concept of social security was driven by the need to protect the emerging
working class during the industrial revolution. Bismarck's work-based earnings model in
the 1880s and Danish’s universal flat-rate model in 1891 instituted to provide limited
coverage and meager benefits to disabled workforce. Several European countries created
analogous social pension schemes the ensuing decades: British Old Pension Act (1908)
and Insurance Act (1911), Swedish compulsory old-age pension (1925), and Swiss Act
(1935) (Gordon, 1988). In Britain, the Beveridge committee’s report (1942) envisioned
a universal social security system that ensued full employment and run through public
institutions of social protection. In contrast with the German model, the Anglo-Saxon
social security model maintained the flat-rate distinctive feature (Veit-Wilson, 1992).
Notwithstanding, social security is a relative new discipline that has steadily matured
over the past forty years. The research development of the field has been accompanied
by the need to preserve social security system effectiveness while maintaining their
efficiency. The design of the social security models was based on the unrealistic
assumptions of sustained economic growth, full employment and low inflation. European
social security systems followed generous redistribution policies that went beyond the
government budget. The post-war twenty-five-year sustained economic growth ended in
1970s with the outbreaks of stagflation and oil crisis. In association with shrining
contribution bases and growing beneficiary populations, the new economic landscape
puts increasing pressure on the fiscal sustainability of social expenditures. The full
financial impact on public finances was not immediate observable until the first
generation begun to retire. The field has become consolidated over this period, while
simultaneously expanding the range of topics analyzed and research methodologies used.
Different theories and approaches, addressing diverse research topics, have been
developed to overcome the deficiencies social security systems face and explore new
cooperative mechanisms. This paper aims to shed light on the past and current trends in
theoretical and empirical research in social security, a field characterized by assorted and
manifold aspects of relevance. It also highlights future challenges and sketches a few
possible futures scenarios for academic research. The paper is organized as follows.
Section 2 offers an overview of the relevant literature. Section 3 briefly reviews. Section
4 explores the possible negotiation scenarios. The final section concludes the paper. The
appendix contains figures.

4.2. Theoretical considerations on social security

The theoretical approaches and concepts emerged in the field of social security
focused on the classification of social security mechanism viewed through a cultural,
social, economic, and political prism. Social security designs varied considerably within
and across regions demonstrating a vast spectrum of views (Palacios & Pallares-Millares,
2000). The classification in various models facilitates to subsume the social security
system institutional set-up within a broader regulatory and legislative framework. The
main criteria used to identify the institutional organization of each type of welfare state
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are: the organizational nature and structure (central, segment, public, private); the
population coverage (universal, means-tested, employer-liability); nature of benefits
(pension, social assistance, health care), and; the methods of financing (direct and/or
indirect taxation, member contributions, mixed financing) (Antonen & Sipila, 1996).
The institutional structure of social security was thoroughly studied by Titmuss
(1958); Esping-Andersen (1990); Palme (1990); Ferrera (1996); Korpi & Palme (1998);
and Gough (2004). The taxonomy of social security systems has initially been identified
by Titmuss (1958) into three different regimes: the residual model, the institutional-
redistributive model, and the industrial achievement-performance model. In the residual
model, the state's role is limited to ensure a safety net, and intervene when the free market
mechanisms and family are unable to meet a minimum level of decent living conditions.
The institutional-redistributive model on the other hand, aims at universal coverage of
needs, irrespective of the mechanisms of the free market. Finally, in the industrial
achievement-performance model, the social needs are covered based on productivity and
work performance following the principle of meritocracy and professional status. Esping-
Andersen (1990) identified the concept of welfare state, in which the state or a well-
established network of social institutions plays a key role in the protection and promotion
of the economic and social well-being of citizens. He distinguished three types or worlds
of the welfare state which show several similarities with Titmuss models. The liberal
Anglo-Saxon model provides selectively minimum benefits; it provides means-tested
assistant and mainly welfare services. It corresponds to Titmuss’s residual model with
the exception here the state takes care of welfare. United States, Canada, and the United
Kingdom welfare pension schemes are characteristic paradigms.
The conservative-corporate model focuses on the profitability of the market and
the commercialization, like the liberal model, but maintains distinctive differences in
terms of social status. In contrast with the liberal model, the role of private insurance is
limited, while great emphasis is given to traditional family standards. It corresponds to
Titmuss’s industrial achievement-performance model. Germany, France, Italy, and
Austria welfare pension schemes are characteristic paradigms. The third world welfare
state is the social-democratic model found in the Nordic countries. This model guarantees
a satisfactory standard of living for the entire population, regardless of status of
employment, or the level of income while acts proactively in terms of family support.
This model matches with Titmuss’s institutional-redistributive model. Diverse
classifications may therefore be performed as separate mechanisms of the social security
system. For example, the categorization on four types of social security systems, with
regard to the question of whether their main aim is to guarantee a minimum income for
all citizens who have reached the age of retirement (Palme, 1990). Based on this criterion,
Palme distinguishes the following models: the targeted model, the voluntary-subsidized
model, the corporatist model, and the basic security model. Palme used similar features
on his model classification with those of Titmuss and Andersen models. Korpi & Palme
(1998) finalized the model by adding a fifth model, the encompassing model. This model
encompasses all citizens, unrelated with income status, into a sufficiently comprehensive
social welfare package of benefits that solely supervised by the state. The scientific
debate regarding the welfare state models went beyond Esping-Andersen’s three worlds,
identifying at least another three models that showed up later on: the welfare State, under
a special regime transition countries of Eastern Europe, which was called post-communist
conservative corporatism (Deacon, 1992; Sapir, 2006); family-oriented, Confucian
model of Japan and the newly industrialized countries of Eastern Asia (G. Esping-
Andersen, 1994); and the South European template (Ferrera, 1996).
49
 At the turn of the twentieth century, welfare state deadlock and retrenchment were
seminal for the evolution of new dynamics in the social reform context, emphasizing the
significance of former social policies as well as the role of involved parties in the welfare
state (Pierson, 1994). The path-dependence theory argues that welfare is an integral part
of the society, so any partial or total structural, economic, political, and technological
system transformation is directly linked with the society’s transformation. The archetype
of this theory is that set of decisions taken for any given circumstance was limited by the
decisions taken in the past, even though past circumstances are no longer relevant
(Bianco, Gerali, & Massaro, 1997; Pierson, 2000). According to Gough (2004), the
traditional welfare classification should leave behind. Regions adopted the same welfare
model, however, countries’ socio-economic-political development through time shows
significant signs of divergence from the initial pattern. Investigating one hundred one
welfare schemes worldwide, he pinpointed the following cross-regional patterns in terms
of state education and health expenditures, private health spending and the combined
international inflows of aid and remittances:
1) Actual or potential welfare state regimes: welfare systems mimicking the
Bismarkian welfare model. This model was adopted by continental a few
Eastern European countries, Latin American countries in the south, the African
states of Algeria, Tunisia and Kenya and Thailand from Southeast Asia.
2) More effective informal security regimes: welfare systems close to the Beveridgean
welfare model. This cluster consisted by countries, mainly from Southeast Asia –
including China and Sri Lanka – with the remained countries of Latin America and
some countries from the Middle East.
3) Less effective informal security regimes: welfare systems prone to Beveridgean
welfare model, but with below-average functions in terms of spending, protection
and benefits. In this category was comprised by South Asian and certain sub-
Saharan African countries.
Externally dependent insecurity regimes: welfare systems with poor
organizational structure. These systems are heavily dependent on subsidies and
external aid. This cluster includes the sub-Saharan African states with available
data.
Furthermore, a common notion existed amongst gender scholars that a gender
approach requires a rethinking of the welfare state and its history (Lewis & Ostner, 1994).
Under this perspective, citizenship and civil society play a catalytic role in the policy
formation process (Hobson, 1997; Miller, 2006).

4.3. The evolution of empirical research in social security

Over the course of its development, social security has gradually accumulated
scientific knowledge, both of empirical and methodological nature. The line of research
focused on the three basic system mechanisms, including social security, social welfare
and healthcare. The employment of different methodologies keeps a constant qualitative
transformation in respect of content and form and quantitative transformation in respect
of output. A content analysis of 1005 papers was conducted between different categories
issued by the Journal of International Social Security Review in the last fifty years (1967
and 2017) (see Figure 1).

50
 Figure 1. Papers Published in the Journal of International Social Security Review (1967-2017)

Source: Journal of International Social Security Review

The bibliometric analysis yielded 1005 scholarly articles from 1967 to 2017. The
publication record for social security has grown geometrically over the last 50 years. In
the late of 1960s, an average of 5.1 papers were produced about social security, and in
the following decade (1970-1979), that average rose to 17.4 publications per year. The
decade after (1980s-1989), the average moderately increased to 21.4 publications per
year, which was slightly decreased to 18.9 publications per year in the 1990s. The 2000s
was one of the most expansive periods for the field, producing 22.1 publications per year.
In the last decade (2010-2017), the number of average paper publications went down to
15.6 publications per year about social security, notwithstanding, this number
undoubtedly will continue to rise. Furthermore, the content analysis identified key
research areas to consider in the design of social security, which can be classified into the
following 25 categories (see Table 1).

Table 1. Journal of International Social Security Review Papers Distribution by 25 Categories (1967-
2017)
No. Social Security Research Categories 1960s 1970s 1980s 1990s 2000/09 2010/17 Total %
1 Ge ne ra l Soci a l Se curi ty a nd Soci a l Prote cti on I s s ue s 25 67 60 50 58 30 290 29%
2 I ns ura nce a nd As s ura nce I s s ue s 4 13 22 13 11 5 68 7%
3 Re ti re me nt a nd Pe ns i ons I s s ue s 5 13 15 30 53 30 146 15%
4 I njury, Di s s a bl e d, I l l ne s s e s ,Acci de nts , Si ckne s s , I nca pa ci ty, Re ha bi l i ta ti on, Ha nddi ca ppe d I s s ue s 3 15 30 7 15 7 77 8%
5 Me di ca l or He a l th Ca re a nd Be ne fi ts I s s ue s 5 6 17 21 18 16 83 8%
6 Soci a l Se curi ty I ns ti tuti ons , Admi ni s tra ti on, Gove rna nce , a nd Ma na ge me nt I s s ue s 3 4 5 8 2 7 29 3%
7 I nforma l Se ctor, Pove rty, a nd I nfl a ti on 0 0 0 5 3 3 11 1%
8 Ge nde r, Wome n, Fa mi l y, Ma te rni ty, Morta l i ty, Si ngl e -Pa re nt, Chi l dhol d Soci a l Progra ms 0 11 12 11 5 5 44 4%
9 Huma n ri ghts a nd Mora l &Ha za rd i n Soci a l Se curi ty I s s ue s 1 1 0 1 0 0 3 0%
10 Empl oye e s ' Provi de nt Fund Sche me s 0 1 0 2 0 0 3 0%
11 Soci a l We l fa re , Soci a l As s i s ta nce , Al l owa nce , Tra ns a cti ons , tra ns fe rs , Compe s a ti ons , a nd Pa yme nts 0 2 1 2 5 7 17 2%
12 Wa ge s , Sa vi ngs , I ncome Ta x, Subs i di e s , I ncome Re di s tri buti on, I ncome Support Progra ms 0 10 10 5 12 10 47 5%
13 La bor a nd Occupa ti ona l Sa fe ty, Une mpl oyme nt Compe s a ti on a nd Une mpl oyme nt I ns ura nce 0 6 7 11 7 7 38 4%
14 Mutua l Funds , Pe rs ona l Fi na nce s , Sa vi ngs , Porta fol i os , Stock Ma rke t, a nd Bonds 0 0 1 0 0 0 1 0%
15 Economi c Re ce s s i on a nd Fi na nci a l Cri s i s 0 2 0 0 1 5 8 1%
16 Economi c De ve l opme nt a nd Economi c Growth 0 0 5 0 2 0 7 1%
17 Economi c Producti vi ty a nd Effi ci e ncy I s s ue s 0 0 2 0 1 0 3 0%
18 Urba n, Rura l , a nd Fore i gne re rs Soci a l Se curi ty Cove ra ge I s s ue s 0 0 3 0 0 2 5 0%
19 Actua ri a l , Fore ca s ti ng, a nd Qua nti ta ti ve Te chni que s 1 11 11 3 0 8 34 3%
20 Agi ng, El de rl y, Sta nda rd of Li vi ng of Ol d Pe opl e 0 6 6 7 12 6 37 4%
21 Soci ol ogy, De mogra phy, La w, Pol i ti cs , a nd Re gul a ti ons 4 5 5 2 7 3 26 3%
22 Ea rl y Re ti re me nt a nd Pa rti a l Re ti re me nt I s s ue s 0 1 1 0 0 0 2 0%
23 Structura l Adjus tme nt a nd Pri va ti za ti on 0 0 0 3 1 0 4 0%
24 La bor Move me nt a nd We l fa re Sta te 0 0 1 8 3 5 17 2%
25 Low I ncome , De ve l opi ng Country, a nd Le a s t De ve l ope d Countri e s Soci a l Se curi ty I s s ue s 0 0 0 0 5 0 5 0%
Total 51 174 214 189 221 156 1005 100%

Source: Journal of International Social Security Review from Sciences Direct by Wiley (2017)
http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1468-246X/issues

51
 Until the First World War, social insurance initially had been incorporated to
social welfare programs as a supplemental component, whereas now social insurance
programs were seen as positive alternatives to social assistance programs. During the
interwar period, social security extended to branches of unemployment and occupational
disease. The insurance for self-employed established in the 1950s. After the Second
World War, most developed countries experienced a twenty-five-year period of sustained
economic growth. Governments allocated a significant part of their budgets for welfare
expansion, in a context where public expenditure and aggregate demand were seen as key
ingredients of the economic growth strategy. The systems in the 1960s became more
comprehensive and generous based on the above growth conditions as well as on the
conditions of low interest rates, high wage growth rate, and high birth rate. The
aforementioned trends in social security followed by the need of academic scholars and
researchers to explore related areas of social security: general social security and social
protection issues (25 papers = 50%); retirement and pensions issues (5 papers = 10%);
medical or health care and benefits issues (5 papers = 10%); insurance and assurance
issues (4 papers = 8%); and, the sociology, demography, law, politics, and regulations (4
papers = 8%).
However, the stagflation along with 1970s energy crisis slackened most of the
developed economies, which in conjunction with the reduction in pensionable age no
average and the increased longevity put the welfare state’s future to uncertainty. Social
security research in the 1970s was focused on: General Social Security and Social
Protection Issues (67 papers = 38%); Injury, Disabled, Illnesses, Accidents, Sickness,
Incapacity, Rehabilitation, Handicapped Issues (15 papers = 9%); insurance and
assurance issues (13 papers = 7%); and, the Retirement and Pensions Issues (13 papers =
7%). The 1980s marked by the prevalence of neoliberal economic policies proceeded to
partly of fully privatization of social security schemes, followed by a phase of skepticism
about their effectiveness in 1990s. Accordingly, the trend of the social security research
changed dramatically. Whereas in the 1980s the general social security and social
protection issues (60 papers = 28%) remained in the first place among all categories,
retirement and pensions issues (15 papers = 7%) moved from third place to the second
place in the list of categories. The third place is taking over by the insurance and
assurance issues (22 papers = 10%). In the 1990s, the aforementioned research areas
continued to monopolize researchers’ interest: general social security and social
protection issues (50 papers = 26%); retirement and pensions issues (30 papers = 16%);
and, medical or health care and benefits issues (21 papers = 11%).
Growing criticism with regard to the development deficiencies, those policy
blueprints produced led eventually to new debates worldwide. In the first decade of the
new millennium, the main areas of research on social security remain unchanged: general
social security and social protection issues (58 papers = 26%); retirement and pensions
issues (53 papers = 24%); and, medical or health care and benefits issues (18 papers =
8%). In 2010s, policy makers have shifted to policies and programs designed to reduce
poverty and vulnerability by promoting efficient labor markets, diminishing people's
exposure to risks, and enhancing their capacity to manage economic and social risks, such
as unemployment, exclusion, sickness, disability and old age. Social protection issues
have become the new area of research by taking over the third place of preference: general
social security and social protection issues and the retirement and pensions issues (30
papers = 19%); medical or health care and benefits issues (16 papers = 10%); and, wages,
savings, income tax, subsidies, income redistribution, income support programs (10
papers = 6%).
52
 Among the 1005 papers on social security published in Journal of International
Social Security Review in the past fifty years, numerous frameworks, conceptual
models, and vulnerability assessment techniques have been developed to advance both
the theoretical underpinnings and practical applications of social security: benefit/cost,
risk, times series, or forecasting analysis through the application of econometric methods
and use of microeconomic and macroeconomic level secondary data. The vast majority
of the scholarly articles are results of monodisciplinary collaborations with sixty-five
percent of them became a prevalent part of economic methodology. Only one percent of
those papers followed a multidisciplinary approach, drawing on knowledge and
expertise outside of social security discipline. The content analysis shown that economic
methodology moves beyond simple collaboration and teaming to integrate data,
techniques, perspectives, and concepts, identifying fifty-three variables used from
journal papers to advance fundamental understanding or to solve real world issues on
social security (see Table 2).

Table 2. The Evaluation of the Journal of International Social Security Review by Research Approach
No. Social Security Research Categories 1960s 1970s 1980s 1990s 2000/09 2010/17 Total %
1 Genera l Soci a l Securi ty a nd Soci a l Protecti on Is s ues 25 67 60 50 58 30 290 29%
2 Ins ura nce a nd As s ura nce Is s ues 4 13 22 13 11 5 68 7%
3 Reti rement a nd Pens i ons Is s ues 5 13 15 30 53 30 146 15%
4 Injury, Di s s a bl ed, Il l nes s es ,Acci dents , Si cknes s , Inca pa ci ty, Reha bi l i tati on, Ha nddi ca pped Is s ues 3 15 30 7 15 7 77 8%
5 Medi ca l or Hea l th Ca re a nd Benefi ts Is s ues 5 6 17 21 18 16 83 8%
6 Soci a l Securi ty Ins ti tuti ons , Admi ni s tra ti on, Governa nce, a nd Ma na gement Is s ues 3 4 5 8 2 7 29 3%
7 Informa l Sector, Poverty, a nd Infl a ti on 0 0 0 5 3 3 11 1%
8 Gender, Women, Fa mi l y, Ma terni ty, Mortal i ty, Si ngl e-Pa rent, Chi l dhol d Soci a l Progra ms 0 11 12 11 5 5 44 4%
9 Huma n ri ghts a nd Mora l &Ha za rd i n Soci a l Securi ty Is s ues 1 1 0 1 0 0 3 0%
10 Empl oyees ' Provi dent Fund Schemes 0 1 0 2 0 0 3 0%
11 Soci a l Wel fa re, Soci a l As s i s tance, Al l owa nce, Tra ns a cti ons , tra ns fers , Compes a ti ons , a nd Pa yments 0 2 1 2 5 7 17 2%
12 Wa ges , Sa vi ngs , Income Ta x, Subs i di es , Income Redi s tri buti on, Income Support Progra ms 0 10 10 5 12 10 47 5%
13 La bor a nd Occupa ti ona l Sa fety, Unempl oyment Compes a ti on a nd Unempl oyment Ins ura nce 0 6 7 11 7 7 38 4%
14 Mutua l Funds , Pers ona l Fi na nces , Sa vi ngs , Portafol i os , Stock Ma rket, a nd Bonds 0 0 1 0 0 0 1 0%
15 Economi c Reces s i on a nd Fi na nci a l Cri s i s 0 2 0 0 1 5 8 1%
16 Economi c Devel opment a nd Economi c Growth 0 0 5 0 2 0 7 1%
17 Economi c Producti vi ty a nd Effi ci ency Is s ues 0 0 2 0 1 0 3 0%
18 Urba n, Rura l , a nd Forei gnerers Soci a l Securi ty Covera ge Is s ues 0 0 3 0 0 2 5 0%
19 Actua ri a l , Foreca s ti ng, a nd Qua nti tati ve Techni ques 1 11 11 3 0 8 34 3%
20 Agi ng, El derl y, Standa rd of Li vi ng of Ol d Peopl e 0 6 6 7 12 6 37 4%
21 Soci ol ogy, Demogra phy, La w, Pol i ti cs , a nd Regul a ti ons 4 5 5 2 7 3 26 3%
22 Ea rl y Reti rement a nd Pa rti a l Reti rement Is s ues 0 1 1 0 0 0 2 0%
23 Structura l Adjus tment a nd Pri va ti za ti on 0 0 0 3 1 0 4 0%
24 La bor Movement a nd Wel fa re State 0 0 1 8 3 5 17 2%
25 Low Income, Devel opi ng Country, a nd Lea s t Devel oped Countri es Soci a l Securi ty Is s ues 0 0 0 0 5 0 5 0%
Total 51 174 214 189 221 156 1005 100%

Source: Journal of International Social Security Review from Sciences Direct by Wiley (2017)
http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1468-246X/issues

The nature of research on social security is dynamic and multidimensional,

enabling researchers to investigate a wide range of societal issues under an economic
(65% = 653 papers), social (10% = 101 papers), or political (15% =151 papers) prism;
related to public (80% = 804 papers), private (15% = 151 papers) sector or mix (5% =
50 papers); within a macroeconomic (85% = 854 papers) or microeconomic (15% = 151
papers) environment; and in national (60% = 603 papers), regional (20% = 201 papers),
and global (20% = 201 papers) level. Furthermore, it is highly analytical, employing a
wide range of theoretical tools, models, and design mechanics. The vast stream of papers
adopted a traditional theoretical framework (97% = 975 papers), developing Keynesian
(35% = 352 papers), monetary (10% = 101 papers), neo-classic (30% = 302 papers) and
53
classic economic models (20% = 201 papers based on general equilibrium (60% = 603
papers), static (75% = 754 papers) and imperfect competition market setting (75% = 754
papers).
The research design of the scholarly papers is predominantly empirical in nature
(95% = 955 papers), leaving behind the purely theoretical ones (5% = 50 papers).
Empirical evidence was mainly analyzed qualitatively (75% = 754 papers), using firstly
descriptive (60% = 603 papers) and secondary monitoring (30% = 286 papers). For those
papers that followed a quantitative path, the predictive approach (9% = 90 papers) takes
the lion share from the simulation approach (1% = 1 paper). In the case of data analysis,
ninety-six percent of all papers use secondary data sources, whereas the rest use primary
(3% = 30 papers) or mix data (1% = 10). The quantitative papers use various econometric
techniques, including times series (25% = 251 papers), cross-sectional (50% = 502
papers), and panel data analysis (20% = 201 papers). It is apparent from the analysis that
the future of social security research depends on the flexibility and dynamism of the
social security research analytical frameworks adapted to the real world through the
application of practical research techniques, methods, methodologies and research focus
through the integration of different knowledge fields. Hence, social security research
can be considered as a multi-discipline research approach that could facilitate the study
of different socio-economic and political problems that could have negative impacts on
the social security performance anywhere and anytime. It is apt to stress that social
security research is an important technical-theoretical analytical tool for future
academics, economists, policy makers and supranational institutions such as World
Bank (WB), United Nations (UN) and others. More importantly, the relative rise in the
impact factor of the Journal of International Social Security Review from 0.48 in the
year 2004 to 1.96 in the year 2011 based on the Wiley Institute for Science Information
(ISI) convincingly justifies the relevance of social security research to a large array of
socio-economic and political issues. (Thomson Reuters, 2011).

4.4. Concluding Remarks

This paper concludes that social security research can open a new research field
to academics, policy makers and social scientist in the study of complex and dynamic
behavior of socio-economic-welfare problems that can affect our society anytime and
anywhere without borders. This conclusion is drawn from the review and analysis of 1005
articles published 50 years ago (1967-2017) by the Journal of International Social
Security Review. The trend of the social security research is changing remarkably fast,
with its origins invoked by uses of new research approaches and research focus. Finally,
the social security research can become a powerful analytical tool that accept the
adaptation of any technique, methodology, method and research approach such as
pensions, insurance, health care, poverty, income distribution, unemployment, transfers,
taxation to explain deeply complex socio-political and economic problems that affect
different social groups in the society at different geographical areas under different
historical events.

4.5. References
Antonen, A., & Sipila, J. (1996). European Social Care Services: Is it possible to
identify models? Journal of European Social Policy, 6(2), 87-100.
Bianco, M., Gerali, A., & Massaro, R. (1997). Financial systems across "developed
economies": convergence or path dependence? Research in Economics, 51(3),
303-331.
54
Deacon, B. (1992). The new Eastern Europe: Social Policy Past, Present and Future.
London; Newsbury Park; Delhi: Sage Publications.
Esping-Andersen, G. (1990). The Three Worlds of Capitalism. Princeton, NJ: Princeton
University Press.
Esping-Andersen, G. (1994). After the Golden Age: The future of the welfare state in
the new global order. Retrieved from Geneva:
Ferrera, M. (1996). The Southern Model of Welfare in Social Europe. Journal of
European Social Policy, 6(1), 17-37.
Gordon, S. M. (1988). Social Security Policies in Industrial Countries: A Comparative
Analysis. Cambridge, UK: Cambridge University Press.
Gough, I. (2004). Welfare regimes in development context: a global and regional
analysis. In I. Gough, G. Wood, A. Barrientos, P. Bevan, P. Davis, & G. Room
(Eds.), Insecurity and Welfare Regimes in Asia, Africa and Latin America:
Social Policy in Development Contexts (pp. 15-48). Cambridge: Cambridge
University Press.
Hobson, B. (1997). Recognition and Redistribution: The Interplay Between Identities
and Institutions: Swedish Women's Mobilization in Welfare State Expansion and
Retrenchment. Working Paper. Working Paper, Stockholm University.
Korpi, W., & Palme, J. (1998). The Paradox of redistribution and strategies of equality:
Welfare state institutions, inequality, and poverty in the western countries.
American Sociological Review, 63(5), 661-687.
Lewis, J., & Ostner, I. (1994). Gender and the Evolution of European Social Policies.
Bremen: Centre for Social Policy Research, University of Bremen.
Miller, C. (2006). Social Welfare in Africa: Meeting the needs of households caring for
orphans and affected by AIDS. Paper presented at the Social protection
initiatives for children, women and families: An analysis of recent experiences,
The New School University.
Palacios, R., & Pallares-Millares, M. (2000). International Patterns of Pension
Provision Pension Prime Paper. The World Bank. Washington, D.C.
Palme, J. (1990). Models of Old-aged Pensions. In A. Ware & E. R. Goodin (Eds.),
Needs and Welfare. London: Sage Publications.
Pierson, P. (1994). Dismantling the Welfare State. Cambridge: Cambridge University
Press.
Pierson, P. (2000). Increasing returns, path dependence, and the study of politics.
American Political Science Review, 94(6-7), 251-267.
Sapir, A. (2006). Globalization and the Reform of European Social Model. Journal of
Common Market Studies, 44(2), 369-390.
Titmuss, M. R. (1958). Essay on "The Welfare State". London: George Allen & Unwin.
Veit-Wilson, J. (1992). Muddle or Mendacity? The Beveridge Committee and the
Poverty Line. Journal of Social Policy, 21(3), 269-301.
Wiley. (2017). Journal of International Social Security Review.
http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1468-246X

55
Chapter V
Pensionomics
By Mario Arturo Ruiz Estrada and Evangelos Koutronas

5.1. Introduction
The concept of retirement has evolved constantly, transforming societies and
shaping both income and non-income dimensions of well-being. Pension entitlement
turned gradually from a political discourse to a human right. Pension schemes have
extended the scope of insurance coverage beyond labor markets and the lifecycle,
supporting the broader needs of entire population. Furthermore, pension schemes are
widely acknowledged as drivers of economic growth: they enhance labor productivity;
foster smooth consumption, and; create a stable economic environment for investment
and innovation. Current expectations require pension schemes to adopt proactive and
reactive policies in order to examine options for mitigation or for modification of
potential consequences in anticipation of exceptional events. The heterogeneity and
complexity in event dynamics are systemic in the sense that the impact is far from linear.
The idiosyncratic nature of unexpected and unpredictable events is rather a result of
multidimensionality based, among others, in magnitude, frequency, timing, intensity and
impact. It is plausible to argue that crisis episodes can destabilize critical systems of
economic activity, producing economic spillovers that can directly or indirectly affect the
sustainability of pension schemes. If the calculation of direct economic impact is readily
traceable, the estimation of indirect economic impact can be an onerous task.
Over the course of their development, pension schemes have gradually
accumulated scientific knowledge, both of empirical and methodological nature. The
employment of different methodologies keeps a constant qualitative transformation in
respect of content and form and quantitative transformation in respect of output.
Empirical literature has identified pension adequacy and financial sustainability as the
key evaluation criteria of pension schemes. The first criterion concerns of the ability of
pension schemes to enable individuals to maintain their living standards at retirement
(Biggs & Springstead, 2008; Blondell & Scarpetta, 1999; Borella & Fornero, 2009;
Chybalski & Marcinkiewicz, 2016; Clingman, Burkhalter, & Chaplain, 2016; European
Commission, 2006; Goodin, Headey, Muffels, & Dirven, 1999; Holzmann & Guven,
2009; Hurd & Rohweder, 2008; Mandatory Provident Fund Schemes Authority, 2010;
Mitchell & Phillips, 2006; Pang & Warshawsky, 2013). The second criterion refers to
fund performance (Farrar, 1962; Grinblatt & Titman, 1989; Henricksson, 1984; Irwin,
Blume, & Crockett, 1970; Irwin & Vickers, 1965; Jensen, 1968; Mains, 1977; Sharpe,
1966; Treynor, 1965). Notwithstanding, the existing evaluation methods are monotonic
in principle, providing inadequate information about scheme’s overall performance.
Developing a performance measurement framework specific for pension schemes is a
relatively new topic in the literature. It is anticipated given that most of the pension
schemes in the developing countries are still in their development phase, whereas the
well-established pension schemes in developed countries experiencing administrative,
regulatory, and political issues.

56
 This paper suggests a paradigm shift, a multidisciplinary approach called
Pensionomics: this “multidisciplinary” focus builds a new analytical framework to
evaluate pension overall performance based on past work on pension evaluation,
incorporating non-economic variables with significant impact on economic growth and
social development. Pensions Consistency Index (PC-Index) introduces a comprehensive
evaluation tool to study the coverage, performance, efficiency, effectiveness, current
trends, and future possibilities of pension schemes. PC-Index investigates the uncertainty
and behavioral change of pension schemes under a new perspective within the framework
of a dynamic imbalanced state (DIS) (Ruiz Estrada & Yap, 2013) and the Omnia Mobilis
assumption (Ruiz Estrada, 2011). The paper is organized as follows. Section Two review
the evaluation methods that has been proposed and used in the literature. Section Three
describes the underlying model. Section Four presents findings in regard to ASEAN
pension schemes. Section Five concludes. The Appendix contains tables and figures.

5.2. Definition and Classification of Pensionomics

Pensionomics places the concept of retirement in a multidisciplinary context.
Pensionomics overcomes theoretical and empirical limitations encountered by the path-
dependency perspective, developing a new research agenda to study pension schemes
under historical, cultural, social, political, economic, political and environmental prism.
Integrating diversified data, techniques, perspectives and concepts, Pensionomics’
objective is to connect natural and man-made events with social protection mechanisms
for the development of a dynamic social protection framework where individual,
community and society needs are met effectively and efficiently by implementing tailored
policies, closely related to their specific context. A qualitative content analysis was
conducted in the journal of pension economic and finance issued by Cambridge
University Press (2017) (see Table 1). The bibliometric analysis yielded 500 scholarly
articles from 2002 to 2017. The publication record for pensions has grown gradually over
the years. Pensionomics can be classified into the following ten categories: (i) insurance;
(ii) private plan retirement; (iii) public plan retirement; (iv) health care programs; (v)
social welfare programs; (vi) unemployment protection; (vii) personal finances; (viii)
formal transfers; (ix) informal transfers; (x) assurance.

Table 1. Papers classification according to Different Categories

Categories # of Articles
(i) Insurance 75
(ii) Private retirement plans 120
(iii) Public retirement plans 150
(iv) Healthcare programs 50
(v) Social welfare programs 15
(vi) Employment protection 15
(vii) Personal finances 25
(viii) Formal transfers 5
(ix) Informal transfers 15
(x) Assurance 10

Source: The Journal of Pension Economic and Finance (2017)

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 Review in the past fifteen years, numerous frameworks, conceptual models, and
vulnerability assessment techniques have been developed to advance both theoretical
underpinnings and practical applications of social security: benefit/cost, risk, times series,
or forecasting analysis through the application of econometric methods and use of
microeconomic and macroeconomic level secondary data. The vast majority of the
scholarly articles are results of monodisciplinary collaborations with ninety percent of
them became a prevalent part of economic methodology. Only ten percent of those papers
followed a multidisciplinary approach, drawing on knowledge and expertise outside of
social security discipline.

5.3. The Pensions Consistency Index (PC-Index)

The Pension Consistency Index is a statistical measure of changes on pension
performance. PC-Index evaluates the consistency level of a pension system by
pinpointing their deficiencies and mapping their patterns. PC-Index involves ten main
variables, of which consist fifty sub variables. PC-Index implementation involves the
following steps: (i) the use of multi-input-output table; (ii) the classification of variables
and identification of parameters; (iii) the measurement of the PC-Index; (iv) the
construction of the PC-Surface. The multi-input-output table in Table 2 analyzes both
direct and indirect effects on pension performance. It is a collection of large amounts of
related data stored in a structured format within a database measured by a single variable.
This single variable portrays the evolution of pension scheme over time. The multi-input-
output table output (“m” number of main-variables x “n” number of sub-variables) does
not include any notion of ranking of variables according to importance. All sub-variables
are given the same importance (weight) expressed by a binary numeral system. The
binary system is applied to every sub-variable because all sub-variables have the same
level of importance and exert the same level of influence in the multi-input-output table.

Table 2: The Multi-Input-Output Table

P α1 α2 α3 α4 α5 α6 α7 α8 α9
1 2 3 4 5 6 7 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 7 8 1 2 3 1 2 3 1 2 3 4 5 6 7 8 1 2 3

Source: Ruiz Estrada (2011)

The construction of the PC-Index involves 9 main-variables and 50 sub-variables.

The 9 main-variables are: (α1) type of research; (α2) research orientation; (α3) data
sources; (α4) econometrics methods applied; (α5) areas of research; (α6) research
theoretical framework; (α7) pensions by sectors; (α8) economics frameworks; (α9)
geographical analysis. The first main-variable (α1) (‘types of research’) is formed by
seven sub-variables: (1) predicting; (2) monitoring; (3) proposal; (4) descriptive; (5)
diagnostic; (6) simulation; (7) experimental. The second main-variable (α2) (‘research
orientation’) is formed by six sub-variables: (1) empirical; (2) theoretical; (3) technical;
(4) historical; (5) quantitative; (6) qualitative. The third main-variable (α3) (‘data
sources’) consists of six sub-variables: (1) primary data; (2) secondary data; (3) mix data;
(4) long term; (5) medium term; (6) short term. The fourth main-variable (α4)
(‘econometric methods applied on policy modeling’) is made up of (1) linear regression

58
analysis; (2) multiple regression analysis; (3) times series data; (4) cross-sectional data;
(5) panel data; multi-dimensional panel data (6). The fifth main-variable (α5) (‘area of
research’) comprises eight sub-variables: (1) economics; (2) social; (3) technological; (4)
political; (5) environment; (6) institutional; (7) sciences; (8) multi-disciplinary. The sixth
main-variable (α6) (‘research theoretical framework’) comprises three sub-variables: (1)
original theoretical framework; (2) traditional theoretical framework; (3) extension
theoretical framework. The seventh main-variable (α7) (‘Pensions by sectors’) is made
up of three sub-variables: (1) private sector; (2) public sector; (3) public/private sector.
The eighth main-variable (α8) (‘economics frameworks applied on policy modeling’)
comprises the following eight sub-variables: (1) macroeconomics analysis; (2)
microeconomics analysis; (3) partial equilibrium; (4) general equilibrium; (5) dynamic
modeling; (6) static modeling; (7) perfect competition; (8) imperfect competition. The
ninth main-variable (α9) (‘geographical analysis’) is affected by three sub-variables: (1)
national level; (2) regional level; (3) global level. It is without any sub-variable (see Table
3).

Table 3. Application of Binary System in the Multi-Input-Output Table.

P α1 α2 α3 α4 α5 α6 α7 α8 α9
v 1 2 3 4 5 6 7 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 7 8 1 2 3 1 2 3 1 2 3 4 5 6 7 8 1 2 3
P1 0 1 1 1 1 1 1 0 1 1 1 1 1 0 1 0 0 1 1 1 1 1 0 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 0 1 1 1 0 1 1 1 1 1
P2 0 1 0 0 1 0 1 0 0 1 0 0 1 0 1 0 0 1 0 1 0 1 0 0 1 1 0 1 0 0 0 0 0 1 0 1 0 0 0 1 0 1 0 1 0 0 1 1 0 0
(a1) Type of research (a2) Research Orientation (a3) Data Source
(1) Predicting (1) Empirical (1) Primary Data
(2) Monitoring (2) Theoretical (2) Secondary Data
(3) Proposal (3) Technical (3) Mix Data
(4) Descriptive (X24) Historical (4) Long Term
(5) Diagnostic (5) Quantitative (5) Medium Term
(6) Simulation (6) Qualitative (6) Short Term

(a5) Area of Research (a6) Research Theoretical Framework (a8) Economics Framework
(1) Economics (1) Original Theoretical Framework (1) Macroeconomic Analysis
(2) Social (2) Traditional Theoretical Framework (2) Microeconomic Analysis
(3) Technological (3) Extension of theoretical Framework (3) Partial Equilibrium
(4) Political (X8:4) General Equilibrium
(5) Environmental (a9) Geographical Analysis (X8:5) Dynamic Modeling
(6) Institutional (X9:1) National Level (X8:6) Static Modeling
(7) Sciences (X9:2) Regional Level (X:8:7) Perfect Competition
(8) Multi-disciplinary (X9:3) Global Level

(a7) Policy Modeling by Sectors

(1) Private Sector
(2) Public Sector
(3) Public/Private Sector
Source: Ruiz Estrada (2011)

PC-Index evaluates each main variable by its sub-variables. PC-Index is equal to the sum
of all main-variables:

− = ∑ , ℎ = , , … , ∞, ~ [ , ],
( )
=

={ : [ ⋁ ]}

where i, j and t correspond to main variables, sub-variables and total variables,

respectively. The matrix for of equation 1 is given by

59
 −

(∑ ) ∑ (∑ )
= = =

= (∑ ) (∑ ) (∑ )
= = =

�
(∑ ) ∑ (∑ )
[ = = = ]

The above matrix formulation reflects the nine main variables. Intuitively, PC-
Index evaluates the level of consistency of pension scheme. PC-Index classifies pension
scheme consistency into four levels: (i) perfect consistency (9 < PC-I < 10); (ii) good
consistency (7 < PC-I < 8.99); (iii) acceptable consistency (5 < PC-I < 6.99); (iv) low
consistency (0 < PC-I < 4.99). Figure 1 graphically represents PC-Index:

Figure 1. The Pensions Consistency Surface (PC-Surface)

Source: Ruiz Estrada and Yap (2012)

The symmetric 3-D surface reveals pension scheme strengths and weaknesses. The
construction of the above graph is based on the concept of the mega-surface coordinate
space, a multi-dimensional manifolds to visualize multi-variable economic data behavior
(Ruiz Estrada, 2007).

5.4. Application of PC-Index and -Surface: An Example

We apply the aforementioned methodology to two different pensions model cases
featured in two papers of the journal of pension economic and finance, Cambridge
University Press. The first is the paper entitled ‘Financial literacy and retirement planning
in the United States’ (Paper-1) authored by Lusardi and Mitchell (2011). The second
paper is ‘A model for the pension system in Mexico: diagnosis and recommendations’
(Paper-2) authored by Alonso, Hoyo, and Tuesta (2015).

60
 Table 4. The PC-Index Measure for Paper-1 and Paper-2

Variables Paper-1 Paper-2

(a1) Type of Research 1.00 0.43
(a2) Research Orientation 0.85 0.67
(a3) Data Source 1.00 0.21
(a4) Econometrics Methods Applied 0.90 0.67
(a5) Area of Research 1.00 0.25
(a6) Research Theoretical Framework 0.88 1.00
(a7) Policy Modeling by Sectors 0.88 0.20
(a8) Economic Framework 1.00 0.62
(a9) Geographical Analysis 1.00 1.00
Total 9 5

Results: Level
Paper-1: 9 Perfect Consistency
Paper-2: 5 Good Consistency

. . . . . .
Paper − =[ . . . ] Paper − =[ . . . ]
. . . . . .

Source: Authors’ Elaboration

Analysis findings are presented in table 4. Paper-1 demonstrates perfect consistency

whereas Paper-2 demonstrates acceptable consistency that reflect to 9 and 5 index points,
respectively. Paper-2’s relatively poor performance lies on the following four weak main-
variables: main-variable X3 (0.21 = poor performance); main-variable X5 (0.25 = poor
performance); main-variable X7 (0.20 = poor performance).

Figure 2. The PC-Surface for Paper-1 and Paper-2

Paper-1

1.00

0.90
Series3
0.80
Series2
0.70
1
2
Series1
3

0.70-0.80 0.80-0.90 0.90-1.00

Paper-2

0.5 Series3

Series2
0
1
2
Series1
3

0-0.5 0.5-1

Source: Authors’ Elaboration

61
 The four weak variables are multi-dimensionally graphically depicted in Figure
2. Possible recommendations: use of secondary data in its specific model to improve the
main-variable (X1); the inclusion of non-economic variables in its model to improve the
main-variable (X5); identify the sector that is relevant to improve the main-variable (X7);
and, improve the main-variable (X9) by applying its model to different regions and
countries.

5.5. Concluding Remarks

The consideration of pensionomics concept as an evaluation tool for pension schemes
provides insights that are helpful in explaining performance differentials. Taking
definition, classification and evaluation as a guiding principle, the new conceptual
framework can be a useful point of reference for the overall evaluation of pension
schemes revealing deficiencies that traditional evaluation methods cannot detect. The
multidisciplinary approach focuses on building intersectoral and holistic policies able to
respond to the multidimensional uncertainties of the new dynamic environment.

5.6. References

Alonzo, A., Hoyo, C., & Tuesta, D. (2015). A model for the pension system in Mexico:
diagnosis and recommendations. The Journal of Pension Economics and Finance,
14(1), 76-112.
Biggs, A. G., & Springstead, G. R. (2008). Alternative measures of replacement rates
for social security benefits and retirement income. Social Security Bulletin,
68(2), 1-19.
Blondell, S., & Scarpetta, S. (1999). The retirement decision in OECD Counties. OECD
Economics Department Working Papers No. 202. OECD. Paris.
Borella, M., & Fornero, E. (2009). Adequacy of pension systems in Europe: An analysis
based on comprehensive replacement rates. ENERGI Research Report No. 68
European Network of Economic Policy Research Institutes Retrieved from
https://ssrn.com/abstract=2033652
Cambridge University Press. (2017). Journal of Economics and Finance. Retrieved
from https://www.cambridge.org/core/journals/journal-of-pension-economics-
and-finance
Chybalski, F., & Marcinkiewicz, E. (2016). The Replacement Rate: An Imperfect
Indicator of Pension Adequacy in Cross-Country Analyses. Social Indicators
Research, 126(1), 99-117.
Clingman, M., Burkhalter, K., & Chaplain, C. (2016). Replacement Rates for
Hypothetical Retired Workers. Retrieved from Baltimore, MD:
https://www.ssa.gov/oact/NOTES/ran9/an2016-9.pdf
European Commission. (2006). Current and Prospective Theoretical Pension
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content/uploads/2008/12/isg_repl_rates_en1.pdf
Farrar, D. E. (1962). The Investment Decision under Uncertainty Englewood Cliffs, NJ:
Prentice-Hall.
Goodin, R. E., Headey, B., Muffels, R., & Dirven, H.-J. (1999). The Real Worlds of
Welfare Capitalism. Cambridge: Cambridge University Press.
Grinblatt, M., & Titman, S. (1989). Portfolio Performance Evaluation: Old Issues and
New Insights. Review of Financial Studies, 2(3), 393-421.

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Henricksson, R. (1984). Market Timing and Mutual Fund Performance: An Empirical
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Holzmann, R., & Guven, U. (2009). Adequacy of retirement income after pension
reforms in Central, Eastern and Southern Europe: Eight country studies.
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Hurd, M. D., & Rohweder, S. (2008). The adequacy of economic resources in
retirement. Working Paper WP 2008-184. University of Michigan Retirement
Research Center. Ann Arbor, MI. Retrieved from
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Irwin, F., Blume, M., & Crockett, J. (1970). Mutual Funds and Other Institutional
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Irwin, F., & Vickers, D. (1965). Portfolio Selection and Investment Performance.
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Lusardi, A., & Mitchell, O. S. (2011). Financial literacy and retirement planning in the
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Mandatory Provident Fund Schemes Authority. (2010). Approaches to Measurement of
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les/Approaches_to_Measurement_of_Retirement_Costs.pdf
Mitchell, O. S., & Phillips, J. W. R. (2006). Social Security replacement rates for
alternative earnings benchmarks. MRRC Working Paper WP 2006-116.
University of Michigan. Michigan.
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Treynor, J. L. (1965). How to Rate Management of Investment Funds. Harvard
Business Review, 43(1), 63-75.

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Chapter VI
Public Pension Reforms: Policy and Outcomes
By Evangelos Koutronas

6.1. Introduction
The debate on pension reforms has become a prominent theme of public policy
since the 1970s and implementation of pension reforms have been as frequent as diverse
(Heller, Hemming, & Kohnert, 1987; Holzman, 1988; World Bank, 1994). Slowing and
less stable economic development, higher inflation and unemployment rates gradually
undermined the financial strength of public pension schemes and created an environment
that was much less favorable to their expansion than in the preceding two decades. The
initial pension fund surpluses gradually became the implicit pension debt that was
building up (Kane & Palacios, 1996; Van Der Nood & Herd, 1994). The initial public
pension schemes reached maturity when the first generation of retirees begun to retire.
Pension outlays outweighed tax revenues turning thus surplus into deficit and the
implications of benefit expenditures become observable on public finances. Governments
initially proceeded to systemic reforms, reshaping the functions of public pension
schemes. However, the challenge remained on how to prolong the financial life of the
existing pension systems while maintaining their efficiency. Past and current literature
had argued that many public pension systems are financially unsustainable in their
present form (Davis, 1995; Lakonishok, Shleifer, & Vishny, 1992; Louise & Palmer,
2000; Vittas, 1993). However, if governments delay reforms, then the scale of adjustment
needed in the short or the long run will be more drastic and afflictive.
This study aims to review the current pension systems practiced by countries
globally, existing proposed reforms to pension systems form literature and address issues
theoretically on our proposed reforms to current pension systems focused, in particular,
on the policy choices within the pension system itself. The study seeks to identify major
reform policies, pinpoint their deficiencies, map their patterns and discuss key lessons
learned. The literature review, although not fully exhaustive, will present important
findings that may distill insightful connotations to alternative paths for reform. The
remainder of this paper is structured as follows. Section two outlines the challenges
pension systems are facing and summarizes the main features of reform policies. The
following sections describe the advantages and disadvantages of the actual and potential
reform policies. Section six considers an optimal pension design. The final section
concludes.

6.2. Pension Reforms from the Past

A substantial literature has identified several factors responsible for the erosion
of pension systems (Davis, 1995; Lakonishok et al., 1992; Louise & Palmer, 2000; Vittas,
1993). Firstly, the demographic trends suggest rapid ageing due to declining fertility rates
and increasing longevity. Both of these have a negative impact on economic growth,
household behavior, labor markets, pension benefits, state revenues and redistribution of
income. Socially, they affect family cohesion and functioning, living arrangements,
housing and migration. Health care expenditures had also been growing at a faster rate

64
than average income resulting in higher contribution rates or the curtailment of benefits
(Weber, 2010).
Secondly, pension reforms face daunting barriers. In developed countries,
existing legal and regulatory framework related to social welfare and institutional rigidity
constrain reform policies (Pierson, 1999). In developing countries, socioeconomic
imbalances accompanied by poor infrastructure quality and underdeveloped capital
markets leave only a few of them able or willing to implement social security reforms.
Political pressures also impose roadblocks to the formulation of welfare policies with
redistributive features (Newbery & Stern, 1987; Radian, 1980). Pension reforms which
began in the 1980s and 1990s were triggered by exogenous (radical technological
changes, market liberalization, demographic changes and the loss of control by the side
of states in the financial, monetary and incomes policy) as well as endogenous factors
(welfare structure inefficiency). Several countries proceeded to moderate improvements
of their existing pension systems (Muller, 2001; Pierson, 1999). Others found fully-
funded schemes more attractive for their capital accumulation higher rates of return.
However, many countries expedited system transitions, from traditional defined-benefit
pay-as-you-go systems to defined-contribution fully funded systems (OECD, 2000).
The spectrum of reform arrangements was mainly parametric and systemic in
nature. The former involves automatic adjustment mechanisms that could help address
actuarial balance challenges, without affecting the structural characteristics of public
pension schemes. Parametric initiatives aimed at optimizing system efficiency, thereby
focusing on ad hoc changes, such as the retirement age, replacement rate, contribution
rate, and benefit indexation (Brooks, 2009; Hur, 2010; Modigliani & Muralidhar, 2004;
Schwarz & Demirguc-Kunt, 1999). All countries, except Greece, linked pension age to
rising life expectancy. Some countries (e.g. Lithuania, Greece, Bermuda, Latvia, and
Paraguay) also changed the years of service required prior to pension entitlement
(Schwarz & Demirguc-Kunt, 1999). Several European countries (e.g. Finland, Sweden,
Germany, France, Italy, Portugal and Switzerland) concentrated on reducing replacement
rates, and even lowering pension distributions (Modigliani & Muralidhar, 2004). South
American countries (e.g. Brazil, Peru and Chile) did exactly the opposite (Brooks, 2009).
Asian countries (e.g. Japan, Korea, Taiwan, Hong Kong, and Singapore) adopted a
mixture of both sides (Hur, 2010). The latter usually encompasses the composition of a
new defined-contribution component, a fully funded pillar inside, or outside of the
existing apparatus (Ponds, Severinson, & Yermo, 2011; Schwarz & Demirguc-Kunt,
1999). In some countries public sector employees were transferred to the main public
pension system (e.g. Austria, Chile, Czech Republic, Greece, Hungary, Mexico, Poland,
Spain, and the United States), which in some cases included a fully-funded, defined-
contribution component (e.g. Chile, Denmark, Hungary, Mexico, and Poland) (Ponds et
al., 2011). In several countries (e.g. Chile, Mexico, El Salvador, Bolivia, Poland,
Hungary, and Kazakhstan), reform arrangements entailed transition mechanisms to
support a new fully-funded system. Few countries though, either switched from pay-as-
you-go to individual notional accounts (Latvia, Sweden, Italy and Poland), or from
provident funds to pay-as-you-go system (Nigeria) (Schwarz & Demirguc-Kunt, 1999).
Literatures on empirical research concluded that the majority of policy initiatives
prompted adverse implications of addressing sustainability issues in public pension
schemes. Reform arrangements generally focused on curbing pension expenditures rather
65
than advancing funding and/or financing mechanisms (Disney, 2000; Hauner, Leigh, &
Skaarup, 2007; Schneider, 2009; World Bank, 1994). Public pension schemes can
“provide adequate, affordable, sustainable and robust benefits” (Holzman & Hinz, 2005)
within fifteen years of retirement (Ehnsson, 2008; Schwarz, 2006) given the benefit
replacement rate of 60 percent (Grech, 2013). This argument violates the assumption of
constant intergenerational transfers: younger generations must shoulder considerably
higher tax burdens to receive the same replacement rates. Thus, net benefits decline under
the traditional actuarial approach. Consequently, demographic trends broadly offset
pension reform effects in the long-run (Grech, 2012).
Pension reforms advocates suggest a paradigm shift to replace the principle of
solidarity with the principle of strict equivalence (Gill, Packard, & Yermo, 2005).
Retirement benefits depend on structural heterogeneity and rigid labor-market
segmentations, reproducing disparities in salary and benefit levels (International Labor
Organization, 2001; Perry et al., 2007). Furthermore, contributions create distortions in
the labor market, increase the cost of labor, reduce the country’s competitiveness, and
stimulate the substitution of labor by capital, hence potentially generating higher
unemployment. Oppositions to the claims suggest that in the long run the employer
contributions are transferred to the workers (through a lower salary) which do not result
in a negative impact on employment, although that effect may occur in the short run
(International Labor Organization, 2000). Based on the premise of the closer link between
contributions and benefits, private pension systems may reduce labor market distortions
arising from the perceived tax character of contributions to public pension schemes
(Laursen, 2000). Critics questioned this assumption arguing that the ultimate goal of a
pension system is social welfare not labor supply; furthermore, the benefit delivery shift
from defined benefits to defined contributions may create undesirable risks that affect
social welfare. Besides, the distortions may occur due to the complexity and the
interactions of the labor markets that involves welfare policy, payroll taxation, financial
social assistance, and a debt-financed transition to individual accounts (Barr, 2002; Barr
& Diamond, 2006; Orszag & Stiglitz, 2001). Despite the fact that pension systems have
shown resistance to reform, most countries demonstrated tremendous resistance towards
pension reform, hesitating to bear the political cost of such a decision. However, pension
reforms seem to be irreversibly needed and therefore governments should take reform
strategies that will ensure pension systems remain financially sustainable to provide
sufficient and adequate universal coverage to the population. From the literatures
reviewed and the studies made, the need for reform is irreversibly identified. At the same
time, the uncertainties of implementing reforms and the nature of the reforms to be made
is yet uncertain. The subsequent section will look at the nature of structural reforms.

6.3. Structural Reforms

Governments have been designing multi-pillar pension schemes to replace the
out-of-date single-pillar models. Multi-pillar designs show higher flexibility than single-
pillar designs and thus are more suitable to address the needs of the targeted population
while being robust enough to withstand major macroeconomic shocks arising from
economic, demographic and political volatilities (Chlon, Gora, & Rutkowski, 1999;
Holzman & Hinz, 2005; Rutkowski, 1998). Furthermore, a multi-pillar system would
attain intra- and inter-pillar optimal risk and desired returns based on asset diversification.
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Empirical findings from OECD countries support the diversification argument
(Thompson, 1998). Moreover, exposing public pension funds to political and regulatory
risks turned employees to seek “safety net” alternatives in private sector institutions
(Chlon et al., 1999; Gora & Rutkowski, 1998). In essence, structural welfare reforms
have turned to a universal panacea for many countries in the last two decades. Welfare
reform involves also changes in ownership: privatization has become the cornerstone of
economic-oriented welfare policies, adopting dynamic asset allocation strategies with the
highest projected average return (Demirguc-Kunt & Levine, 1996; Levine & Zervos,
1998). Linciano (2000) defined privatization as the transition of traditional pay-as-you-
go systems to mandatory or voluntary funded programs. It could take several forms:
individual accounts financed by a portion of payroll taxes; government investment of the
surplus in private markets; and personal accounts in addition to the payroll tax (Frederick
& Stanley, 2003).
Diverting funds to private accounts would reduce available funds to pay current
retiree benefits. This shift involves transition costs because the state must continue to pay
pension to retired beneficiaries and acquired right benefits to employees. Current
employees have also partial or full contributions into individual defined-contribution
accounts. This dilates the looming predicament rather than solving it. Over time, though,
analysts argue that privatization will progressively metamorphose social security
landscape with the transition from an unfunded pay-as-you-go system to a fully-funded
pension, individually capitalized system. Although →orld Bank’s three-pillar pension
scheme sets the benchmark for pension reform, only few countries worldwide would
condition to launch a three-pillar scheme as in the case of Switzerland, Australia,
Argentina, Chile, Uruguay, Bolivia, Hong Kong, and Kazakhstan, whereas limited
number of countries seem prone to proceed on three-pillar scheme reform (World Bank,
2006). However, government bodies failed to consider the adverse side effects of this
strategy would cause, including high participation rates, tax payment irregularities, and
distortions in labor market mechanisms. The adoption of a multi-pillar solution carries
complex challenges, including basic macroeconomic and financial prerequisites essential
for a multi-pillar reform. This include a fiscally feasible plan to address transition costs.
Multi-pillar scheme devolvement may hide financial shortfalls that are sufficient to
undermine fiscal stability due to the lack of legislative support and precise refinancing
assessment. The challenge to streamline systems and processes, optimize revenue cycles
and minimize expenditures first before launching a multi-pillar platform is formidable.
Thus far, most countries have reacted by modifying their existing pension
systems. The implementation of structural reforms varies on the basis of type and volume.
Schwarz (2006) acknowledged four types of structural pension reforms: (i) parametric
reforms; (ii) systemic reforms; (iii) regulatory reforms; and (iv) administrative reforms.
We will now review the structural reforms from the four aspects below.

6.4. Parametric Reforms

Parametric reforms involve systemic approaches for improvement of the fundamental
pay-as-you-go mechanisms in an attempt to optimize the system’s efficiency either
through prolonging productivity capacity of the elderly workforce or smoothing the fiscal
costs of population aging. However, in many cases, such approaches proved

67
counterproductive to pension systems with weakened linkage among contributions and
benefits.
Participation rates. The increase in the participation rate implies a proportional
increase in the cost of the contributions paid in during the active life of the worker,
without this translating into greater benefits. Germany, France, Nicaragua and Romania
announced reform proposals for gradually increasing the contribution rate ranges from 1
to 4.5 percent over a period that varies from 1 to 20 years. Lithuania alternatively
proceeded to a reduction of the participation rate from 5.5 to 2 percent of gross salary
(FIAP, 2010). A participation rate increase will have a negative impact on net salaries
and net benefits. Higher participation rates can lead to idle labor demand, informal sector
expansion, or impoverished individual saving behavior. Instead, the preferred alternative
is the implementation of a participation rate that labor market can bear and keep constant
over time.
Wages conditioned to contributions. In contrast with contribution rates, a wage
increase will have a positive impact to employees. Employees will have to pay
accordingly higher contributions with expecting also to receive higher benefits in
retirement. There will be a positive redistributive effect in the short run and current
retirees will receive higher benefits. However, this strategy is Pareto optimal as long as
pension deficit is limited enough to render the structural balance positive. Otherwise, the
implementation of this strategy will threaten the pension’s financial sustainability.
Accrual rate (the rate of benefit per year of service). The accrual rate is the rate at
which future benefits accumulate. It is usually part of the pension benefit formula. The
accrual rate amounts to a proportion of the final salary, and for its estimation takes into
account individual’s pensionable membership and final earnings. The accrual rate varies
for each individual depending on dates and type of service. The accrual rate is
intrinsically associated with the contribution rate, the retirement age, survival post-
retirement rate, and the revalorized wage rate. The decrease of accrual rate will make
employees worse off and receive lower benefits. This implies negative redistribution
effect to the younger generation and vulnerable population groups. Many countries
adjusted the benefits formula or reduced the benefits plan (Brazil, Belgium, Italy,
Netherlands and United Kingdom)(FIAP, 2010).
Averaging period for wages. The averaging period for wages is referred to the
entire working history of the individual. The average contributions are aligned with the
average benefits. This strategy tends to be progressive and favors high-income employees
if the benefit formula is based on the final working years.
Revalorization of wages. Valorization refers to the actuarial adjustment of the
accumulated contributions to the present value of current pension benefits. The actuarial
adjustment should reflect changes in costs and standards of living at time of retirement.
The most common practice is to revalue earlier years’ pay with the growth of average
earnings. Valorization of past earnings may not seem obvious in pension systems, but its
impact on retirement incomes is large. The majority of OECD countries revalue
accumulated contributions with respect to wage growth. Belgium, France, Greece and
Spain, revalue accumulated contributions with respect to price growth. Estonia, Finland
and Portugal use a mixture of the two, whereas Turkey uses a mix of price and GDP
growth (OECD, 2013). The revalorization of the wage growth to the average wage growth
will impact the contribution rate, respectively. The contribution growth rate will be equal
68
to the average wage growth rate. Employees have ongoing incentives to contribute from
the beginning of their career. Setting the wage revalorization lower than the benchmark,
in theory could be fiscally beneficial in the short run but may undermine fiscal policy in
the long run. It will lead to contribution evasion, which in turn, produces adequate
benefits to be higher than they would need to be causing a revenue shortfall. As a result,
several countries have moved away from earnings valorization in recent years (D'Addio
& Whitehouse, 2012).
Indexation of pensions. Practices vary, but pension indexation is the proper way
to preserve the constant rate of return within and across generations. Pension indexation
is twofold referring to rights and benefits paid out. Public pensions can provide a
reasonable insurance of pension benefits against wage or price inflation. In the
Netherlands, indexation of pension benefits to either wage or price increases has long
been considered a guaranteed right. Germany indexes public pensions according to the
income development. Denmark indexes pension benefits according to wage
development. Finland uses a mixture of the two (Hansen, 2006). The introduction of an
automatic pension adjustment mechanism will offer greater pension sustainability even
during periods of recession. Absence of indexation apparatus will result in the
deterioration of purchasing power of pensions. Wage indexation growth seems to be an
unattainable target for most countries. Besides, critics on pension indexed to wage growth
levels argue that retirees do not need to increase consumption during the retirement period
due to the benefits provided by the state. Pension indexation is subject to debate for both
defined-benefit, defined-contribution systems and non-contributory benefits.
Minimum pension. Minimum testing benefits aim at the poor retiree population
who live at subsistence level or have special needs in the form of social assistance and
support. The value of benefits is usually limited to the unemployed beneficiaries who
satisfy certain criteria considering income from other sources, such as a supplementary
income, assets and family resources. In Canada, Ireland New Zealand and Denmark
which have flat rate pension schemes; there is almost no bond between pension benefits
and contributions. Australia and the United Kingdom have significant means-tested
public schemes; the bond between pension benefits and contributions is weak. United
States pension scheme consists of basic contribution component and an earnings-
related component calculated according to a progressive formula; the link between
pension benefits and contributions fall in between (Dethier, 2007). Furthermore,
numerous countries adopt minimum income requirements in an attempt to improve the
adequacy of retirement incomes. In 2011, Finland launched minimum pension
requirements as a supplement to the universal type allowance. Greece and Mexico
introduced new means-tested benefits during the 2009-2013 period. In 2013, Portugal
introduced mean-tested requirements for eligibility to Income Support Allowance,
whereas Spain increased survivor benefits for those without a pension (OECD, 2013).
Retirees cannot receive higher benefits than the contributions paid. In addition,
the accumulated pension benefits cannot exceed pension assets, which are measured at
their fair value. Future pension benefits generally produce estimates using current rather
projected future cash flow earnings. Decreasing minimum pension will definitely lower
the redistribution with low-income pensioners to be worse off. Minimum pension
equilibrium is attainable as long as limit out-of-system transfers and encourages
individuals to contribute to the system regardless of their financial status. Minimum
69
pension affects both funded and unfunded pension schemes as well as side benefits for
those who are not eligible for retirement benefits.
Normal retirement age. Normal retirement age ought to be an endogenous
parameter and be adjusted according to life expectancy and productivity capacity. Several
countries raised retirement ages by taking into account both projected increases in life
expectancy and the uncertainty surrounding the estimates in those countries. There is a
wide range in projected effective retirement ages in 2050, from 60 (Serbia, Turkey
Luxemburg) to 65 (Austria, Belgium, Hungary, Czech Republic, Slovenia, Romania,
Italy, Greece, Bulgaria, South Korea and Nicaragua), 67 (Iceland, Norway, Germany,
Denmark, Spain, Israel, Australia and United States) and 68 (United Kingdom)(FIAP,
2010; OECDa, 2011). According to Schwarz (2006), pension systems should use the 15-
year retirement threshold. An employee who reaches the normal retirement age is entitled
to receive payment of his normal retirement benefit. In the case of early retirement, his
retirement benefit is his accrued benefit. The level of the accrual rate in this scenario
determines the level of retirement age, ceteris paribus. The higher the accrual rate, the
longer the individual has to work. A potential increase of retirement age will adversely
affect low-income individuals whose life expectancy is generally lower more than high
earners. For numerous different reasons, a certain part of the population will not receive
the benefits that have already paid for. In this case, deficit gap will be diminished while
the rest of the pensioners will receive their benefits. Equalizing retirement ages for men
and women will substantially increase the pension level for women. Changes in the
conventional retirement age will improve social security’s fiscal position. The retaining
ready-to-retire senior population fraction in the workforce will generate gains for defined-
benefit systems and non-contributory pensions: employee contribution cash flows will
increase – senior employees will continue to pay pension contributions and taxes while
they will delay claiming of their benefits – for pension expenditures will decrease.
Alternatively, defined-contribution systems and voluntary systems will experience
redistribution effects: welfare contribution for temporary employment will increase while
unemployment benefits may increase, and pension benefits will increase. It is estimated
that an individual loses 30 percent of his productivity capacity between 40 to 65 years of
age, on average. The level of physical demanding labor determines the level of retirement
age, which varies across economic sectors. If age limits human physical performance,
then it also limits the value of the accrual rate implying that there is a ceiling on how
much a given economy can afford to pay.
Pensionable Years of service required. Age and years of service requirements
must be met before someone retires. It is possible for someone who meets the service
requirement to retire at an earlier age. Thus, a potential increase of years or service will
be against low earners whose career in general is shorter. In principle, the short service
contribution behavior is actuarially adjusted to normal contribution behavior: early
retirees will receive a fair proportion of what members would receive at their normal
retirement age. Overall, the variation of benefits among members and across economic
sectors is insignificant. Minimum vesting standards should be prescribed as a necessary
condition for a beneficiary to be eligible for retirement benefits. Late pension entrants
will be penalized by late members paying higher contributions to satisfy pension system
fully or partially vesting requirements. Otherwise, accrual rate could not set properly.

70
 Early retirement. Early retirement policy was initiated to reduce unemployment
(OECD, 1998). The level of accumulated contributions, as well as member’s age upon
retirement, determines the level of accrual rate. The accrual rate will be adjusted
downward for individuals who want to retire before the attainment of normal retirement
age, and upwards when individuals decide to delay their retirement. This is beneficial as
long as other exogenous factors remain constant. Otherwise, early retirement will shift
financial burden to pension funds (Boeri, Brugiavini, & Maignan, 2001). The dramatic
increase of life expectancy in relation to lower birth rates made early retirement
unfavourable.

6.5. Systemic Reforms

Systemic reforms are usually referred to the composition of a new component or the
introduction of a new pillar. Systemic reforms concern mainly with the diversification of
redistribution asymmetries arising from demographic imbalances and uneven
contributions and benefits which usually lead to a funding gap or an unfunded liability.
Systemic reforms differ with respect to goals and the context of pension pillars. Many
less developed and developing countries have expanded their single-pillar systems well
beyond the basic redistributive functions (Bloom & McKinnon, 2013). The introduction
of a zero pillar aims to operate as a safety net providing basic support for everyone. It is
a mandatory, publicly managed, tax-financed program that provides mean assistance to
beneficiaries living at the subsistence level (Grosh, Del Ninno, Tesliuc, & Querghi,
2008). In 2008, Chile launched a zero pillar, a new basic solidarity pension plan that
integrated with the existing funded pillar and serves as pension supplement to pensioners
in the lowest 60 percent of the income distribution (Rocha, Vittas, & Rudolph, 2010).
This reform is seen as a benchmark (Rofman, Fajnzylber, & Herrara, 2008).
The majority of developed countries with defined-benefit schemes proceeded to
either parametric or systemic reforms. The latter refers to the introduction of notional
defined-contribution plans or virtual account systems. Notional defined-contribution
(NDC) plans constitute a policy countermeasure against the endogenous distortions in
the labor markets caused by the rapid growth of the informal sector. Mimicking pay-as-
you-go pattern, NDCs maintain the contributions-to-benefits ratio fixed while the level
of benefits varies with life expectancy (Gora & Palmer, 2001). In the mid-90s, Sweden,
Poland, Latvia and Italy launched NDC schemes (Chlon-Dominczak, Franco, & Palmer,
2012). The Australian, Dutch and United States pension systems considered hybrid plans
without deviating from their traditional schemes (Barr, 2006). In 2009, Norway
announced the implementation of a pension plan with NDC features. Egypt enacted an
NDC reform in 2010 for its implementation is envisaged in 2013. Uruguay, China,
Lebanon, Belarus as well as many EU countries have been considering NDC reform
approach (Holzmann, 2012).
The development of a second and a third pillar suggests a phased retirement: the
gradual transition from full-time employment status to part-time employment status to
full retirement in exchange additional income supplement from the three existing pillars.
The mandated second-pillar pension schemes are characterized by defined-contribution
plans. Chile introduced a second pillar in 1981. Very few emerging and developing
countries introduced a second pillar in their existing systems, which are still in the
accumulation phase (Holzmann, 2012). Finally, the voluntary third-pillar pension
71
schemes have been variously designed as individual savings accounts, mutual funds and
occupational pensions. High administrative and marketing costs and questionable
investment management practices have led some governments (i.e., Australia, Denmark,
the Netherlands) to espouse regulatory reforms (G. Brunner, Hinz, & Rocha, 2008).
Systemic reforms proceeded to financing rearrangements concerning the composition of
debt structure, shifting pension liabilities from implicit to explicit debt (Holzman,
Palacios, & Zviniene, 2004; Werding, 2006). Hence, while debt shifting is fiscally
restricted, explicit debt is theoretically unrestricted (Eberl, 2015). The periodic rollover
of pension promises from one generation to another constitutes a hidden public debt1
(Holzman, 1998; OECD, 1997). Debt shifting prompts a recognition effect of the implicit
debt in the form of securitized debt instruments. When the cost of borrowing exceeds the
pay-as-you-go contribution rate2, then debt shifting would effectively increase the overall
public debt (Cangiano, Cottarelli, & Cubeddu, 1998). The success of pension transition
epicheirema has been under skepticism in countries, of which, public debt lie beyond
their fiscal capacity (Barr, 2000; Eisner, 1998; Sawyer, 2003). Heavily indebted countries
may lose the confidence of financial markets (Eberl, 2015).

6.6. Regulatory Reforms

Regulatory reforms concern improvements to the quality of governance and regulation.
Developments in regulatory framework are rarely related to redistributive aspects.
Regulatory amendments ensure welfare benefits to all individuals as well as fair treatment
of the financially unsophisticated individuals. Transparency in investment management
and effective communication management are imperative directives for the governing
bodies to set out a prudential framework for pension funds, which have a fiduciary duty
to its members to act in their best interests. Setting a minimum guaranteed return, it may
create distortions in investment decisions, reduce the window of opportunity for asset
diversification, and hamper the performance of pension funds (Schwarz, 2006). The
regulatory framework for privately managed pension funds should also be following the
prudent person principle and/or analogous quantitative portfolio restrictions. The prudent
person principle targeted on the behavior of pension fund managers in the context of
capital markets. The quantitative approach includes security, cash flow management, and
risk management concepts (McLeod, Moody, & Phillips, 1993).

6.7. Administrative Reforms

Administrative reforms’ main objective was to reinvent the social security,
advocating a series of top-to-down shifts with an emphasis in the way of pension
administration is organized and managed, producing better performance, and requiring
greater transparency and accountability. Its concept was associated with a contracting
view of the role of governance moving towards to a flexible, less conventional
bureaucratic framework introducing performance incentives, private-sector techniques,
and market-based strategies to service delivery and administration. This flat-type

1 International rating agencies have recently stressed their interest in including the amounts and future
trends of implicit pension debt in the criteria for their country credit ratings (Hampton, Kutter, & Behr,
2011)
2 The rate of return on pay-as-you financing is equal to the growth in the contribution base (Samuelson,
1958)
72
structure reduces the number of tiers within the organization, enhances the bottom-to-top
information flow, and increases production efficiency (Schwarz, 2006).

6.8. Changes in Welfare Fundamental Assumptions for Pension Systems

According to Torben (2007), there have been several recommendations on how
these challenges can be met. Many scholars believe that the solution lay with fundamental
factors since their variation caused those welfare system imbalances in the first place.
Torben believes that these suggestions turned out to be nonviable in practice.
Economic growth. The raising of the overall GDP rate per se does not solve the
problem. Empirically, economic growth is positively correlated with welfare growth as
we have seen in most industrial countries during the Golden Age. The concept of
perpetual economic growth is implausible. Economic growth cannot resolve the financial
dilemma of the welfare state and has deteriorated rather than improve public finances.
Economic growth can become a positive indicator for public budget only under the
unrealistic assumption that public sector wages and transfers should grow at a slower than
the average general income pace.
Higher taxes. One of the underlying motives for taxation lies in funding public
pension systems. A moderate tax increase can improve the medium and long-term welfare
sustainability from a technical perspective. According to Laffer curve, a hypothetical
increase of tax rate beyond a certain point would be counterproductive for raising further
tax revenue. This theoretical assumption is realistic for lower tax-bracket economies,
where the impact from a potential increase of the tax rate will be insignificant; this
assumption cannot hold though for higher tax-bracket economies which operate in a
dynamic global environment. Higher tax wedges would trigger substitution mechanisms
away from work to leisure-type of activities and/or encouraging people to look for a job
in the informal sector. They can also crowd out of private investment, savings and capital
accumulation – with an overall negative impact on economic growth.
Higher fertility. The demographic challenges stem from the negative tendencies
of longevity and fertility. Population growth may sound an attractive strategy to reverse
the negative demographic trends, but actually, it is not. Along with the gradual reductions
in labor force participation and employment, changes in population density will have a
sizable impact on the old-age dependency ratio. The dramatic increase of young
population growth rate implies strong pressures on support and education expenditures,
and combined with revenue loss, will lead to large deficits in public pension systems. In
the absence of other corrective mechanisms, higher fertility rate will not be desirable; in
fact, the welfare state will be more vulnerable than previously.
Immigration. In the face of high demand for labor, pensions, health and welfare
services, loosen immigration policies could be a possible remedy for many countries.
Immigration effects are analyzed in economic literature, but the empirical findings are
diverse. Relevant studies highlighted the fact that the economic effects of immigration
could temporarily cover the unfunded liabilities of the state social programs, but only
under certain conditions as follows: 1) The selective admission of young, high-skilled,
and healthy individuals from the immigration pool, 2) the selective admission among
family members of the immigrant that fulfill the above criteria, and 3) immigrants should
get less social security benefits (sick leave, unemployment benefits, or early retirement
pension benefits) than the native-born population. Even if the unrealistic “immigration
73
without immigrants” conditions could be met, the positive effects of immigration would
be offset as immigrant’s reach retirement age.

6.9. A Review of the Shift from a Pay-as-you-go to a Fully-Funded System

Pension reforms have been subject of debate among economists and policy
makers to see whether to shift from the current pay-as-you-go schemes to the fully-
funded. Adherents argue that fully-funded pension schemes would better address political
and demographic pressures that threaten the financial sustainability of pay-as-you-go
pension schemes. Opposition to the ideas have expressed skepticism with respect to the
success of pension transition epicheirema if fully funded pension schemes face the same
challenges that undermine pay-as-you-go schemes (Barr, 2000; Eisner, 1998; Sawyer,
2003). A fully-funded Social Security system has certain advantages: intergeneration
transfer risk passes from the government to individuals’ accounts; it maintains much of
the structure of the current system; government has more opportunities to invest a portion
of the funds in equities; national savings will increase, thus inducing future growth in the
economy; and, fully-funded system does not change the redistributive structure of the
current system. A fully funded system, though has some drawbacks: current consumption
will dramatically decrease; and one generation must pay for itself and for the current
retirees (Taulbee, 1999).
A significant body of literature acknowledges the possibility of a Pareto-
improving transition from an unfunded to a funded system (Breyer, 1989; Breyer &
Straub, 1993; J. K. Brunner, 1994, 1996; Homburg, 1990). The transition from a pay-as-
you-go to a fully-funded pension system can be supported by the formation of individual
capitalized accounts as a substitutive, parallel, or a mixed system (Mesa-Lago, 2005).
Substitutive system is the system, in which individual accounts replaces the displaced
pay-as-you-go pension system. The parallel system indicates the coexistence of both pay-
as-you-go and fully-funded systems. Pension members have the option between the pay-
as-you-go and the individual account programs. Finally, mixed system refers to the
complementary character of the embodied individual accounts to the existing pay-as-you-
go scheme. A transition in a different pension system is not problematic if the economy
initially is characterized by either (i) no pension system at all, (ii) a fully-funded system
or (iii) a pay-as-you-go system that is smaller than the pay-as-you-go part of the new
system (Matsen & Thogersen, 2004). It should be noted that this structural change entails
transition costs and the whole process may take 40 to 60 years for its completion (World
Bank, 2005).
The transition from a pay-as-you-go to a fully funded system is not a Pareto
improving transition because it generates an intra-generational redistribution (J. K.
Brunner, 1996). System transition creates distortions in the labor market, which cannot
be reduced by decreasing the contribution rate (Fenge, 1995). At first, the old system will
experience operating deficit; the system will be left without contributors, but the burden
of all current pensions plus those who stayed in the old system. Second, the new pension
system should fairly compensate current beneficiaries recognizing prior contribution
value in full with retroactive and actuarial adjustments, including inflation adjustments
and interest paid. In Chile, the economic downturn coincided with significant pension
reforms. Public finances suffered substantial deterioration in the underlying budget
deficit with negative implications on real wages and unemployment. Costa Rica
74
preferably adopted a mixed model, adding a second fully-funded compulsory pillar, so
the reform did not experience operating deficit. The case of Argentina was somewhere in
between: benefits calculation formula had changed, so the government integrated
convertible benefits in order to reimburse middle-aged beneficiaries and stretching the
cost out over a longer period (Titelman, Vera, & Caldentey, 2009).

6.10. Is there an Ideal Model?

Is there any ideal model? According to Lindbeck and Perrson (2002) the ideal
pension model relies on defined-benefit scheme with defined-contribution elements
where the state accepts to manage in a principled manner as well as to financial intervene
when is needed. Orszag and Stiglitz (2001) have argued that any ideal model is unlikely
to be realized in practice. Modigliani and Muralidhar (2004) suggested a two-pillar
pension scheme that includes the ideal model mentioned above plus a voluntary defined-
contribution scheme. This model is sustainable and viable as long as the compounded
contributions along with the expected retirement amount and the expected return of assets
is in perfect alignment. Of course, the contribution rate as well as the replacement rate is
unattainable to be estimated, so state intervention is mandatory to eliminate potential
system imbalances. It is a pay-as-you-go type scheme, but not based on the inter-
generation transfers; individuals contribute to their own individual accounts. The
contribution risk is transferred now to individual per se, as in the case of East Asian
provident funds, but without accompanying supplementary funding is abound with their
shortcomings. The scheme should be partial, or fully-funded through variable rate
contributions, a fixed amount that will guarantee a minimum pension, plus a voluntary
contribution that will guarantee a rate of return. In addition, the state will create a defined-
benefit annuity based on accumulated balances in individual accounts that will guarantee
the real value of return with the use of a swap between the social security agency and the
treasury and will be tightened with market returns.
This sinking fund for any surplus receipts the government uses will fully-funded
the scheme, whereas in the case the actual returns fall short of the guaranteed swap rate,
the government will provide additional funds to cover the short amount. As in the case
of provident funds, individuals should be permitted to personal financing, such as
education, housing down payments and medical care. In contrast with East Asian
provident fund policies, they will use the retirement savings accounts as collateral,
subject to strict limitation terms, borrowing at the guaranteed rate.

6.11. Concluding Remarks

The “one size fits for all” pension system does not exist. Each system involves
important trade-offs to meet current objectives. Many countries’ limited reform policies
to moderate improvements of their existing social security systems. Few countries
proceeded to structural reforms and partial and/or full transition of their existing systems.
Reform decisions should be based on a clear understanding of what outcomes the current
design influences and how it allocates costs and risks. Governments should seek ways of
reforming their pension systems in anticipation of far financial burdens in the future
(Holzman, 1988). Pension funds can restore their actuarial balance if policy makers
undertake funding-oriented reform initiatives. Notwithstanding, the need for system
sustainability constitute an opportunity to re-evaluate existing programs and social
75
trends, considering more fundamental changes. Given the rapidly changing nature of
advanced economies, in terms of demographics, patterns of employment and social risks,
recasting is also likely to be an ongoing process. Neither outright benefit retrenchment
nor labor market deregulation is necessary for an economy to remain competitive in this
global era. Rephrasing Pierson (1999), there is not a single “new policy” of pension
reform, but different policies in different configurations. In the context of a permanent
austerity, path-dependence arguments are highly relevant for analyzing and explaining
the controversial impact of reform policies. The current debate on pension reform calls
for a holistic, sustainable approach where all parties coordinate their activities and
resources in line with the incentive structures of their existing environment. This research
did not receive any specific grant from funding agencies in the public, commercial, or
not-for-profit sectors.

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Chapter VII
How Productivity Can Affect Pension Plan Systems
Performance?
By Mario Arturo Ruiz Estrada, Evangelos Koutronas, and Donghyun Park

7.1. Introduction
The role of pension schemes on economic growth has become the prominent
theme on policy agenda since the 1950s, and its use has been as frequent as it has been
diverse. Most of the developed countries established earnings-related insurance programs
in the twenty-five-year post World War II period of sustained economic growth, known
as the “Golden Age”. The Beveridgean (pay-as-you-go) model involves intra- and inter-
generational redistributions with minimum state participation. The Bismarkian (fully-
funded) model alternatively involves public funding via taxation and relies on capital
contributions and investment returns1. Pension schemes are sustainable in the presence
of high or constant replacement rates2, constant population growth, sustain technological
progress, and excessive capital accumulation (Aaron, 1966). Empirically, the scarcity of
natural resources constitutes sustain economic growth implausible3. A pay-as-you-go
scheme of compulsory saving, insurance of earning capabilities, and redistribution could
only be financially sustainable (Diamond, 1977). In parallel, a fully-funded pension
scheme is viable, as long as the market value of assets equals the actuarial present value
of promised retirement benefits (Novy-Marx & Rauh, 2009). Poor financial market
returns and low long-term real interest rates can lead to funding shortfalls. In addition,
conservative investment strategies may preserve capital and protect against inflation;
however, they are likely to lead in inadequate pension benefits in the long-run. Besides,
actual funding ratios (pension assets to liabilities) are less than 100 percent, implying that
continue maturity of pension schemes will not result in higher levels (Bohn, 2010).
Economists and policymakers failed to predict the socioeconomic issues that
would follow. Besides, social security schemes were in their initial development phase;
as the economy continued to grow, so did pension schemes. Pension schemes reached the
stage of maturity when the first generations begun to retire. The maturity phase coincided
with the end of a prolonged period of economic growth. Only then, the financial
implications of welfare expenditures become observable on public finances. Economic
growth can become a positive indicator for public budget only under the unrealistic
assumption that public sector wages and transfers should grow at a slower than the
average general income pace (Koutronas, 2015). It is a commonly held view that
economic growth is a proponent of pension system growth. However, in view of
economic uncertainty, can pension systems play role in state economic development?
Relevant strand of literature argued that pension funding is associated with an increase in
productivity growth rates (Barr, 2000; Davis & Hu, 2008; Holzmann, 1997, 1999). An
increase of pension redistribution mechanisms would lead to higher saving rates, which
can be translated into labor market and capital market development, leading consequently
to a higher economic growth. Alternative point of views classified pension funding as a
consumption rather than an investment, adversely affecting social welfare (Galenson,
1968; Wigger, 2002; Zandberg & Spierdijk, 2010).

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 This paper formulates an analytical framework to analyze whether pension
growth can be a determinant of productivity growth. The Pension Scheme Performance
Evaluation Model (PSPE-Model) intends to study the performance of pension schemes
from a macroeconomic perspective. The PSPE-Model will test the following hypothesis
- The marginal optimum national pension system coverage critical point based on the
national productivity growth performance is simultaneously determined by the efficient
coordination of private and public pension system programs coverage and the national
productivity level. The model investigates the marginal optimum national pension system
coverage critical point of two Asian countries, Japan and Malaysia. The paper is
organized as follows. Section Two review presents the relevant literature. Section Three
describes the underlying model. Section Four presents comparative findings. Section Five
concludes. The Appendix contains tables and figures.

7.2. Literature Review

The role of pension systems on economic growth has found attention in the
literature for several decades. In the absence of a pension system, the economy can reach
a time-consistent equilibrium where the aggregate savings can derive a necessary and
sufficient condition for living of the current population at retirement. Aggregate savings
balanced out when they die. However, this equilibrium is achievable as long as people
prefer consumption smoothing: optimize their lifetime standard of living by ensuring a
proper balance of spending and saving during the different phases of their life. Their
myopic behavior influences the decision-making in youth without fully taking into
account the implications of those decisions have for their own welfare when they become
old. If this is the case, public intervention forces individuals to save for their own
retirement, whether through compulsory savings or taxation, so their lifetime welfare will
rise (M. Feldstein, 1997). Besides, in the presence of longevity, savings will be depleted
before their natural end (Dorsey, Cornwell, & Macpherson, 1998). The introduction of
an unfunded pension system lowers aggregate savings of the young population since part
of labor earnings are held in the form of welfare contributions, which are permanently
carried forward. Welfare contributions decrease income, consumption, saving of the
young generation in the short run. The intergenerational overlap balances out the
economic behavior of the young and old generations in the long run, leaving aggregate
output, labor, capital investment and interest rates intact. Solow (1956) neoclassical
growth model suggests that an unfunded pension system can contribute on country’s
economic growth but without affecting the growth rate. Indeed, Wigger (2002) shown
that unfunded welfare contributions may have a positive impact on productivity growth
in some transition periods. Sato (1963), Atkinson (1969) and King & Rebelo (1993)
viewed welfare contributions as exogenous savings and noticed a low increase in output.
Samuelson (1958), Schultz (1961), Uzawa (1965), Aaron (1966) and Lucas (1988),
analyzed unfunded pension systems in the context of endogenous growth4. Following
Solow’s neoclassical setting, the economy is dynamically inefficient5, so
intergenerational redistributions can restore balance6. Furthermore, Samuelson (1975)
argued that lump-sum welfare contributions have a sizable effect on individual life-cycle
saving, thus aggregate wealth accumulation, that can lead economy’s steady state to the
golden rule7. In Arrow’s (1962) and Romer (1986) endogenous-type model, economy’s

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equilibrium is Pareto-efficient based on the assumptions of homothetic preferences and
constant population growth.
In the case of the fully-funded pension systems, the marginal rate of productivity
and interest rates are relevant. As in the case of unfunded pension systems, tax-deferred
contributions temporarily decrease income, consumption and saving of the young
generation. However, aggregate savings and saving rate remain unchanged: now welfare
contributions are part of the public budget, so the government surplus will be allocated
in the capital markets to finance its expenditures and eliminate a potential shortage of
loanable funds that would lead to higher borrowing costs for firms. At retirement, capital-
plus-interest pension benefits along with current labor earning pushes consumption,
savings and interest rates into a level higher than that of unfunded pension systems,
reaching a new equilibrium. As a result, employment and marginal rate of capital will
rise8. Seminal works of by Ramsey (1928), Allais (1947), Samuelson (1958), Diamond
(1965), Cass (1965) and Koopmans (1965) on overlapping generation models shown that
capital is neutral in the presence of fully-funded pension systems. The aforementioned
argument holds in the case of developed financial markets, but in financial markets with
borrowing constraints (Fisher & Roberts, 2003). Recent empirical findings show a
positive correlation between pension funding and financial development (Catalan,
Impavido, & Musalem, 2000; Y.-W. Hu, 2005; Impavido, Musalem, & Tressel, 2003)
and financial development with economic growth9 (Beck & Levine, 2004; Levine &
Zervos, 1998).
In general, the presence of a pension system also affects households’ economic
behavior in the context of saving, productivity, and retirement. The effect of pension
system on households’ saving behavior is threefold. People tend to save less for
retirement when they feel the presence of a “safety net” decreasing thereby their
expectations about how much they need to save (wealth substitution effect) (Aaron &
Reischauer, 1998). Contrary, people tend to save more during their productivity period
in an attempt to accumulate savings sufficient to lead to early retirement (retirement
effect). Finally, people also tend to save more prone to higher social security taxes in
consideration of encasing future expected costs of having children (bequest effect)
(Rosen & Gayer, 2008). The intergenerational redistribution feature on contributions
gives a sense of security about individual’s future cash flows. If consumption preferences
remain constant, then the household will find pension benefits and other saving to be
good substitutes, pension system will reduce private saving (Martin Feldstein, 1974). The
above relation reverses for low-income or uncertain income households (Samwick,
1995). Barro (1974) emphasized the neutrality of pension system in the presence of
private intergenerational transfers. The prior empirical literature has been inconclusive
though (Barro & MacDonald, 1979; Coates & Humphreys, 1999; Martin Feldstein, 1982,
1996; Leimer & Lesnoy, 1982; Modigliani & Sterling, 1983; Seater, 1993).
The presence of a comprehensive pension mechanism also comprises a good
substitute for family protection thereby influencing household redistributive behavior.
Parents will not leave any or no significant bequests to their children contrary to relevant
literature (Becker & Barro, 1988; Chu, 1991; Cigno & Rosati, 1992; Lapan & Enders,
1990; Mulligan, 1997; Nishimura & Zhang, 1992; Sala-i-Martin, 1996; Wildasin, 1990;
Zhang, 1995). They considered factors such as altruism, perpetuity of family line,
fertility, human capita, and age-dependent productivity. Others research believe that
83
parents are selfish so they do not leave any bequests (Modigliani & Brumberg, 1954); or
if they may leave only unintended or accidental bequests (Davies, 1981; Kotlikoff, 1989;
Levhari & Mirman, 1977); or conditional bequests (Bernheim, Shleifer, & Summers,
1985; Cox, 1987).
Although a pension system has a positive impact on saving and income
distribution, it may have an adverse impact on labor supply. Unemployment benefits
serve as one of the main economic stabilizers that tend by their design to offset
fluctuations in the economic activity. However, long-term unemployed individuals often
confronted with the unemployment trap dilemma: a situation in which the opportunity
cost of returning to work is considerably significant, so benefits create a perverse
incentive not to work. Individuals who drop out of the welfare system may become more
detached from the labor market and put less effort into searching for a new job. Alongside
with the labor market distortions, this may decrease the employment rate in the future,
exactly the opposite effect of the one intended (Walker, 2005).
Pension arrangements provide a complex set of incentives for retirement. The provision
of welfare benefits entices workers to retire before retirement age than they otherwise
would have (Gruber & Wise, 1999). Payroll taxes, the level of benefits earned, and the
offsetting actuarial adjustment distort individuals’ labor supply incentives (Gordon,
1982). In addition, the tendency toward earlier retirement is also positively correlated
with the impressive developments in health and life expectancy; the growth of income
combined with an increasing demand for leisure; technological advancement; and the
expansion of social insurance programs implies that people tend to appreciate more
leisure time (Boskin & Hurd, 1978).

7.3. An Introduction to the PSPE-Model Theoretical Framework

Consider a pension scheme with P number of registered members. The individuals
are effective members, Λ, paying regularly their earnings contributions to pension fund
and ineffective members, T, who do not pay regularly or at all their earnings contributions
to pension fund. The coverage ratio, α, is defined as the number of effective labor force
divided by the total labor force. Let = ∑ be the total number of effective fund
members, the annual coverage growth rate is given by

∑ � � � −∑ � �
∆ =
∑ � �
× %

Pension scheme is effective and ineffective for high and low levels of Δα,
respectively. in the case of existence of private pension scheme, let � be the number of
effective members of the private pension scheme, and � be now the number of effective
members of the public pension scheme with coverage rates: = ∑ , and = ∑ . The
relationship between the two coverage rates is defined by expression (2):

= + +

ln −√ − : ln −√ −

× %

84
Similarly, the annual coverage growth rate is given by

∑ � � � −∑ � �
∆ =
∑ � �
× %

Pension’s fund resources are usually allocated to certain pillars of economic

activity such as education, healthcare. Consider workforce productivity measured in
terms of intensity/quality of labor and capital associated with the aforementioned pillars
of the economy. The national TFP level (∆TFP) is based on nine variables: education
infrastructure growth rate (∆↑1); diet improvement growth rate (∆↑2); life expectation
growth rate (∆↑3): health coverage growth rate (∆↑4); labor security growth rate (∆↑5);
pensions coverage growth rate (∆↑6); centralized or decentralized management systems
(promotions) growth rate (∆↑7); holidays and annual leave growth rate (∆↑8); and
maternity/medical leave growth rate (V9). Hence, the national TFP level is a determinant
from a matrix three by three according to expression (4):

�
∆ ∆ ∆
= [∆ ∆ ∆ ]
∆ ∆ ∆

The national TFPL growth rate (ΔTFP) is

� ���+ − � ���
� �� =
� ���
× % �

The calculation of the marginal pension system performance Ω' is expressed as

�′
−
� � �
� {∑ [ ]}
−�
=∑ +
� ∞ � ∞×� ∞
� {∑ [ ]}
−� ∞

Expression (6) depicts the intertemporal procyclical relationship between

economic growth and pension scheme performance. Any changes in system parameters
will affect economic growth in the short run (participation rates, level of pension benefits,
minimum pension) and long run (wages conditioned to contributions, accrual rate (the
rate of benefit per year of service), averaging period for wages, revalorization of wages,
indexation of pensions, normal retirement age, pensionable years of service required,
early retirement) (see figure 1).

85
 Figure 1. The Marginal Optimum National Pension System Rate

Source: Authors’ Elaboration

Both economic growth and pension scheme follow a parallel trajectory that
gradually their critical points converge to a steady state in the long run. The marginal
optimum pension coverage point is given by

+
� �′
[ ]
∗
�
� = ,
� �′ �
[ ]
� �′ �
{ }
= { | ∈ ℛ+ ∀ � ∗ }, = { | ∈ ℛ+ ∀ � ∗ }

As it is shown in figure 2, a pension scheme in its initial development phase grows

in the short run as the economy grows. In the long run, pension scheme’s performance
will stabilize or decline as it reaches the maturity phase, ceteris paribus.

Figure 2. The Marginal Optimum National Pension System Coverage Critical Point (Ω*)

Source: Authors’ Elaboration

Undoubtedly, informal employment arrangements10 prevent pension schemes to

achieve their full potential. In a microeconomic level, informal labor force reduces the
productive capacity of formal counterparts, which is translated into lower welfare
contributions via direct transfers and tax revenue in the short run. In the long run,
unregistered healthcare, insurance and pension arrangements will increase pushing
86
healthcare costs upwards and pension benefits downwards. In a macroeconomic level,
lower productivity and labor income affect adversely the level of aggregate output and
consequently economic growth (Ravallion, 2003). The chain of the aforementioned
interactions is mapped in the following combinatorial coordinate system:
Figure 3. The Pension Plan System Expansion Diamond Graph

Y1 = Ω’

∆NTFP
∆β

APPSNCL

θ Δα

Y2 = -D
Source: the marginal optimum national pension plan system rate (Ω’); the pension plan system coverage deficit (-D);
the total national pension plan system coverage per year growth rate (Δα); the private and public pensioner’s
volume coverage under the national level growth rate (∆β); the national total factor productivity annual rate
(∆NTFP); and the informal labor effective rate (θ).

Diamond graph (Ruiz Estrada, 2017) is a multidimensional coordinate space

formed by four inter-linked axes, each of which has only positive values. The crossover
point is equal to zero, which is the epicenter of the coordinated system. This
multidimensional configuration captures the incidence (boundary and co-boundary) and
adjacency relations of pension schemes within the framework of the dynamic imbalanced
state (DIS)11 and the Omnia Mobilis assumption12. The four axes are total national
pension plan system coverage per year growth rate, Δα, private and public pension
coverage under the national level growth rate, ∆β, the national TFPL growth rate, ΔTFP, and
informal labor effective rate, θ. Informal (or non-standard, atypical, alternative, irregular,
precarious, etc.) employment rate, θ, is defined as the total number of informal employees
�
Pi divided by the total workforce (active and inactive) PT: � = � , � ≥ . These indexes are
� �

independent variables. There can be joined together creates a large manifold area into the
same graphical space and time called “Pension Scheme National Coverage Level”
(PSNCL). PSNCL portrays the overall pension scheme performance. The analysis of the
PSNCL is based on comparison of two periods and examines three possible scenarios:
(a) Expansion (PSNCL0 initial period < PSNCL’ next period); (b) Stagnation (PSNCL 0
initial period = PSNCL’ next period); and (c) Contraction (PSNCL0 initial period >
PSNCL’ next period). The fifth and sixth axes are represented by the dependent variables
Y1 (Ω') and Y2 (-D). Pension scheme coverage deficit, -D, is equal to the national pension
system coverage per year α minus one: − = − .They are positioned in the center of
the graph which is the meeting point of the four axes.

87
7.4. Application of the PSPE-Model in Japanese and Malaysian Pension Schemes
We examine the Japanese and Malaysian pension schemes from 1981 to 2016
(see Table 1). We employ secondary data from different domestic and international
institutions. The two countries are part of what is called East Asian welfare model
(Holliday, 2000). East Asian welfare model primarily focuses on the social policy’s
positive outcome with regard to state economic development and secondary to the
welfare system’s institutional role. The welfare state is seen as having an important role
in supporting economic growth, political solidarity, social cohesion, and human capital
development (Goodman & White, 1998). Social policy is heavily concentrated on
education and healthcare as part of the nation’s long-term development plan (Gough,
2000). Welfare state operates within an economic and political environment that shares
common characteristics: (i) strict fiscal policy, (ii) relatively flexible labor markets and
(iii) subjective social policy (Aspalter, 2006). The two countries vary considerably in the
sphere of infrastructure, economic development, institution capacity and social policy.
However, they demonstrate a strong linkage between the marginal optimum national
pension system rate, Ω’, and pension system coverage deficit, -D.

Table 1. PPSPE-Model Final Results (1981-2016)

Japan Malaysia
α = 0.985 Δα = 0.93 α = 0.65 Δα = 0.20
Private: 0.20 Public: 0.80 Private: 0.30 Public: 0.70
ΔNTF ΔNTF ΔNTF ΔNTF
. . . 1980s: 0.20 . . . 1980s: 0.35
( . . . ) 1990s: 0.10 ( . . . ) 1990s: 0.45
. . . 2000-2016: 0.05 . . . 2000-2016: 0.30
θ θ
1980s: 0.80 1980s: 0.25
1990s: 0.75 1990s: 0.30
2000-2016: 0.83 2000-2016: 0.35
Ω’ Ω’
1980s: 0.91 1980s: 0.63
1990s: 0.87 1990s: 0.65
2000-2016: 0.89 2000-2016: 0.68
θ θ
1980s: 0.03 1980s: 0.22
1990s: 0.05 1990s: 0.25
2000-2016: 0.08 2000-2016: 0.30
-D -D
-0.015 -0.35

Sources: Asian Development Bank (2016); Japan Pension Service (2016); KWSP (2016); Ministry of Health, Labour,
and Welfare of Japan (2016); Ministry of Human Resources (2016); and World Bank (2016).

The national total factor productivity annual growth rate (∆TFP) for Japan (0.05)
is lower than Malaysia (0.30) between 2000-2016 (see Table 1). The low rate of total
factor productivity annual growth rate (∆TFP) is related to Japan’s rapid population
aging. More specifically, the ratio of young population (0-15 years old) to elderly
population (60-100 years old) is low and continues to fall. On the other hand, Malaysia
has a relatively high young population (0-15 years old) to elderly population (60-100
years old) ratio.
88
 Figure 4. Pension System Expansion Diamond Graph for Japan (2000-2016)

Y1 = Ω’=0.89

∆NTFP = 0.01 ∆β = 0.98

(High)
(High)

(High)

APPSNCL (11)

(High)
(Low)
(Low)

Θ = 0.08
Δα = 0.93

Y2 = -D = -0.015

Sources: Asian Development Bank (2016); Japan Pension Service (2016); KWSP (2016); Ministry of Health,
Labour, and Welfare of Japan (2016); Ministry of Human Resources (2016); and World Bank (2016).

Note: the marginal optimum national pension plan system rate (Ω’); the pension plan system coverage deficit
(-D); the total national pension plan system coverage per year growth rate (Δα); the private and public
pensioner’s volume coverage under the national level growth rate (∆β); the national total factor
productivity annual rate (∆NTFP); and the informal labor effective rate (θ).

Findings show that the national pension scheme coverage growth rates, Δα, of
Japan is equal to 0.93 (see Figure 4). Not surprisingly, the traditional Japanese
family/enterprise-driven configuration welfare model as being solely responsible for
welfare provision has been replaced by a public institutional network (Tachibanaki,
2004). Indeed, observing the national level growth rate, Δβ, public pension coverage
amount to 98 percent, whereas the private is limited to 2 percent. The 2004 reform has
improved pension coverage by decreasing pensionable qualifying period, increasing the
coverage to non-contributed members, including non-working spouses, public-sector
workers, and private sector individuals (OECD, 2017).

89
 Figure 5. Pension System Expansion Diamond Graph for Malaysia (2000-2016)

Y1 = Ω’ = 0.68

∆NTFP = 0.0057
∆β = 0.60
(Low)
(High)

(Low)

(11)
APPSNCL
(Low)
(High)
(High)

Θ = 0.30 Δα = 0.20

Y2 = -D = -0.35

Sources: Asian Development Bank (2016); Japan Pension Service (2016); KWSP (2016); Ministry of Health, Labour,
and Welfare of Japan (2016); Ministry of Human Resources (2016); and World Bank (2016).
Note: the marginal optimum national pension plan system rate (Ω ’); the pension plan system coverage deficit (-D); the
total national pension plan system coverage per year growth rate (Δα); the private and public pensioner’s volume coverage
under the national level growth rate (∆β); the national total factor productivity annual rate (∆NTFP); and the informal
labor effective rate (θ).

In the case of Malaysia, the pension scheme coverage growth rate, Δα, is equal to
0.20 (see Figure 5). This is translated into public pension coverage rate of approximately
7 percent and private pension coverage rate of 13 percent. In regards to the latter, only
one third of Employee Provident Fund (EPF) members with active positive balances have
sufficient accumulated savings at retirement (Holzmann, 2014). Low welfare coverage is
subject of three main reasons: 1) Malaysian pension system is unique due to increased
individual risk and lack of social pooling; 2) the system rejects social insurance for senior
citizens (Park & Estrada, 2013); and 3) Malaysia’s relatively large underground or
informal economy. The marginal optimum national pension system rate, Ω', is
experiencing fast changes and adaptability of any pension system expansion depends on
growth of national productivity in the long run. The slow economic growth of Japanese
economy indirectly affects the marginal optimum pension system growth rate that is fast
dropping. Despite the fact that Malaysian economy has experienced substantial growth
the previous years, the moderate increase marginal pension system growth rate, Ω', is not
enough to generate a homogeneous national strong pension system that can satisfy
population needs. Similarly, the marginal optimum national pension system coverage
critical point, Ω*, moves in parallel path for both countries. If pension system coverage
rates fall below the minimum rates of 89 percent and 68 percent in Japan and Malaysia,
respectively, pension systems can cause deep socio-economic spillover effects. Given the
informal employment rates (Japan: 0.08; Malaysia: 0.30) and pension coverage deficit
(Japan: -0.015; Malaysia: -0.035), the gap between the actual and effective pension
system can be widened in the long run.

90
7.5. Concluding Remarks
Consistent with empirical evidence pension funding is associated with an increase in
productivity growth. The Pension Scheme Performance Evaluation Model (PSPE-Model)
suggest alternative methodological evaluation directly linking pension performance with
economic growth. Changes in social policy undoubtedly affect productivity performance.
The ability to expand pension systems depends on the ability of the pension system to
adapt to labor productivity changes. Higher labor productivity lead to a strong pension
system able to adapt to internal and external uncertainties. The marginal increase of labor
productivity is determined is based on how the human capital factor can be adapted to
new technological changes and social issues (political and fast economic
transformations).

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7.7. Endnotes
1 In contrast to pay-as-you-go schemes, fully-funded schemes are dissociated from
demographic risks. Oksanen (2001) claimed that this argument is somehow misleading
because aging affects savings, which in turn, it should also affect interest rates. Brooks
(2000) and Merrill Lynch (2000) produced simulations showing that long-lived retiree
population can suffer significant losses to their pension wealth due to an interest rate
shock. Certain occupation schemes though, can be subject of demographic risks
(Brooks, 2000; Stevens, 2001).
2It is possible, theoretically, for every generation to obtain higher benefits than
contributions paid, given that, the pension
rate of return exceeds the market rate of return indefinitely (Samuelson, 1958). In the
case of actuarial imbalance, the state bears the financial risk for benefits payments.

95
3 The use of alternative abundant natural resource substitutes, recycling, and, resource
optimization can result of purposeful activity in response to signals of increased scarcity
(Krautkraemer, 2005).
4Competitive equilibria of endogenous growth economies exhibit static inefficiency
(Wigger, 2002).
5 Developed economies are dynamically efficient, therefore, unfunded pension systems
cause no effect (Abel, Mankiw, Lawrence, & Zeckhauser, 1989; Barbie, Hagedorn, &
Kaul, 2004).
6 This is known as Aaron’s social insurance paradox. However, this argument does not
hold because the competitive equilibria of those economies are dynamically efficient
(Grossman & Yanagawa, 1993; I. King & Ferguson, 1993; Saint-Paul, 1992).
7 The term “Golden Rule” was introduced by Phelps (1961).
8 According to Barr (2000), three conditions have to be fulfilled: Fully-funded saving rate
to be higher than the unfunded saving rate; the additional savings have to be allocated
for investment purposes; and finally, additional investments must lead to a higher
economic growth rate.
9Pension funds have limited influence in the domestic economy if they invest abroad
(Davis & Hu, 2008; Kakes, 2006).
10 The definition of informal sector/informal employment definitions and to the
characteristics of informal sector employment/ informal employment varies by country
(Yu-Wei Hu & Stewart, 2009; Hussmanns, 2001, 2002, 2004).
11 Omnia Mobilis assumption suggests the simultaneous observation of changes in all
variables in real time (Ruiz Estrada & Yap, 2013).
12 Imbalance state assumption incorporates internalities and externalities in the
explanation of market behavior (Ruiz Estrada, 2011).

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Chapter VIII
How Inflation and Exchange rate Affects Pension Plan
Systems Real Value: The Case of Malaysia
By Mario Arturo Ruiz Estrada, Alam Khan, Marcin Staniewski

8.1. Introduction
Old age was previously considered to be a demographic phenomenon for rich
countries. However, currently, the aging population is a strong demographic trend not
only in the developed world but also in developing nations. Most Latin American and
Asian nations have experienced substantial increases in the portion of the population over
age 60 since 2010 (Ahmad et al 1991; Grosh 1990; ILO 1989). Given this worldwide rise
in the aged population, the pension systems in many countries have begun to face
financial problems. Around the globe in different countries, multiple retirement and
pension systems have been used. Pension system models can be updated and have
brought reforms to existing pension systems as well as the design of new ones in the light
of these reforms. A number of organizations have advocated a multi-pillar approach to
pension provisions, such as the World Bank, the ILO, the IMF and the Geneva
Association, whose “Four Pillars Programme” was introduced some 25 years back
(Ostaszewski, 2012). The measurement of the actual benefits and costs of a pension
system is vague due to the lack of historical information, the impossibility of forecasting
even mid-term basic economic variables, and the complexity of rules that change from
time to time as a result of legislation. Further, any comparison among nations or even
over time for a given nation should be limited by a foundation of solvency of the plans.
For instance, an estimation of the expansion in contributions or decrease in benefits is
compulsory to adjust the plan monetarily or measure the additional and average cost of
fiscal assets that are required to be adjusted in a framework. In this manner, factors, for
example, inflation, exchange rate, salaries and loan fees, can change in light of irregular
characteristics in the national pension framework, confounding further the elucidation of
the computation of advantages and losses.
Researchers such as Kotlikoff (1988), and Sales, and Videgaray (1998) have
devised methods that aim to measure pension systems under an aggregate restriction.
Among these is the inter-generational accounting approach, which combines
demographic and fiscal restrictions to measure flows of benefits and cost across
generations. Second is actuarial evaluations of pension plans, which are the institutional
way to measure pension systems financially. They usually make assumptions on the
future evolution of salaries, interest rates, labor force participation and other variables
and calculate the financial deficit of a plan at a given point in time. The main issue with
both of the models is that significant behavioral issues remain despite the practice of
inter-generational accounting and traditional actuarial models. A main subject for
developing countries is the way individuals may opportunistically adjust their
contribution in the formal sector to develop their social security wealth. In this paper, our
focus is identifying the impact of inflation and the exchange rate on any pension system
to evaluate existing pension systems in developing countries, in particular whether it
benefits individuals with adjusted inflation. Therefore, this paper attempts to evaluate the

97
impact of inflation and the exchange rate on any pension plan system value in the medium
and long run. We are proposing a new methodology to visualize the relationship between
inflation/exchange rate and the pension plan system final value. Therefore, the main
inspiration to write this paper is based on analyzing how inflation and the exchange rate
can affect any pension system performance and value in a certain period of time. It leads
to better understanding about keeping inflation low and exchange rates strong to generate
a high value in any pension system. In fact, this paper is interested in comparing
graphically how high inflation and constant exchange rate depreciation impact on the
pension system value performance. The main objective of this paper is to propose an
alternative analytical tool that can enhance understanding of complex and dynamic
relationships between the inflation/exchange rate and pension systems within the same
graphical space at different periods of time. This paper is divided into three sections: (i)
The calculation of the integral value of the pension system; (ii) the final result of the real
value of the pension system; (iii) the plotting of the PRV-Box; (iv) observations about
the inflation/exchange rate impact on the final value of any pension plan system. In this
study, we evaluate the case of Malaysia EPF from 1980 to 2017; (v) policy
recommendation. The rest of the paper is organized as follows. Section 2 presents the
evolution of the pension system in Malaysia. Section 3 gives a methodology of the
pension real value box (PRV-Box). Section 4 presents the application of the EPF real
value box to the Malaysian economy. Section 5 concludes the paper.

8.2. Evolution of Pension System in Malaysia

The Malaysian Social Security Organization (SOCSO) was established in 1971
under the Ministry of Human Resources. This agency provides social security protection
to all workers in the country. SOCSO administers and implements two types of schemes;
one is the Employment Injury Insurance Scheme, and the second is the Invalidity Pension
Scheme. The Public Service Department (PSD) is responsible for pension policy and
regulation. This department works under the umbrella of the Prime Minister’s
Department. The Employees Provident Fund (EPF) is an agency of the Malaysian
Ministry of Finance established under the 1991 Employees Provident Fund Act. This is
the national compulsory retirement savings scheme for private-division and non-
pensionable public representatives in this country. Additionally, the EPF provides a
convenient system to employers to meet the constitutional rights of employees. In
September 2016, the EPF has a sum of 14.72 million individuals. The aggregate number
of active and participating individuals is 6.83 million. The aggregate number of active
employers is 541,503. This retirement plan is completely supported and gives DC-sort
advantages to its individuals. Government employees have their own, non-contributory
DB annuity arrange. The Civil Service Pension is the present arrangements that depend
on the Pensions Act 1980. In accordance with worldwide patterns, the retirement age has
been raised a few times here in Malaysia. So, the changes have been made three times;
first, the mandatory retirement age increased from 55 to 56 years in October 2001; from
56 to 58 in July 2008; and from 58 to 60 in January 2012, under the Minimum Retirement
Age Act 2012 (Public Service Department, 2013; Social Security Administration, 2013).
By and large, then, Malaysia's retirement age went up by five years over a 12-year time
frame. However, the increases in the retirement age were followed by various fruitful
measures to expand benefits to labor. In May 2007, the Malaysian Parliament altered the
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1991 EPF Act to advance more retirement funds for private and non-pensionable
government employees (Employees Provident Fund, 2007). Under the new Act, EPF
individuals were urged to keep working beyond the age of 55. Additionally, the new
amended Act needs all workers to make month-to-month contributions to the EPF as
indicated by a two-tiered commitment rate. For those less than 55 years old, the statutory
contribution rates were held at the past levels of 11% for laborers and 12% for businesses.
For people whose ages are between 55 and 75, the relevant rates are 5.5% for laborers
and 6% for bosses. In September 2012, further changes were made that respond to the
changes in the demographic and social environment. The Malaysia government
implemented the voluntary Private Retirement Scheme (PRS). This is a new DC
retirement savings plan open to all Malaysian citizens aged 18 and above (Social Security
Administration, 2012). Furthermore, a new law was implemented in October 2010 to
expend the public pension coverage to part-time labor. The Ministry of Human Resources
projected that around 12 million part-time workers would benefit from this new coverage
(Tolos, Wang & Zhang, 2014).

8.3. An Introduction to The Pension Real Value Box (PRV-Box)

The EPF Real Value Box (EPFRV Box) is willing to evaluate the real value of any
pension
system. The calculation of the EPFRV Box is based on the calculation of two large
sections: the total EPF domestic real value (EPF-DRV) and the total EPF international
real value (EPF-IRV). The first section is the calculation of the EPF-DRV, which follows
four basic steps: (i) find the inflation annual rate (I%); (ii) calculate the inflation growth
rate between two years, where (∆I) is equal to the first partial differentiation between the
present inflation annual rate (∂I%t) and the inflation annual rate from the last year (∂I%t-
1) divided by 100% (see Expression 1). In fact, we need to apply a constant that is equal
to K= -1 because we can transform the negative results (or the decrement in the inflation
rates) in positive results that can benefit the EPF real value domestically (EPF-DRV) and
vice versa. Now, we can measure the discount domestic depreciation rate of EPF (∆CPIt)
that is equal to multiplying the (∆I) by the coefficient (-1) (see Expression 2); (iii) the
next step is to calculate the total domestic depreciation value (CPI*) that is equal to
multiplying (∆CPIt) by the present EPF amount of retirement (PA) according to
expression 3. (iv) Finally, we can calculate the EPF domestic real value (EPF-DRV) that
is equal to differentiating PA minus CPI*. Therefore, the EPF-DRV can show how much
value is necessary for our EPF to cover any medical care and pay debt and any necessity
item domestically after the EPF is obtained in the long run by pensioners (see Expression
4).

∆I = [∂I% t/∂I% t-1]/100% (1)

∆CPIt = ∆I .K => K = -1 (2)
CPI* = ∆CPIt x PA (3)
EPF-DRV = PA - CPI* (4)

Moreover, the second section to calculate is the total EPF international real value (EPF-
IRV). The EPF-IRV involves a series of steps: (i) find the average yearly exchange rate
for each year (XR); (ii) the next step is to transform all the present EPF amounts of

99
retirement (PA) from the local currency to American Dollars (US$) or any currency such
as Japanese Yen (¥) or the Pound (£) according to our research interest (see Expression
5). (iii) The next step is based on the calculation of the exchange rate growth rate (∆XR);
the ∆XR is equal to the first partial differentiation between the average exchange rate
from the present year (∂XRt) and the average exchange rate from the last year (∂↓Rt-1)
divided by 100% (see Equation 6). Hence, we need to apply a constant that is equal to
K= -1 because we can transform the negative results (appreciation of the currency) into
positive results that can benefit the EPF real value internationally and vice versa. Now,
we can measure the discount international depreciation rate of EPF (∆↓Rt) that is equal
to multiplying the (∆↓R*) by the coefficient (-1) (see Expression 7); (iv) Finally, we
proceed to calculate the total international depreciation value (XR*) that is equal to
multiplying the discount international depreciation rate of EPF (∆↓Rt) by the present EPF
amount of retirement (PA). Subsequently, the XR* is equal to multiplying again by the
average yearly exchange rate for each year (XR) to obtain the EPF-IRV (see Expression
8). Finally, we need to convert the EPF-IRV from American Dollars (US$) to the current
currency using the same country. Additionally, we are using 15 periods of analysis (i =
1, 2, 3,…,15.). Each period of analysis is based on the change rate between two years.
Therefore, we have 30 years (j = 1, 2, 3, …, 30) to build the EPFR↑ Box, respectively.

PV/XR (5)
∆XR* = [∂↓Ri/∂↓Ri-1]/100% (6)
∆XRt = ∆↓R* .K => K = -1 (7)
XR* = ∆↓Rt x PA (8)
EPFIRV = XR* x XR (9)

Now, it is possible to calculate the total depreciation of EPF (EPF-d). The EPF-d is equal
to the total domestic depreciation value (CPI*) plus the total international depreciation
value (XR*) using the local currency from the same country (see Expression 10).

EPF-d = CPI* + XR* (10)

In the next step, we need to find the EPF present value (+EPF) following Expression
11.

+EPF = PA + (EPF-d) (11)

Finally, we can find the real value of EPF (EPFrv) in our simulator according to
Expression 12.
EPFrv = PA – (+EPF) (12)

Basically, the Pension Real Value Box (PRV-Box) uses five variables, CPI*, EPF-
DRF, XR*, EPF-IRV, and EPF-RV, from the year 1980 to 2030. In addition, we are
running five different amounts in the PRV-Box: (Rm 100,000), (Rm 200,000) (Rm
300,000) (Rm 400,000) (Rm 500,000). The main objective of the Pension Real Value
Box (PRV-Box) is to find the optimum inflation rate and exchange rate to avoid the EPF
losing its real value in the long run. Basically, in figure 1, we use the Mega-Dynamic
Disks Multivariable Random Coordinate Space in Vertical Position by Ruiz Estrada
2014. The Mega-Dynamic Disks Multivariable Random Coordinate Space in Vertical
100
Position is the basic graphical framework that we are using to build the Pension Real
Value Box (PRV-Box). The Mega-Dynamic Disks Multivariable Random Coordinate
Space in Vertical Position captures n-dimensions in the same graphical space at the same
time. Therefore, this new special coordinate space creates the possibility to visualize a
large number of endogenous and exogenous variables that are interconnected and moving
into different graphical spaces with different time frameworks without any restrictions.
Now, it is possible to observe how an infinite number of endogenous variables and
exogenous variables are working together simultaneously. At the same time, we can
visualize how all these variables interact together through the visualization of an
asymmetric spiral-shaped figure with n-faces that keep in constant movement in real time.
This asymmetric spiral-shaped figure with n-faces can show an expansion or contraction
that is based on different changes among all variables at different graphical spaces with
different time frameworks. In our case, we are looking to find the final EPF real value at
the same graphical space and time. Later, we proceed to transfer the EPF real value
critical point (EPF-CP) into a 2-Dimensional Cartesian coordinate to show the EPF real
value critical point (EPF-CP) is equal to 0. At the same time, the EPF real value critical
point (EPF-CP) starts to get negative values. From a mathematical perspective, the EPF
real value critical point (EPF-CP) is equivalent to a second derivative based on the
differentiation in the EPF present value ∂2+EPF(t) by the EPF past value past year
∂2+EPF(t-1).

EPF-CP = ∂2+EPF(t)/∂2+EPF = 0

The main reason to find the EPF real value critical point (EPF-RV) is to evaluate
the optimum inflation rate and exchange rate that can alert us to implement fiscal and
monetary policies to reduce the damage of the EPF real value in the long run.

101
 Figure 1
The Pension Real Value Box (PRV-Box)

Source: Ruiz Estrada (2014)

8.3. How Inflation and the Exchange Rate Can Affect the Malaysian EPF Real Value
(EPF-RV):

Initially, we select the Malaysia Employees Provident Fund (EPF) to apply the EPF
Real Value Box (EPFRV Box). First, we consider taking the inflation annual rates (I%)
of Malaysia from 1980 to 2016. Later, we forecast the inflation annual rate (I%) from the
year 2017 to the year 2030. Additionally, we use five possible scenarios with different
amounts of funds to simulate from low to high funds: (Rm 100,000), (Rm 200,000) (Rm
300,000) (Rm 400,000) (Rm 500,000). We can observe that the inflation rates of
Malaysia keep a low and acceptable range from the year 1980 to the year 2015. But, the
inflation rate starts to move up from the year 2016 until the current day according to
column 3, represented by (I%) in Tables 1, 2, 3, 4, and 5. The high inflation annual rates
from the year 2016 to the year 2030 can easily cause the EPF domestic real value to fall

102
considerably. The exchange rate, a critical variable in the calculation of the EPF
international real value, shows that from the year 2016, Malaysia experiences a high
devaluation of the Ringgit Malaysia (RM) compared to the past 35 years (1980-2014)
according to column 10 (XR) in tables 1, 2, 3, 4, and 5. The large depreciation of the
Ringgit Malaysia generates a huge impact on the EPF-IRV in the long run that can
directly affect the EPF real value (EPF-RV) performance constantly.
Therefore, the EPF critical point shows the optimal maximum inflation rate and
optimal; maximum exchange rate to avoid the considerable drop in EPF real value in
negative numbers (poor value). In the case of the Malaysian EPF real value, to keep an
acceptable real value, the optimal inflation rate needs to be less than 7% and the exchange
rate equal to US$1 = Rm 7 (Ringgit Malaysia). If the exchange rate of Malaysia passes
more than US$1 = Rm 7, the EPF real value can drop considerably until bringing the EPF
real price to negative values (poor value) in the long run for Malaysians (see Table 1, 2,
3, 4, 5 and Figure 1). The EPF real value maintains constant expansion and good
performance from the year 1980 to the year 2004 under the period of Tun Dr. Mohamad
Mahathir as Prime Minister of Malaysia. From the year 2005 until the current day, the
EPF real value drops dramatically. According to the EPF Real Value Box (EPFRV Box),
there is a high possibility that the EPF critical point is going to arrive in the year 2022
based on five simulations performed with different fund amounts: Rm 100,000), (Rm
200,000) (Rm 300,000) (Rm 400,000) (Rm 500,000) according to Tables 1,2,3,4, and 5.
The five simulations show that a common result is that the EPF critical point is in the
year 2022 (see Figures 3, 4, 5, 6). This means that the EPF real value is equal to zero
according to our calculations. Therefore, from the year 2023 to the year 2030, the EPF
real value is dropping in negative values. These negative values represent the lowest
value to pay high medical care costs, large debts in the long run, or buy goods and services
with high prices domestically after people receive the Employees Provident Fund (EPF)
in the long run.
Finally, to keep healthy EPF real values in Malaysia, it is essentially a question
of keeping or reducing inflation rates at a level of 7% because a large increment in the
inflation rates of Malaysia can directly affect the performance of the EPF domestic real
price and the EPF real value. It is necessary to keep healthy and sustainable inflation rates
under the application of fiscal policy based on an equilibrate taxation (focus on the
reduction of GST – indirect tax – and strict control on the direct tax) together with better
control in government spending items (increase investment spending – infrastructure and
development – more than functional spending –salaries and maintenance) and better
control of domestic prices (top prices policy). On the other hand, regarding the same
situation with respect to exchanges rates, Malaysia needs to maintain better control of its
monetary policy and balance of payments to generate favorable conditions so that the
Malaysian Ringgit (RM) appreciates against the US$ and other strong international
currencies such as the Japanese Yen, Pound, Euro, and Yuan. Hence, the main objective
is to keep an equilibrate EPF domestic real value (low inflation) and EPF international
real value (domestic currency appreciation) to generate favorable conditions, generating
strong and sustainable socio-economic development for Malaysians through a strong EPF
real value in the long run.

103
 Figure 2
The Pension Real Value Box (PRV-Box) of Malaysia EPF from 1980 to 2030

Source: From tables 1, 2, 3, 4, and 5.

104
 Table 1: Malaysian EPF Real Value with an Amount of RM 100,000 (1980-2030)
EPF COMPETITIVINESS (Value = RM100,000)
PER Year I% ∆I C0f.-1 ∆CPI PA CPI* EPF-DRV XR EPFus$ ∆XR Cof.-1 ∆XR* PA XR* EPF-IRV EP F -d +EPF EPF-RV
1 1980 7 0.00 -1.00 0.00 100,000 0 100000 2.18 45937 0.00 -1.00 0.00 100,000 0 0 0 100,000 0
2 1981 10 0.09 -1.00 -0.09 100,000 -8700 91300 2.30 43400 0.01 -1.00 -0.01 100,000 -1,304 -3,005 -10004 89,996 10,004
3 1982 6 0.05 -1.00 -0.05 100,000 -4819 95181 2.34 42819 0.01 -1.00 -0.01 100,000 -1,335 -3,119 -6154 83,842 16,158
4 1983 4 0.03 -1.00 -0.03 100,000 -2704 97296 2.32 43080 0.01 -1.00 -0.01 100,000 -1,321 -3,067 -4025 79,816 20,184
5 1984 4 0.03 -1.00 -0.03 100,000 -3000 97000 2.34 42669 0.01 -1.00 -0.01 100,000 -1,344 -3,149 -4344 75,472 24,528
6 1985 0.3 -0.01 -1.00 0.01 100,000 700 100700 2.48 40273 0.01 -1.00 -0.01 100,000 -1,483 -3,682 -783 74,689 25,311
7 1986 1 0.00 -1.00 0.00 100,000 0 100000 2.58 38738 0.02 -1.00 -0.02 100,000 -1,581 -4,082 -1581 73,108 26,892
8 1987 0.3 -0.01 -1.00 0.01 100,000 710 100710 2.52 39688 0.02 -1.00 -0.02 100,000 -1,520 -3,829 -810 72,298 27,702
9 1988 3 0.02 -1.00 -0.02 100,000 -1810 98190 2.62 38186 0.02 -1.00 -0.02 100,000 -1,619 -4,239 -3429 68,870 31,130
10 1989 3 0.02 -1.00 -0.02 100,000 -1620 98380 2.71 36916 0.02 -1.00 -0.02 100,000 -1,709 -4,629 -3329 65,541 34,459
11 1990 3 0.02 -1.00 -0.02 100,000 -2000 98000 2.70 36970 0.02 -1.00 -0.02 100,000 -1,705 -4,611 -3705 61,836 38,164
12 1991 4 0.03 -1.00 -0.03 100,000 -3000 97000 2.75 36363 0.02 -1.00 -0.02 100,000 -1,750 -4,813 -4750 57,086 42,914
13 1992 5 0.04 -1.00 -0.04 100,000 -4000 96000 2.55 39256 0.02 -1.00 -0.02 100,000 -1,547 -3,942 -5547 51,538 48,462
14 1993 4 0.03 -1.00 -0.03 100,000 -2720 97280 2.57 38849 0.02 -1.00 -0.02 100,000 -1,574 -4,052 -4294 47,244 52,756
15 1994 4 0.03 -1.00 -0.03 100,000 -3000 97000 2.62 38106 0.02 -1.00 -0.02 100,000 -1,624 -4,262 -4624 42,620 57,380
16 1995 3 0.02 -1.00 -0.02 100,000 -2490 97510 2.50 39930 0.02 -1.00 -0.02 100,000 -1,504 -3,768 -3994 38,626 61,374
17 1996 3 0.02 -1.00 -0.02 100,000 -2000 98000 2.52 39747 0.02 -1.00 -0.02 100,000 -1,516 -3,814 -3516 35,110 64,890
18 1997 3 0.02 -1.00 -0.02 100,000 -1740 98260 2.81 35547 0.02 -1.00 -0.02 100,000 -1,813 -5,101 -3553 31,556 68,444
19 1998 5 0.04 -1.00 -0.04 100,000 -4000 96000 3.92 25482 0.03 -1.00 -0.03 100,000 -2,924 -11,476 -6924 24,632 75,368
20 1999 3 0.02 -1.00 -0.02 100,000 -2000 98000 3.80 26316 0.03 -1.00 -0.03 100,000 -2,800 -10,640 -4800 19,832 80,168
21 2000 2 0.01 -1.00 -0.01 100,000 -810 99190 3.80 26316 0.03 -1.00 -0.03 100,000 -2,800 -10,640 -3610 16,222 83,778
22 2001 1 0.00 -1.00 0.00 100,000 0 100000 3.80 26316 0.03 -1.00 -0.03 100,000 -2,800 -10,640 -2800 13,422 86,578
23 2002 2 0.01 -1.00 -0.01 100,000 -1000 99000 3.80 26316 0.03 -1.00 -0.03 100,000 -2,800 -10,640 -3800 9,622 90,378
24 2003 1 0.00 -1.00 0.00 100,000 0 100000 3.80 26316 0.03 -1.00 -0.03 100,000 -2,800 -10,640 -2800 6,822 93,178
25 2004 2 0.01 -1.00 -0.01 100,000 -1000 99000 3.80 26316 0.03 -1.00 -0.03 100,000 -2,800 -10,640 -3800 3,022 96,978
26 2005 3 0.02 -1.00 -0.02 100,000 -2000 98000 3.79 26405 0.03 -1.00 -0.03 100,000 -2,787 -10,555 -4787 -1,765 98,235
27 2006 4 0.03 -1.00 -0.03 100,000 -3000 97000 3.67 27261 0.03 -1.00 -0.03 100,000 -2,668 -9,787 -5668 -7,433 92,567
28 2007 2 0.01 -1.00 -0.01 100,000 -1000 99000 3.44 29090 0.02 -1.00 -0.02 100,000 -2,438 -8,379 -3438 -10,871 89,129
29 2008 5 0.04 -1.00 -0.04 100,000 -4000 96000 3.34 29978 0.02 -1.00 -0.02 100,000 -2,336 -7,792 -6336 -17,207 82,793
30 2009 1 0.00 -1.00 0.00 100,000 0 100000 3.52 28373 0.03 -1.00 -0.03 100,000 -2,525 -8,898 -2525 -19,731 80,269
31 2010 2 0.01 -1.00 -0.01 100,000 -660 99340 3.22 31045 0.02 -1.00 -0.02 100,000 -2,221 -7,154 -2881 -22,612 77,388
32 2011 3 0.02 -1.00 -0.02 100,000 -2000 98000 3.06 32680 0.02 -1.00 -0.02 100,000 -2,060 -6,304 -4060 -26,672 73,328
33 2012 2 0.01 -1.00 -0.01 100,000 -1000 99000 3.09 32375 0.02 -1.00 -0.02 100,000 -2,089 -6,452 -3089 -29,761 70,239
34 2013 2 0.01 -1.00 -0.01 100,000 -1000 99000 3.15 31737 0.02 -1.00 -0.02 100,000 -2,151 -6,777 -3151 -32,912 67,088
35 2014 3 0.02 -1.00 -0.02 100,000 -2000 98000 3.27 30554 0.02 -1.00 -0.02 100,000 -2,273 -7,439 -4273 -37,185 62,815
36 2015 2 0.01 -1.00 -0.01 100,000 -1000 99000 3.91 25605 0.03 -1.00 -0.03 100,000 -2,906 -11,347 -3906 -41,090 58,910
37 2016 4 0.03 -1.00 -0.03 100,000 -3000 97000 4.00 25000 0.03 -1.00 -0.03 100,000 -3,000 -12,000 -6000 -47,090 52,910
38 2017 5 0.04 -1.00 -0.04 100,000 -4000 96000 4.60 21739 0.04 -1.00 -0.04 100,000 -3,600 -16,560 -7600 -54,690 45,310
39 2018 6 0.05 -1.00 -0.05 100,000 -4500 95500 5.00 20000 0.04 -1.00 -0.04 100,000 -4,000 -20,000 -8500 -63,190 36,810
40 2019 6 0.05 -1.00 -0.05 100,000 -4900 95100 5.25 19048 0.04 -1.00 -0.04 100,000 -4,250 -22,313 -9150 -72,340 27,660
41 2020 6 0.05 -1.00 -0.05 100,000 -5100 94900 6.00 16667 0.05 -1.00 -0.05 100,000 -5,000 -30,000 -10100 -82,440 17,560
42 2021 6 0.05 -1.00 -0.05 100,000 -5350 94650 6.20 16129 0.05 -1.00 -0.05 100,000 -5,200 -32,240 -10550 -92,990 7,010
43 2022 6 0.05 -1.00 -0.05 100,000 -5450 94550 6.50 15385 0.06 -1.00 -0.06 100,000 -5,500 -35,750 -10950 -103,940 -3,940
44 2023 7 0.06 -1.00 -0.06 100,000 -5900 94100 7.00 14286 0.06 -1.00 -0.06 100,000 -6,000 -42,000 -11900 -115,840 -15,840
45 2024 7 0.06 -1.00 -0.06 100,000 -6000 94000 7.35 13605 0.06 -1.00 -0.06 100,000 -6,350 -46,673 -12350 -128,190 -28,190
46 2025 7 0.06 -1.00 -0.06 100,000 -6150 93850 7.80 12821 0.07 -1.00 -0.07 100,000 -6,800 -53,040 -12950 -141,140 -41,140
47 2026 7 0.06 -1.00 -0.06 100,000 -6290 93710 8.00 12500 0.07 -1.00 -0.07 100,000 -7,000 -56,000 -13290 -154,430 -54,430
48 2027 7 0.06 -1.00 -0.06 100,000 -6390 93610 8.15 12270 0.07 -1.00 -0.07 100,000 -7,150 -58,273 -13540 -167,970 -67,970
49 2028 8 0.07 -1.00 -0.07 100,000 -6850 93150 8.40 11905 0.07 -1.00 -0.07 100,000 -7,400 -62,160 -14250 -182,220 -82,220
50 2029 8 0.07 -1.00 -0.07 100,000 -6960 93040 8.67 11534 0.08 -1.00 -0.08 100,000 -7,670 -66,499 -14630 -196,850 -96,850
51 2030 8 0.08 -1.00 -0.08 100,000 -8000 92000 9.50 10526 0.09 -1.00 -0.09 100,000 -8,500 -80,750 -16500 -213,350 -113,350
Source: World Bank (2017)

105
 Table 2: Malaysian EPF Real Value with an Amount of RM 200,000 (1980-2030)
EPF REAL VALUE (Value = RM200,000)
PER Year I% ∆I C0f.-1 ∆CPI PA CPI* EPF-DRV XR EPFus$ ∆XR Cof.-1 ∆XR* PA XR* EPF-IRV EP F -d +EPF EPF-RV
1 1980 7 0.00 -1.00 0.00 200,000 0 200000 2.18 91874 0.00 -1.00 0.00 200,000 0 200,000 0 200,000 0
2 1981 10 0.09 -1.00 -0.09 200,000 -17400 182600 2.30 86801 0.01 -1.00 -0.01 200,000 -2,608 -6,010 -20008 179,992 20,008
3 1982 6 0.05 -1.00 -0.05 200,000 -9638 190362 2.34 85639 0.01 -1.00 -0.01 200,000 -2,671 -6,237 -12309 167,683 32,317
4 1983 4 0.03 -1.00 -0.03 200,000 -5408 194592 2.32 86160 0.01 -1.00 -0.01 200,000 -2,642 -6,134 -8051 159,632 40,368
5 1984 4 0.03 -1.00 -0.03 200,000 -6000 194000 2.34 85337 0.01 -1.00 -0.01 200,000 -2,687 -6,298 -8687 150,945 49,055
6 1985 0.3 -0.01 -1.00 0.01 200,000 1400 201400 2.48 80546 0.01 -1.00 -0.01 200,000 -2,966 -7,365 -1566 149,379 50,621
7 1986 1 0.00 -1.00 0.00 200,000 0 200000 2.58 77476 0.02 -1.00 -0.02 200,000 -3,163 -8,165 -3163 146,216 53,784
8 1987 0.3 -0.01 -1.00 0.01 200,000 1420 201420 2.52 79376 0.02 -1.00 -0.02 200,000 -3,039 -7,658 -1619 144,597 55,403
9 1988 3 0.02 -1.00 -0.02 200,000 -3620 196380 2.62 76371 0.02 -1.00 -0.02 200,000 -3,238 -8,478 -6858 137,739 62,261
10 1989 3 0.02 -1.00 -0.02 200,000 -3240 196760 2.71 73832 0.02 -1.00 -0.02 200,000 -3,418 -9,258 -6658 131,081 68,919
11 1990 3 0.02 -1.00 -0.02 200,000 -4000 196000 2.70 73941 0.02 -1.00 -0.02 200,000 -3,410 -9,223 -7410 123,672 76,328
12 1991 4 0.03 -1.00 -0.03 200,000 -6000 194000 2.75 72726 0.02 -1.00 -0.02 200,000 -3,500 -9,626 -9500 114,172 85,828
13 1992 5 0.04 -1.00 -0.04 200,000 -8000 192000 2.55 78512 0.02 -1.00 -0.02 200,000 -3,095 -7,884 -11095 103,077 96,923
14 1993 4 0.03 -1.00 -0.03 200,000 -5440 194560 2.57 77697 0.02 -1.00 -0.02 200,000 -3,148 -8,104 -8588 94,489 105,511
15 1994 4 0.03 -1.00 -0.03 200,000 -6000 194000 2.62 76212 0.02 -1.00 -0.02 200,000 -3,249 -8,525 -9249 85,240 114,760
16 1995 3 0.02 -1.00 -0.02 200,000 -4980 195020 2.50 79859 0.02 -1.00 -0.02 200,000 -3,009 -7,535 -7989 77,251 122,749
17 1996 3 0.02 -1.00 -0.02 200,000 -4000 196000 2.52 79493 0.02 -1.00 -0.02 200,000 -3,032 -7,628 -7032 70,219 129,781
18 1997 3 0.02 -1.00 -0.02 200,000 -3480 196520 2.81 71094 0.02 -1.00 -0.02 200,000 -3,626 -10,202 -7106 63,113 136,887
19 1998 5 0.04 -1.00 -0.04 200,000 -8000 192000 3.92 50964 0.03 -1.00 -0.03 200,000 -5,849 -22,953 -13849 49,264 150,736
20 1999 3 0.02 -1.00 -0.02 200,000 -4000 196000 3.80 52632 0.03 -1.00 -0.03 200,000 -5,600 -21,280 -9600 39,664 160,336
21 2000 2 0.01 -1.00 -0.01 200,000 -1620 198380 3.80 52632 0.03 -1.00 -0.03 200,000 -5,600 -21,280 -7220 32,444 167,556
22 2001 1 0.00 -1.00 0.00 200,000 0 200000 3.80 52632 0.03 -1.00 -0.03 200,000 -5,600 -21,280 -5600 26,844 173,156
23 2002 2 0.01 -1.00 -0.01 200,000 -2000 198000 3.80 52632 0.03 -1.00 -0.03 200,000 -5,600 -21,280 -7600 19,244 180,756
24 2003 1 0.00 -1.00 0.00 200,000 0 200000 3.80 52632 0.03 -1.00 -0.03 200,000 -5,600 -21,280 -5600 13,644 186,356
25 2004 2 0.01 -1.00 -0.01 200,000 -2000 198000 3.80 52632 0.03 -1.00 -0.03 200,000 -5,600 -21,280 -7600 6,044 193,956
26 2005 3 0.02 -1.00 -0.02 200,000 -4000 196000 3.79 52811 0.03 -1.00 -0.03 200,000 -5,574 -21,110 -9574 -3,530 196,470
27 2006 4 0.03 -1.00 -0.03 200,000 -6000 194000 3.67 54523 0.03 -1.00 -0.03 200,000 -5,336 -19,575 -11336 -14,866 185,134
28 2007 2 0.01 -1.00 -0.01 200,000 -2000 198000 3.44 58181 0.02 -1.00 -0.02 200,000 -4,875 -16,759 -6875 -21,741 178,259
29 2008 5 0.04 -1.00 -0.04 200,000 -8000 192000 3.34 59955 0.02 -1.00 -0.02 200,000 -4,672 -15,584 -12672 -34,413 165,587
30 2009 1 0.00 -1.00 0.00 200,000 0 200000 3.52 56746 0.03 -1.00 -0.03 200,000 -5,049 -17,795 -5049 -39,462 160,538
31 2010 2 0.01 -1.00 -0.01 200,000 -1320 198680 3.22 62091 0.02 -1.00 -0.02 200,000 -4,442 -14,309 -5762 -45,224 154,776
32 2011 3 0.02 -1.00 -0.02 200,000 -4000 196000 3.06 65359 0.02 -1.00 -0.02 200,000 -4,120 -12,607 -8120 -53,344 146,656
33 2012 2 0.01 -1.00 -0.01 200,000 -2000 198000 3.09 64750 0.02 -1.00 -0.02 200,000 -4,178 -12,904 -6178 -59,522 140,478
34 2013 2 0.01 -1.00 -0.01 200,000 -2000 198000 3.15 63474 0.02 -1.00 -0.02 200,000 -4,302 -13,555 -6302 -65,824 134,176
35 2014 3 0.02 -1.00 -0.02 200,000 -4000 196000 3.27 61109 0.02 -1.00 -0.02 200,000 -4,546 -14,878 -8546 -74,369 125,631
36 2015 2 0.01 -1.00 -0.01 200,000 -2000 198000 3.91 51210 0.03 -1.00 -0.03 200,000 -5,811 -22,695 -7811 -82,180 117,820
37 2016 4 0.03 -1.00 -0.03 200,000 -6000 194000 4.00 50000 0.03 -1.00 -0.03 200,000 -6,000 -24,000 -12000 -94,180 105,820
38 2017 5 0.04 -1.00 -0.04 200,000 -8000 192000 4.60 43478 0.04 -1.00 -0.04 200,000 -7,200 -33,120 -15200 -109,380 90,620
39 2018 6 0.05 -1.00 -0.05 200,000 -9000 191000 5.00 40000 0.04 -1.00 -0.04 200,000 -8,000 -40,000 -17000 -126,380 73,620
40 2019 6 0.05 -1.00 -0.05 200,000 -9800 190200 5.25 38095 0.04 -1.00 -0.04 200,000 -8,500 -44,625 -18300 -144,680 55,320
41 2020 6 0.05 -1.00 -0.05 200,000 -10200 189800 6.00 33333 0.05 -1.00 -0.05 200,000 -10,000 -60,000 -20200 -164,880 35,120
42 2021 6 0.05 -1.00 -0.05 200,000 -10700 189300 6.20 32258 0.05 -1.00 -0.05 200,000 -10,400 -64,480 -21100 -185,980 14,020
43 2022 6 0.05 -1.00 -0.05 200,000 -10900 189100 6.50 30769 0.06 -1.00 -0.06 200,000 -11,000 -71,500 -21900 -207,880 -7,880
44 2023 7 0.06 -1.00 -0.06 200,000 -11800 188200 7.00 28571 0.06 -1.00 -0.06 200,000 -12,000 -84,000 -23800 -231,680 -31,680
45 2024 7 0.06 -1.00 -0.06 200,000 -12000 188000 7.35 27211 0.06 -1.00 -0.06 200,000 -12,700 -93,345 -24700 -256,380 -56,380
46 2025 7 0.06 -1.00 -0.06 200,000 -12300 187700 7.80 25641 0.07 -1.00 -0.07 200,000 -13,600 -106,080 -25900 -282,280 -82,280
47 2026 7 0.06 -1.00 -0.06 200,000 -12580 187420 8.00 25000 0.07 -1.00 -0.07 200,000 -14,000 -112,000 -26580 -308,860 -108,860
48 2027 7 0.06 -1.00 -0.06 200,000 -12780 187220 8.15 24540 0.07 -1.00 -0.07 200,000 -14,300 -116,545 -27080 -335,940 -135,940
49 2028 8 0.07 -1.00 -0.07 200,000 -13700 186300 8.40 23810 0.07 -1.00 -0.07 200,000 -14,800 -124,320 -28500 -364,440 -164,440
50 2029 8 0.07 -1.00 -0.07 200,000 -13920 186080 8.67 23068 0.08 -1.00 -0.08 200,000 -15,340 -132,998 -29260 -393,700 -193,700
51 2030 8 0.07 -1.00 -0.07 200,000 -14000 186000 9.50 21053 0.09 -1.00 -0.09 200,000 -17,000 -161,500 -31000 -424,700 -224,700
Source: World Bank (2017)

106
 Table 3: Malaysian EPF Real Value with an Amount of RM 300,000 (1980-2030)
EPF REAL VALUE (Value = RM300,000)
PER Year I% ∆I C0f.-1 ∆CPI PA CPI* EPF-DRV XR EPFus$ ∆XR Cof.-1 ∆XR* PA XR* EPF-IRV EP F -d +EPF EPF-RV
1 1980 7 0.00 -1.00 0.00 300,000 0 300000 2.18 137812 0.00 -1.00 0.00 300,000 0 0 0 300,000 0
2 1981 10 0.09 -1.00 -0.09 300,000 -26100 273900 2.30 130201 0.01 -1.00 -0.01 300,000 -3,912 -9,015 -30012 269,988 30,012
3 1982 6 0.05 -1.00 -0.05 300,000 -14457 285543 2.34 128458 0.01 -1.00 -0.01 300,000 -4,006 -9,356 -18463 251,525 48,475
4 1983 4 0.03 -1.00 -0.03 300,000 -8113 291887 2.32 129241 0.01 -1.00 -0.01 300,000 -3,964 -9,201 -12076 239,448 60,552
5 1984 4 0.03 -1.00 -0.03 300,000 -9000 291000 2.34 128006 0.01 -1.00 -0.01 300,000 -4,031 -9,447 -13031 226,417 73,583
6 1985 0.3 -0.01 -1.00 0.01 300,000 2100 302100 2.48 120820 0.01 -1.00 -0.01 300,000 -4,449 -11,047 -2349 224,068 75,932
7 1986 1 0.00 -1.00 0.00 300,000 0 300000 2.58 116214 0.02 -1.00 -0.02 300,000 -4,744 -12,247 -4744 219,324 80,676
8 1987 0.3 -0.01 -1.00 0.01 300,000 2130 302130 2.52 119065 0.02 -1.00 -0.02 300,000 -4,559 -11,487 -2429 216,895 83,105
9 1988 3 0.02 -1.00 -0.02 300,000 -5430 294570 2.62 114557 0.02 -1.00 -0.02 300,000 -4,856 -12,718 -10286 206,609 93,391
10 1989 3 0.02 -1.00 -0.02 300,000 -4860 295140 2.71 110748 0.02 -1.00 -0.02 300,000 -5,127 -13,887 -9987 196,622 103,378
11 1990 3 0.02 -1.00 -0.02 300,000 -6000 294000 2.70 110911 0.02 -1.00 -0.02 300,000 -5,115 -13,834 -11115 185,507 114,493
12 1991 4 0.03 -1.00 -0.03 300,000 -9000 291000 2.75 109088 0.02 -1.00 -0.02 300,000 -5,250 -14,438 -14250 171,257 128,743
13 1992 5 0.04 -1.00 -0.04 300,000 -12000 288000 2.55 117768 0.02 -1.00 -0.02 300,000 -4,642 -11,825 -16642 154,615 145,385
14 1993 4 0.03 -1.00 -0.03 300,000 -8160 291840 2.57 116546 0.02 -1.00 -0.02 300,000 -4,722 -12,156 -12882 141,733 158,267
15 1994 4 0.03 -1.00 -0.03 300,000 -9000 291000 2.62 114318 0.02 -1.00 -0.02 300,000 -4,873 -12,787 -13873 127,860 172,140
16 1995 3 0.02 -1.00 -0.02 300,000 -7470 292530 2.50 119789 0.02 -1.00 -0.02 300,000 -4,513 -11,303 -11983 115,877 184,123
17 1996 3 0.02 -1.00 -0.02 300,000 -6000 294000 2.52 119240 0.02 -1.00 -0.02 300,000 -4,548 -11,442 -10548 105,329 194,671
18 1997 3 0.02 -1.00 -0.02 300,000 -5220 294780 2.81 106640 0.02 -1.00 -0.02 300,000 -5,440 -15,303 -10660 94,669 205,331
19 1998 5 0.04 -1.00 -0.04 300,000 -12000 288000 3.92 76445 0.03 -1.00 -0.03 300,000 -8,773 -34,429 -20773 73,896 226,104
20 1999 3 0.02 -1.00 -0.02 300,000 -6000 294000 3.80 78947 0.03 -1.00 -0.03 300,000 -8,400 -31,920 -14400 59,496 240,504
21 2000 2 0.01 -1.00 -0.01 300,000 -2430 297570 3.80 78947 0.03 -1.00 -0.03 300,000 -8,400 -31,920 -10830 48,666 251,334
22 2001 1 0.00 -1.00 0.00 300,000 0 300000 3.80 78947 0.03 -1.00 -0.03 300,000 -8,400 -31,920 -8400 40,266 259,734
23 2002 2 0.01 -1.00 -0.01 300,000 -3000 297000 3.80 78947 0.03 -1.00 -0.03 300,000 -8,400 -31,920 -11400 28,866 271,134
24 2003 1 0.00 -1.00 0.00 300,000 0 300000 3.80 78947 0.03 -1.00 -0.03 300,000 -8,400 -31,920 -8400 20,466 279,534
25 2004 2 0.01 -1.00 -0.01 300,000 -3000 297000 3.80 78947 0.03 -1.00 -0.03 300,000 -8,400 -31,920 -11400 9,066 290,934
26 2005 3 0.02 -1.00 -0.02 300,000 -6000 294000 3.79 79216 0.03 -1.00 -0.03 300,000 -8,361 -31,665 -14361 -5,295 294,705
27 2006 4 0.03 -1.00 -0.03 300,000 -9000 291000 3.67 81784 0.03 -1.00 -0.03 300,000 -8,005 -29,362 -17005 -22,299 277,701
28 2007 2 0.01 -1.00 -0.01 300,000 -3000 297000 3.44 87271 0.02 -1.00 -0.02 300,000 -7,313 -25,138 -10313 -32,612 267,388
29 2008 5 0.04 -1.00 -0.04 300,000 -12000 288000 3.34 89933 0.02 -1.00 -0.02 300,000 -7,007 -23,376 -19008 -51,620 248,380
30 2009 1 0.00 -1.00 0.00 300,000 0 300000 3.52 85118 0.03 -1.00 -0.03 300,000 -7,574 -26,693 -7574 -59,193 240,807
31 2010 2 0.01 -1.00 -0.01 300,000 -1980 298020 3.22 93136 0.02 -1.00 -0.02 300,000 -6,663 -21,463 -8643 -67,836 232,164
32 2011 3 0.02 -1.00 -0.02 300,000 -6000 294000 3.06 98039 0.02 -1.00 -0.02 300,000 -6,180 -18,911 -12180 -80,016 219,984
33 2012 2 0.01 -1.00 -0.01 300,000 -3000 297000 3.09 97125 0.02 -1.00 -0.02 300,000 -6,266 -19,356 -9266 -89,283 210,717
34 2013 2 0.01 -1.00 -0.01 300,000 -3000 297000 3.15 95211 0.02 -1.00 -0.02 300,000 -6,453 -20,332 -9453 -98,736 201,264
35 2014 3 0.02 -1.00 -0.02 300,000 -6000 294000 3.27 91663 0.02 -1.00 -0.02 300,000 -6,819 -22,316 -12819 -111,554 188,446
36 2015 2 0.01 -1.00 -0.01 300,000 -3000 297000 3.91 76815 0.03 -1.00 -0.03 300,000 -8,717 -34,042 -11717 -123,271 176,729
37 2016 4 0.03 -1.00 -0.03 300,000 -9000 291000 4.00 75000 0.03 -1.00 -0.03 300,000 -9,000 -36,000 -18000 -141,271 158,729
38 2017 5 0.04 -1.00 -0.04 300,000 -12000 288000 4.60 65217 0.04 -1.00 -0.04 300,000 -10,800 -49,680 -22800 -164,071 135,929
39 2018 6 0.05 -1.00 -0.05 300,000 -13500 286500 5.00 60000 0.04 -1.00 -0.04 300,000 -12,000 -60,000 -25500 -189,571 110,429
40 2019 6 0.05 -1.00 -0.05 300,000 -14700 285300 5.25 57143 0.04 -1.00 -0.04 300,000 -12,750 -66,938 -27450 -217,021 82,979
41 2020 6 0.05 -1.00 -0.05 300,000 -15300 284700 6.00 50000 0.05 -1.00 -0.05 300,000 -15,000 -90,000 -30300 -247,321 52,679
42 2021 6 0.05 -1.00 -0.05 300,000 -16050 283950 6.20 48387 0.05 -1.00 -0.05 300,000 -15,600 -96,720 -31650 -278,971 21,029
43 2022 6 0.05 -1.00 -0.05 300,000 -16350 283650 6.50 46154 0.06 -1.00 -0.06 300,000 -16,500 -107,250 -32850 -311,821 -11,821
44 2023 7 0.06 -1.00 -0.06 300,000 -17700 282300 7.00 42857 0.06 -1.00 -0.06 300,000 -18,000 -126,000 -35700 -347,521 -47,521
45 2024 7 0.06 -1.00 -0.06 300,000 -18000 282000 7.35 40816 0.06 -1.00 -0.06 300,000 -19,050 -140,018 -37050 -384,571 -84,571
46 2025 7 0.06 -1.00 -0.06 300,000 -18450 281550 7.80 38462 0.07 -1.00 -0.07 300,000 -20,400 -159,120 -38850 -423,421 -123,421
47 2026 7 0.06 -1.00 -0.06 300,000 -18870 281130 8.00 37500 0.07 -1.00 -0.07 300,000 -21,000 -168,000 -39870 -463,291 -163,291
48 2027 7 0.06 -1.00 -0.06 300,000 -19170 280830 8.15 36810 0.07 -1.00 -0.07 300,000 -21,450 -174,818 -40620 -503,911 -203,911
49 2028 8 0.07 -1.00 -0.07 300,000 -20550 279450 8.40 35714 0.07 -1.00 -0.07 300,000 -22,200 -186,480 -42750 -546,661 -246,661
50 2029 8 0.07 -1.00 -0.07 300,000 -20880 279120 8.67 34602 0.08 -1.00 -0.08 300,000 -23,010 -199,497 -43890 -590,551 -290,551
51 2030 8 0.07 -1.00 -0.07 300,000 -21000 279000 9.50 31579 0.09 -1.00 -0.09 300,000 -25,500 -242,250 -46500 -637,051 -337,051
Source: World Bank (2017)

107
 Table 4: Malaysian EPF Real Value with an Amount of RM 400,000 (1980-2030)
EPF COMPETITIVINESS (Value = RM400,000)
PER Year I% ∆I C0f.-1 ∆CPI PA CPI* EPF-DRV XR EPFus$ ∆XR Cof.-1 ∆XR* PA XR* EPF-IRV EP F -d +EPF EPF-RV
1 1980 7 0.00 -1.00 0.00 400,000 0 400000 2.18 183749 0.00 -1.00 0.00 400,000 0 0 0 400,000 0
2 1981 10 0.09 -1.00 -0.09 400,000 -34800 365200 2.30 173602 0.01 -1.00 -0.01 400,000 -5,216 -12,019 -40016 359,984 40,016
3 1982 6 0.05 -1.00 -0.05 400,000 -19276 380724 2.34 171277 0.01 -1.00 -0.01 400,000 -5,342 -12,475 -24617 335,366 64,634
4 1983 4 0.03 -1.00 -0.03 400,000 -10817 389183 2.32 172321 0.01 -1.00 -0.01 400,000 -5,285 -12,268 -16102 319,264 80,736
5 1984 4 0.03 -1.00 -0.03 400,000 -12000 388000 2.34 170675 0.01 -1.00 -0.01 400,000 -5,375 -12,596 -17375 301,890 98,110
6 1985 0.3 -0.01 -1.00 0.01 400,000 2800 402800 2.48 161093 0.01 -1.00 -0.01 400,000 -5,932 -14,730 -3132 298,758 101,242
7 1986 1 0.00 -1.00 0.00 400,000 0 400000 2.58 154952 0.02 -1.00 -0.02 400,000 -6,326 -16,330 -6326 292,432 107,568
8 1987 0.3 -0.01 -1.00 0.01 400,000 2840 402840 2.52 158753 0.02 -1.00 -0.02 400,000 -6,079 -15,316 -3239 289,193 110,807
9 1988 3 0.02 -1.00 -0.02 400,000 -7240 392760 2.62 152743 0.02 -1.00 -0.02 400,000 -6,475 -16,957 -13715 275,478 124,522
10 1989 3 0.02 -1.00 -0.02 400,000 -6480 393520 2.71 147665 0.02 -1.00 -0.02 400,000 -6,835 -18,516 -13315 262,163 137,837
11 1990 3 0.02 -1.00 -0.02 400,000 -8000 392000 2.70 147881 0.02 -1.00 -0.02 400,000 -6,820 -18,446 -14820 247,343 152,657
12 1991 4 0.03 -1.00 -0.03 400,000 -12000 388000 2.75 145451 0.02 -1.00 -0.02 400,000 -7,000 -19,251 -19000 228,343 171,657
13 1992 5 0.04 -1.00 -0.04 400,000 -16000 384000 2.55 157024 0.02 -1.00 -0.02 400,000 -6,190 -15,767 -22190 206,154 193,846
14 1993 4 0.03 -1.00 -0.03 400,000 -10880 389120 2.57 155394 0.02 -1.00 -0.02 400,000 -6,296 -16,207 -17176 188,977 211,023
15 1994 4 0.03 -1.00 -0.03 400,000 -12000 388000 2.62 152424 0.02 -1.00 -0.02 400,000 -6,497 -17,050 -18497 170,480 229,520
16 1995 3 0.02 -1.00 -0.02 400,000 -9960 390040 2.50 159719 0.02 -1.00 -0.02 400,000 -6,018 -15,071 -15978 154,502 245,498
17 1996 3 0.02 -1.00 -0.02 400,000 -8000 392000 2.52 158986 0.02 -1.00 -0.02 400,000 -6,064 -15,256 -14064 140,439 259,561
18 1997 3 0.02 -1.00 -0.02 400,000 -6960 393040 2.81 142187 0.02 -1.00 -0.02 400,000 -7,253 -20,403 -14213 126,226 273,774
19 1998 5 0.04 -1.00 -0.04 400,000 -16000 384000 3.92 101927 0.03 -1.00 -0.03 400,000 -11,698 -45,905 -27698 98,528 301,472
20 1999 3 0.02 -1.00 -0.02 400,000 -8000 392000 3.80 105263 0.03 -1.00 -0.03 400,000 -11,200 -42,560 -19200 79,328 320,672
21 2000 2 0.01 -1.00 -0.01 400,000 -3240 396760 3.80 105263 0.03 -1.00 -0.03 400,000 -11,200 -42,560 -14440 64,888 335,112
22 2001 1 0.00 -1.00 0.00 400,000 0 400000 3.80 105263 0.03 -1.00 -0.03 400,000 -11,200 -42,560 -11200 53,688 346,312
23 2002 2 0.01 -1.00 -0.01 400,000 -4000 396000 3.80 105263 0.03 -1.00 -0.03 400,000 -11,200 -42,560 -15200 38,488 361,512
24 2003 1 0.00 -1.00 0.00 400,000 0 400000 3.80 105263 0.03 -1.00 -0.03 400,000 -11,200 -42,560 -11200 27,288 372,712
25 2004 2 0.01 -1.00 -0.01 400,000 -4000 396000 3.80 105263 0.03 -1.00 -0.03 400,000 -11,200 -42,560 -15200 12,088 387,912
26 2005 3 0.02 -1.00 -0.02 400,000 -8000 392000 3.79 105622 0.03 -1.00 -0.03 400,000 -11,148 -42,220 -19148 -7,060 392,940
27 2006 4 0.03 -1.00 -0.03 400,000 -12000 388000 3.67 109046 0.03 -1.00 -0.03 400,000 -10,673 -39,149 -22673 -29,733 370,267
28 2007 2 0.01 -1.00 -0.01 400,000 -4000 396000 3.44 116361 0.02 -1.00 -0.02 400,000 -9,750 -33,517 -13750 -43,483 356,517
29 2008 5 0.04 -1.00 -0.04 400,000 -16000 384000 3.34 119910 0.02 -1.00 -0.02 400,000 -9,343 -31,168 -25343 -68,826 331,174
30 2009 1 0.00 -1.00 0.00 400,000 0 400000 3.52 113491 0.03 -1.00 -0.03 400,000 -10,098 -35,590 -10098 -78,924 321,076
31 2010 2 0.01 -1.00 -0.01 400,000 -2640 397360 3.22 124182 0.02 -1.00 -0.02 400,000 -8,884 -28,617 -11524 -90,449 309,551
32 2011 3 0.02 -1.00 -0.02 400,000 -8000 392000 3.06 130719 0.02 -1.00 -0.02 400,000 -8,240 -25,214 -16240 -106,689 293,311
33 2012 2 0.01 -1.00 -0.01 400,000 -4000 396000 3.09 129500 0.02 -1.00 -0.02 400,000 -8,355 -25,808 -12355 -119,044 280,956
34 2013 2 0.01 -1.00 -0.01 400,000 -4000 396000 3.15 126948 0.02 -1.00 -0.02 400,000 -8,604 -27,109 -12604 -131,647 268,353
35 2014 3 0.02 -1.00 -0.02 400,000 -8000 392000 3.27 122217 0.02 -1.00 -0.02 400,000 -9,091 -29,755 -17091 -148,739 251,261
36 2015 2 0.01 -1.00 -0.01 400,000 -4000 396000 3.91 102420 0.03 -1.00 -0.03 400,000 -11,622 -45,390 -15622 -164,361 235,639
37 2016 4 0.03 -1.00 -0.03 400,000 -12000 388000 4.00 100000 0.03 -1.00 -0.03 400,000 -12,000 -48,000 -24000 -188,361 211,639
38 2017 5 0.04 -1.00 -0.04 400,000 -16000 384000 4.60 86957 0.04 -1.00 -0.04 400,000 -14,400 -66,240 -30400 -218,761 181,239
39 2018 6 0.05 -1.00 -0.05 400,000 -18000 382000 5.00 80000 0.04 -1.00 -0.04 400,000 -16,000 -80,000 -34000 -252,761 147,239
40 2019 6 0.05 -1.00 -0.05 400,000 -19600 380400 5.25 76190 0.04 -1.00 -0.04 400,000 -17,000 -89,250 -36600 -289,361 110,639
41 2020 6 0.05 -1.00 -0.05 400,000 -20400 379600 6.00 66667 0.05 -1.00 -0.05 400,000 -20,000 -120,000 -40400 -329,761 70,239
42 2021 6 0.05 -1.00 -0.05 400,000 -21400 378600 6.20 64516 0.05 -1.00 -0.05 400,000 -20,800 -128,960 -42200 -371,961 28,039
43 2022 6 0.05 -1.00 -0.05 400,000 -21800 378200 6.50 61538 0.06 -1.00 -0.06 400,000 -22,000 -143,000 -43800 -415,761 -15,761
44 2023 7 0.06 -1.00 -0.06 400,000 -23600 376400 7.00 57143 0.06 -1.00 -0.06 400,000 -24,000 -168,000 -47600 -463,361 -63,361
45 2024 7 0.06 -1.00 -0.06 400,000 -24000 376000 7.35 54422 0.06 -1.00 -0.06 400,000 -25,400 -186,690 -49400 -512,761 -112,761
46 2025 7 0.06 -1.00 -0.06 400,000 -24600 375400 7.80 51282 0.07 -1.00 -0.07 400,000 -27,200 -212,160 -51800 -564,561 -164,561
47 2026 7 0.06 -1.00 -0.06 400,000 -25160 374840 8.00 50000 0.07 -1.00 -0.07 400,000 -28,000 -224,000 -53160 -617,721 -217,721
48 2027 7 0.06 -1.00 -0.06 400,000 -25560 374440 8.15 49080 0.07 -1.00 -0.07 400,000 -28,600 -233,090 -54160 -671,881 -271,881
49 2028 8 0.07 -1.00 -0.07 400,000 -27400 372600 8.40 47619 0.07 -1.00 -0.07 400,000 -29,600 -248,640 -57000 -728,881 -328,881
50 2029 8 0.07 -1.00 -0.07 400,000 -27840 372160 8.67 46136 0.08 -1.00 -0.08 400,000 -30,680 -265,996 -58520 -787,401 -387,401
51 2030 8 0.07 -1.00 -0.07 400,000 -28000 372000 9.50 42105 0.09 -1.00 -0.09 400,000 -34,000 -323,000 -62000 -849,401 -449,401
Source: World Bank (2017)

108
 Table 5: Malaysian EPF Real Value with an Amount of RM 500,000 (1980-2030)
EPF COMPETITIVINESS (Value = RM500,000)
PER Year I% ∆I C0f.-1 ∆CPI PA CPI* EPF-DRV XR EPFus$ ∆XR Cof.-1 ∆XR* PA XR* EPF-IRV EP F -d +EPF EPF-RV
1 1980 7 0.00 -1.00 1.00 500,000 0 500000 2.18 229686 0.00 -1.00 0.00 500,000 0 0 0 500,000 0
2 1981 10 0.09 -1.00 -0.09 500,000 -43500 456500 2.30 217002 0.01 -1.00 -0.01 500,000 -6,521 -15,024 -50021 449,979 50,021
3 1982 6 0.05 -1.00 -0.05 500,000 -24095 475905 2.34 214097 0.01 -1.00 -0.01 500,000 -6,677 -15,593 -30771 419,208 80,792
4 1983 4 0.03 -1.00 -0.03 500,000 -13521 486479 2.32 215401 0.01 -1.00 -0.01 500,000 -6,606 -15,335 -20127 399,080 100,920
5 1984 4 0.03 -1.00 -0.03 500,000 -15000 485000 2.34 213343 0.01 -1.00 -0.01 500,000 -6,718 -15,745 -21718 377,362 122,638
6 1985 0.3 -0.01 -1.00 0.01 500,000 3500 503500 2.48 201366 0.01 -1.00 -0.01 500,000 -7,415 -18,412 -3915 373,447 126,553
7 1986 1 0.00 -1.00 0.00 500,000 0 500000 2.58 193690 0.02 -1.00 -0.02 500,000 -7,907 -20,412 -7907 365,540 134,460
8 1987 0.3 -0.01 -1.00 0.01 500,000 3550 503550 2.52 198441 0.02 -1.00 -0.02 500,000 -7,598 -19,145 -4048 361,492 138,508
9 1988 3 0.02 -1.00 -0.02 500,000 -9050 490950 2.62 190928 0.02 -1.00 -0.02 500,000 -8,094 -21,196 -17144 344,348 155,652
10 1989 3 0.02 -1.00 -0.02 500,000 -8100 491900 2.71 184581 0.02 -1.00 -0.02 500,000 -8,544 -23,145 -16644 327,704 172,296
11 1990 3 0.02 -1.00 -0.02 500,000 -10000 490000 2.70 184851 0.02 -1.00 -0.02 500,000 -8,524 -23,057 -18524 309,179 190,821
12 1991 4 0.03 -1.00 -0.03 500,000 -15000 485000 2.75 181814 0.02 -1.00 -0.02 500,000 -8,750 -24,064 -23750 285,429 214,571
13 1992 5 0.04 -1.00 -0.04 500,000 -20000 480000 2.55 196280 0.02 -1.00 -0.02 500,000 -7,737 -19,709 -27737 257,692 242,308
14 1993 4 0.03 -1.00 -0.03 500,000 -13600 486400 2.57 194243 0.02 -1.00 -0.02 500,000 -7,870 -20,259 -21470 236,221 263,779
15 1994 4 0.03 -1.00 -0.03 500,000 -15000 485000 2.62 190530 0.02 -1.00 -0.02 500,000 -8,121 -21,312 -23121 213,100 286,900
16 1995 3 0.02 -1.00 -0.02 500,000 -12450 487550 2.50 199648 0.02 -1.00 -0.02 500,000 -7,522 -18,838 -19972 193,128 306,872
17 1996 3 0.02 -1.00 -0.02 500,000 -10000 490000 2.52 198733 0.02 -1.00 -0.02 500,000 -7,580 -19,070 -17580 175,548 324,452
18 1997 3 0.02 -1.00 -0.02 500,000 -8700 491300 2.81 177734 0.02 -1.00 -0.02 500,000 -9,066 -25,504 -17766 157,782 342,218
19 1998 5 0.04 -1.00 -0.04 500,000 -20000 480000 3.92 127409 0.03 -1.00 -0.03 500,000 -14,622 -57,382 -34622 123,161 376,839
20 1999 3 0.02 -1.00 -0.02 500,000 -10000 490000 3.80 131579 0.03 -1.00 -0.03 500,000 -14,000 -53,200 -24000 99,161 400,839
21 2000 2 0.01 -1.00 -0.01 500,000 -4050 495950 3.80 131579 0.03 -1.00 -0.03 500,000 -14,000 -53,200 -18050 81,111 418,889
22 2001 1 0.00 -1.00 0.00 500,000 0 500000 3.80 131579 0.03 -1.00 -0.03 500,000 -14,000 -53,200 -14000 67,111 432,889
23 2002 2 0.01 -1.00 -0.01 500,000 -5000 495000 3.80 131579 0.03 -1.00 -0.03 500,000 -14,000 -53,200 -19000 48,111 451,889
24 2003 1 0.00 -1.00 0.00 500,000 0 500000 3.80 131579 0.03 -1.00 -0.03 500,000 -14,000 -53,200 -14000 34,111 465,889
25 2004 2 0.01 -1.00 -0.01 500,000 -5000 495000 3.80 131579 0.03 -1.00 -0.03 500,000 -14,000 -53,200 -19000 15,111 484,889
26 2005 3 0.02 -1.00 -0.02 500,000 -10000 490000 3.79 132027 0.03 -1.00 -0.03 500,000 -13,935 -52,775 -23935 -8,825 491,175
27 2006 4 0.03 -1.00 -0.03 500,000 -15000 485000 3.67 136307 0.03 -1.00 -0.03 500,000 -13,341 -48,937 -28341 -37,166 462,834
28 2007 2 0.01 -1.00 -0.01 500,000 -5000 495000 3.44 145452 0.02 -1.00 -0.02 500,000 -12,188 -41,897 -17188 -54,354 445,646
29 2008 5 0.04 -1.00 -0.04 500,000 -20000 480000 3.34 149888 0.02 -1.00 -0.02 500,000 -11,679 -38,960 -31679 -86,033 413,967
30 2009 1 0.00 -1.00 0.00 500,000 0 500000 3.52 141864 0.03 -1.00 -0.03 500,000 -12,623 -44,488 -12623 -98,655 401,345
31 2010 2 0.01 -1.00 -0.01 500,000 -3300 496700 3.22 155227 0.02 -1.00 -0.02 500,000 -11,105 -35,772 -14405 -113,061 386,939
32 2011 3 0.02 -1.00 -0.02 500,000 -10000 490000 3.06 163399 0.02 -1.00 -0.02 500,000 -10,300 -31,518 -20300 -133,361 366,639
33 2012 2 0.01 -1.00 -0.01 500,000 -5000 495000 3.09 161875 0.02 -1.00 -0.02 500,000 -10,444 -32,259 -15444 -148,805 351,195
34 2013 2 0.01 -1.00 -0.01 500,000 -5000 495000 3.15 158684 0.02 -1.00 -0.02 500,000 -10,755 -33,887 -15755 -164,559 335,441
35 2014 3 0.02 -1.00 -0.02 500,000 -10000 490000 3.27 152772 0.02 -1.00 -0.02 500,000 -11,364 -37,194 -21364 -185,924 314,076
36 2015 2 0.01 -1.00 -0.01 500,000 -5000 495000 3.91 128025 0.03 -1.00 -0.03 500,000 -14,528 -56,737 -19528 -205,451 294,549
37 2016 4 0.03 -1.00 -0.03 500,000 -15000 485000 4.00 125000 0.03 -1.00 -0.03 500,000 -15,000 -60,000 -30000 -235,451 264,549
38 2017 5 0.04 -1.00 -0.04 500,000 -20000 480000 4.60 108696 0.04 -1.00 -0.04 500,000 -18,000 -82,800 -38000 -273,451 226,549
39 2018 6 0.05 -1.00 -0.05 500,000 -22500 477500 5.00 100000 0.04 -1.00 -0.04 500,000 -20,000 -100,000 -42500 -315,951 184,049
40 2019 6 0.05 -1.00 -0.05 500,000 -24500 475500 5.25 95238 0.04 -1.00 -0.04 500,000 -21,250 -111,563 -45750 -361,701 138,299
41 2020 6 0.05 -1.00 -0.05 500,000 -25500 474500 6.00 83333 0.05 -1.00 -0.05 500,000 -25,000 -150,000 -50500 -412,201 87,799
42 2021 6 0.05 -1.00 -0.05 500,000 -26750 473250 6.20 80645 0.05 -1.00 -0.05 500,000 -26,000 -161,200 -52750 -464,951 35,049
43 2022 6 0.05 -1.00 -0.05 500,000 -27250 472750 6.50 76923 0.06 -1.00 -0.06 500,000 -27,500 -178,750 -54750 -519,701 -19,701
44 2023 7 0.06 -1.00 -0.06 500,000 -29500 470500 7.00 71429 0.06 -1.00 -0.06 500,000 -30,000 -210,000 -59500 -579,201 -79,201
45 2024 7 0.06 -1.00 -0.06 500,000 -30000 470000 7.35 68027 0.06 -1.00 -0.06 500,000 -31,750 -233,363 -61750 -640,951 -140,951
46 2025 7 0.06 -1.00 -0.06 500,000 -30750 469250 7.80 64103 0.07 -1.00 -0.07 500,000 -34,000 -265,200 -64750 -705,701 -205,701
47 2026 7 0.06 -1.00 -0.06 500,000 -31450 468550 8.00 62500 0.07 -1.00 -0.07 500,000 -35,000 -280,000 -66450 -772,151 -272,151
48 2027 7 0.06 -1.00 -0.06 500,000 -31950 468050 8.15 61350 0.07 -1.00 -0.07 500,000 -35,750 -291,363 -67700 -839,851 -339,851
49 2028 8 0.07 -1.00 -0.07 500,000 -34250 465750 8.40 59524 0.07 -1.00 -0.07 500,000 -37,000 -310,800 -71250 -911,101 -411,101
50 2029 8 0.07 -1.00 -0.07 500,000 -34800 465200 8.67 57670 0.08 -1.00 -0.08 500,000 -38,350 -332,495 -73150 -984,251 -484,251
51 2030 8 0.07 -1.00 -0.07 500,000 -35000 465000 9.50 52632 0.09 -1.00 -0.09 500,000 -42,500 -403,750 -77500 -1,061,751 -561,751

Source: World Bank (2017)

109
 Figure 3
Critical EPF Real Value under RM 100,000 (1980-2017)

Source: See Table 1

Figure 4
Critical EPF Real Value under RM 200,000 (1980-2017)

Source: See Table 2

110
 Figure 5
Critical EPF Real Value under RM 300,000 (1980-2017)

Source: See Table 3

Figure 6
Critical EPF Real Value under RM 400,000 (1980-2017)

Source: See Table 4

111
 Figure 7
Critical EPF Real Value under RM 500,000 (1980-2017)

Source: See Table 5

8.4. Conclusion
We can confirm that inflation and the exchange rate strongly affects any pension
system in the long run. The major contribution of this research paper is the innovative
way that pension systems are analyzed, especially in the case of the Employees Provident
Fund (EPF). This research uses an alternative multidimensional graphical approach (The
Mega-Dynamic Disks Multivariable Random Coordinate Space in Vertical Position) and
a large database from the World Bank (WB) to build the Pension Real Value Box (PRV-
Box). This new analytical tool makes it possible to evaluate a large number of variables
such as CPI*, EPF-DRV, XR*, EPF-IRV, and EPF-RV together in the same graphical
space and time framework. The Pension Real Value Box (PRV-Box) was applied in the
case of the Malaysia Employees Provident Fund (EPF) from the year 1980 to the year
2030. This research concludes that the EPF critical point is located in the year 2022 (see
Figure 3, 4, 5, 6, and 7) in our five simulations with different amounts of funds (Rm
100,000), (Rm 200,000) (Rm 300,000) (Rm 400,000) (Rm 500,000) according to Table
1, 2, 3, 4, and 5. If the Malaysian inflation rate is higher than 7% and the exchange rate
is more than US$ 1 by RM 7, the EPF real value of Malaysia can collapse with negative
values (an extremely low value) such that the EPF real value is so low that it cannot cover
basic medical care costs or large debts in the long run, nor can it buy goods and services
to satisfy the basic necessities of Malaysian pensioners in the long run. In figure 1, we
can observe how a large number of variables affect directly or indirectly the Malaysian
EPF value in the last 30 years with dramatic changes in the same graphical space and
time framework. Therefore, we plot different points around the surface to fit and
interconnect these variables with straight lines. At a glance, each surface looks logical,
lacking interconnectivity among these variables, which is based on this research. This
paper captures multidimensional graphical modelling based on the mega-dynamic disks
112
multivariable random coordinate space in horizontal position that is proposed. We clearly
observe the relationship that exists between inflation/exchange rate and its effects on any
pension system in a logical and systematic order. Hence, we demonstrate how a non-
linear spiral-shape graphical form representation construction starts to be plotted from
the top to the bottom of the mega-dynamic disks multivariable random coordinate space
in a horizontal position. The Pension Real Value Box (PRV-Box) value surface from a
multidimensional perspective is displayed and follows consistent behavior to prove that
there exists a strong relationship between inflation/exchange rate and the EPF real value.
We conclude that any pension system needs to include inflation and the exchange rate to
evaluate its future and real value for pensioner’s welfare without any restriction or
limitations in the analysis.

8.5. References
Ahmad, E., J. Dreze, J. Hills, and A. Sen (1991). Social Security in Developing
Countries, Oxford: Oxford University Press.
Grosh, M.E. (1990). "Social Spending in Latin America", World Bank Discussion Paper,
Washington, D.C.
Employees Provident Fund (EPF). (2007). Employees Provident Fund (Amendment) Act
2007 (Act A1300). Kuala Lumpur.
International Labour Office (ILO) (1989). From Pyramid to Pillar, Geneva: International
Labour Office.
Kotlikoff, L. (1988). “Intergenerational Transfers and Savings”. Journal of Economic
Perspectives. Vol. 2.
Ostaszewski, Krzysztof. 2012. “Editorial: The Four Pillars: Looking at the last 25 years
and the next 25 years”, in Life and Pensions Newsletter (formerly Four Pillars
Newsletter), No. 50, pp. 1–5.
Public Service Department (PSD). (2013). Improvement of pension benefits (1968–
2004). Kuala Lumpur. Available at:
http://www.jpapencen.gov.my/english/improvement_pension.html [accessed 11
Nov. 2016].
Ruiz Estrada, M.A. 2011. “Policy Modeling: Definition, Classification, and
Evaluation.” Journal of Policy Modeling, 33(4): 523-536.
Ruiz Estrada, M.A. (2014). “An Introduction to the Mega-Dynamic Disks Coordinate
Space in Horizontal and Horizontal Position.” Malaysian Journal of Sciences, 33(2):
105 109.
Sales Sarrapy, Carlos and Videgaray Caso Luis. (1998). La sustentabilidad de largo plazo
de la política fiscal en México: un enfoque de cuentas generacionales”. Gaceta de
Economía, Suplemento Año 5.
Social Security Administration (SSA). (2013). International update: Recent
developments in foreign public and private pensions. SSA Publication No. 13-
11712. Washington, DC. June.
—. (2012). International update: Recent developments in foreign public and private
pensions SSA Publication No. 13-11712. Washington, DC. Sep.
—. (2009). International update: Recent developments in foreign public and private
pensions.SSA Publication No. 13-11712. Washington, DC. Feb.

Tolos, H., Wang, P., & Zhang, M. (2014). Retirement Systems and Pension Reforms: A
Malaysian Perspective. International Labour Review, 153 (3).
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(accessed March 15, 2017)
113
Chapter IX
The National Social Protection Fund: The Multi-Pillar
Employees Provident Fund
By Mario Arturo Ruiz Estrada, Evangelos Koutronas, and Donghyun Park

9.1. Introduction
There is a growing concern among policy makers that the Malaysian Employment
Provident Fund (EPF) is not an effective and efficient welfare mechanism for meeting
the retirement needs of its members. It is an accepted fact that the provident fund is a
variant of defined-contribution plan, which by definition is not designed to address
longevity, inflation, and survivors’ benefit risk (Asher, 2012). EPF satisfies in principle
the prudent person rule, addressing the distortions of myopic individual behavior
(Mitchell & Fields, 1995). Notwithstanding, retirement income per se does not meet the
threshold of insurability, constituting state intervention inevitable at the expense of
taxpayers, current contributors, and retirees (Feldstein, 1998). Furthermore, the current
retirement status quo of the provident fund members is not economically desirable
(Koutronas & Ismail, 2016). Only one third of the active EPF members will have
sufficient accumulated savings (Holzmann, 2014), with the account balances of 73.2
percent of fund contributors yield less than RM 50,000 (Asher, 2012). With 70 percent
lump sum withdrawal rate, 50 percent participation and absence of a life annuity option,
prima facie, the actual EPF coverage is substantially lower (Koutronas & Ismail, 2016;
Othman, 2010). As a result, most of the EPF members will not have adequate retirement
income.
It is a plausible conjecture that EPF needs a paradigm shift in emphasis from
retirement-based benefits to social protection type means-tested forms of support. Such
a development is mandatory given the emergence of new risks (demographic factors,
labor mobility, climate, technological developments) and new needs (health care,
pensions). These conditions require a dynamic provident fund where individual needs are
met effectively and efficiently by implementing enhanced welfare benefits closely related
to their specific context. This paper formulates a comprehensive pension fund framework
for enhancing system capacity to manage economic and social risks. The National Social
Protection Fund (NSPF) attempts to quantify informal sector, incorporated under a
unified national protection scheme. The new protection mechanism consists of two sub
funds: The National Integral Social Security Fund (NISSF) and the National Education
Fund (NEF). NISSF encompasses all economically active Malaysian population,
including the informal workforce, whereas the NSPF captures the economically inactive
young population. The remainder of this paper is organized as follows. Section two
outlines the Employment Provident Fund. Section three describes the integrated fund
mechanism into a simplified theoretical framework. Section four concentrates on data
requirements and the simulation technique used upon the data. The final section
concludes. The Appendix contains tables and figures.

114
9.2. Employees Provident Fund (EPF) at a Glance
EPF is a trust fund (functions as a trustee for its members) established under the
EPF Ordinance, 1951. It was amended to the EPF Act in 1991. EPF is a defined
contribution plan based on a prescribed rate of contribution by employers and employees,
accumulated as savings in a personal account and full withdrawal upon retirement. The
scheme is mandatory for those in the formal sector, but it also allows those who are self-
employed to contribute towards the fund. This flexibility is aimed at encouraging savings
for old age. The rate of contribution is 12 percent and 13 percent for employers and
employees, respectively regardless of age of employee (Employee Provident Fund
(EPF), 2014). EPF is structured into three types of accounts, namely, Account I, Account
II and Account III (see Figure 1). Each account is designed to serve the different needs
of contributors and conditions under which a certain amount can be withdrawn. Account
I constitute 60 percent of member’s savings for retirement in accordance to the primary
objective of the scheme, i.e., to ensure that members have sufficient cash savings for
retirement. Up to 20 percent of the balance in Account I can be transferred for investment
purposes. Account II allows a member to withdraw his/her savings once for buying or
building a house. This withdrawal is limited to 20 percent of the price of the house or 45
percent of the savings but not exceeding a certain amount. Further withdrawals to reduce
or to settle balance of the housing loan is allowed every five years from the date of the
previous withdrawal until the member attains the age of 55 years. Under this account,
members will also be allowed to withdraw some money to finance the cost of their
children’s education. Account III is intended to help members to pay for their medical
expenses of critical illness. This assistance in the form of emergency medical expenses
allows 10 percent of contribution to be withdrawn and it is not limited to the member
only, but is extended to member’s spouse, children, parents and siblings.

115
 Table 1: Types of Withdrawal of EPF
No. Type
1. Age 55 years withdrawal.
2. Incapacitation withdrawal.
3. Pensionable employees
withdrawal and optional
retirement withdrawal.
4. Leaving the country
withdrawal.
5. Death withdrawal.
6. Savings of more than
RM1 million withdrawal.
7. Members investment
withdrawal.
8. Age 50 years withdrawal.
9. Withdrawal to reduce /
redeem housing loan.
10. Education withdrawal.
11. Withdrawal to purchase a
house or to build a house.
12. Housing loan monthly
installment withdrawal.
13. Flexible housing
withdrawal.
14. Health withdrawal.
15. Hajj withdrawal.
Source: Employees Provident Fund Data in (Mansor, Syed Salleh, Tan, Koutronas, & Aikanathan, 2014)
Account Purpose
Account 1 Members can withdraw all of their savings either in a lump sum or partially
Account 2 for financial support during retirement period.
Account 1 Members can withdraw all of their savings should they become physically or
Account 2 mentally incapacitated to work, having achieved the level of Maximum
Medical Rehabilitation (MMI) to work to help and support their living.
Account 1 This withdrawal allows members who are still employed in the Public Service
Account 2 and have been emplaced in the pensionable establishment to withdraw the
employee's share of contribution including the dividends accrued after
returning the government’s share to Retirement Fund.
This withdrawal allows the members who opted for early retirement from the
Public Service to withdraw the employee's share of contributions, including
the dividends accrued for periods where it was compulsory to contribute to
EPF while in the Public Service.
Account 1 Withdrawal can be made by Malaysian citizens who have renounced their
Account 2 citizenship in order to migrate to another country OR foreign citizens
(members who contribute before 1 August 1998) who have ceased to be
employed in this country and wish to return to their country of origin.
Account 1 This withdrawal allows member’s nominees or administrators or next-of-kin
Account 2 to withdraw the savings in the event of the member’s death.
Account 1 Members can withdraw their savings if the credit is RM1.05 million as RM1
Account 2 million is view as adequate to finance their basic retirement needs.
Members are eligible to withdraw not less than RM 50,000 which will be
taken from Account 2, and if it is insufficient, the balance will be taken from
Account 1.
Account 1 Members can invest not more than 20% of their savings in Account 1 in
excess of basic savings amount to increase their retirement savings.
Account 2 Members can withdraw all of their savings in Account 2 upon reaching age
of 50 to prepare and plan for their retirement earlier.
Account 2 Members can withdraw their savings in Account 2 to reduce or redeem the
housing loan balance with the financial institution approved by EPF.
Withdrawal to reduce or redeem the housing loan balance for a second house
is allowed when the first house is sold or disposal of ownership has taken
place.
Account 2 Members can withdraw their savings in Account 2 to finance the member’s
education and their children's education (including step-children and legally
adopted children) at an Institution of Higher Learning either locally or abroad.
Account 2 Members can withdraw their savings in Account 2 to finance the purchase of
a house and withdrawal to purchase a second house is allowed after the first
house is sold or disposal of ownership of property has taken place.
Members can withdraw their savings in Account 2 to finance to build a house
and withdrawal to purchase a second house is allowed after the first house is
sold or disposal of ownership of property has taken place.
Account 2 Members can withdraw their savings in Account 2 to pay for housing loan
monthly instalments taken for the purpose of buying or building a house.
This is an addition to the existing withdrawal, which is the withdrawal to
reduce or redeem housing loan.
Account 2 Set aside a part of savings in member’s Account 2 to the Flexible Housing
Withdrawal Account to enable the member to obtain a higher housing loan
amount to purchase or build a house. Member can obtain a higher loan amount
since the credit assessment on the net income also takes the EPF contribution
into consideration.
Account 2 Members can withdraw their savings in Account 2 to pay for medical
expenses incurred for the treatment of critical illnesses and/or to buy medical
aid equipment as approved by the EPF Board for oneself or permitted family
members.
Account 2 Members can withdraw their savings in Account 2 to perform their Hajj
effective from January 2013.
116
 EPF introduced the Periodical Payment Withdrawal Scheme in 1994 to allow
members who have reached retirement age to withdraw their savings periodically (once
a month), until all savings are withdrawn. This is similar to the monthly payment for
government pensions. Besides the lump sum withdrawal at retirement and the periodic
payment, EPF also provides two other schemes. One of the other two options is part lump
sum and part periodic payment while the other allows contributors to maintain the
principal amount with EPF, withdrawing only the annual dividends. In July 2000 EPF
introduced yet another option, which is the annuity scheme comprising two types of
schemes to suit the preference of contributors. The first one is known as the Conventional
Annuity Scheme and the other is the Takaful Annuity Scheme. These schemes are aimed
at providing members an even income stream throughout their retirement years. They are
open to contributors between the ages of 16 and 70. Members of EPF may choose to buy
one or both the schemes. (Ong, 2001). EPF have exhibited significant cash flow growth
that inconsistently return added value to its members in the form of dividends (see Figure
2). EPF nominal rates have been historically moderate to high, averaging 5.95 percent
per annum during the period 1961–2014 (Koutronas & Ismail, 2016). EPF dividends have
reached historic low levels during the 1997 Asian financial crisis and the 2008 global
financial crisis with 4.25 percent and 4.50 percent, respectively. The fund experienced a
dividend rate of 5.70 percent due to domestic economic conditions.

Table 2: EPF-Dividend (1952-2017)

Source: EPF (2017)

In September 2016, the membership of the pension fund reached 14.72 million,
of which 6.83 million are active and contributing members. A significant change to age
pension eligibility was made by the Malaysian government in 2001 (from 55 to 56), in
2008 (from 56 to 58) and in 2012 (from 58 to 60) (Peng & Tengku Hamid, 2014).

117
9.3. The National Social Protection Fund (NSPF)
The NSPF relies on a defined-benefit scheme with defined-contribution elements
where EPF accepts to manage in a principled manner. It remains a savings scheme with
personal financing features, such as education, housing down payments and medical care,
accompanied though by predetermined mandatory contributions. In the case of additional
borrowing, members will use the retirement savings accounts as collateral, subject to
strict limitation terms, borrowing at the guaranteed rate. Furthermore, EPF will create a
defined-benefit annuity based on accumulated balances in individual accounts that will
guarantee the real value of return. The three-to-one pillar scheme will be sustainable and
viable as long as the compounded contributions along with the expected retirement
amount and the expected return of assets is in perfect alignment. The new fund
mechanism aims to reduce vulnerability and manage the risk of low-income EPF
members with regard to basic consumption and social services. The combination of basic
needs, such pension, health insurance and education, into a comprehensive fund can
eliminate the risk of loss to individuals in isolation. The fund is designed to transfer
resources to groups deemed eligible due to deprivation.

9.4. The Social Protection-DNA Model

The proposed analytical framework evaluates the overall impact of integrated
funding. The development of the two national funds follows a right-handed double helix
curvature. The Social Protection-DNA model (SP-DNA) examines the impact of the dual
funds in reducing poverty within the framework of real-time multidimensionality (Ruiz
Estrada, Chandran, & Tahir, 2014) and the Omnia Mobilis assumption (Ruiz Estrada,
2011). The NISFF and NEF fund spiral around interconnected to each other. NISFF is a
three-pillar fund encompassing three sub funds, namely, the formal employees fund (α1),
the informal employees fund (α2), and the unemployed insurance fund (α3). NEF
alternatively is a single-pillar fund. In a three-dimensional Euclidean space, each of the
fund surface is geometrically bounded by a sphere.

118
 Figure 1: The National Integral Social Security Fund (NISSF)

Social Protection
Sub-Structure (SS)

α1
Social Security
Micro-Structure (MS)

α3
α2

Source: Authors’ Elaboration

The movement of the integrated fund and the three sub funds on helix-1 trajectory
is perpendicular to the social security microstructure (MS) and the single social protection
sub-structures (SS), respectively. The sub fund trajectories change when their single
social protection sub-structures angular with different angle against their single social
protection structures. The establishment of the sub funds is not perpendicular to their
single social protection structures. Accumulated contributions cause the sub funds’
orbital motion in the direction of their single social protection structures. So, the sub
funds drift on the helix-1 trajectory. In parallel, the single-pillar fund drifts on the helix-
2 trajectory. NISFF and NEF interact in the social protection substructure area (see Figure
2).

119
 Figure 2: The Social Protection Helix

Social Protection
Sub-Structure (MS)

NISFF NEF

Source: Authors’ Elaboration

The volume formula of a sphere is given by

� �
=∫ ∫ ∫ � s�n � � �

≈ ��

ri reflects the radial distance of a point from a fixed origin; θ depicts the polar
angle measured from a fixed zenith direction; and φ represents the azimuth angle of its
orthogonal projection on a reference plane that passes through the origin and is
orthogonal to the zenith, measured from a fixed reference direction on that plane. In the
helix-1 setting, the radial distance ri is equivalent to sub funds’ annual growth rate:

ℎ
�
�
=
�

120
 ℎ ℎ ℎ
The radial distances � � , � � , and � � of sub funds are given by

ℎ
��
�
=
�

ℎ
��
�
=
�

ℎ
��
�
=
�

Then, we calculate their social security micro-structure:

ℎ
�

ℎ
= � (�� )

ℎ
�

ℎ
= � (�� )

ℎ
�

ℎ
= � (�� )

The merge of the three social security micro-structures gives the social protection
substructure of NISFF:

ℎ ℎ ℎ
= �
╬ �
╬ �

where (╬) is defined as the c-connector symbol. The total sum of the social protection
substructures gives the helix-1 curvature:

∞
ℎ
ℎ =∑
=
ℎ ℎ ℎ
= ╦ …╦ ∞

where (╦) is defined as the t-connector symbol. In the helix-2 setting, the radial distance
ℎ
� of the fund is given by

121
 ℎ ℎ
=�
�
=
�

Similarly, the total sum of social protection substructures gives the helix-2 curvature:

∞
ℎ
ℎ =∑
=
ℎ ℎ ℎ
= ╦ …╦ ∞

122
 Figure 3:
The Social Security Micro-Structures (MS), the Social Security Sub-Structures (SS),
Social Protection Helix for Malaysia.

Source: Authors’ Elaboration

123
9.5. Application of the Social Protection DNA Model (SP-DNA) in Malaysia
The multi-dimension setting enables the SP-DNA model to be tested in real-world
setting. The interacted Euclidean space facilitates the visualization of real time changes
in each fund component. Change in the determination of the past, present, and future
assumes the existence of a subjective and temporally extended point of view over reality,
from which reality can be described. We perform a serial of simulations by using the
Social Protection DNA Simulator in the case of Malaysia. The primary objective is to
evaluate the possibility of implementing the National Social Protection Fund (NSPF) in
Malaysia. Numerical data necessary for the SP-DNA model retrieved from international
and national organizations, namely, Asian Development Bank, International Labour
Organization, World Bank, International Monetary Fund, World Health Organization and
Employees Provident Fund.
The NISFF and NEF funds depend on their accumulated contribution rates. In the
NISFF, the accumulated contribution rate e1 stands for the formal employee’s fund α1;
the accumulated contribution rate e2 stands for the informal employee’s fund α2; and the
accumulated contribution rate e3 stands for the unemployed insurance fund α3. Similarly,
the accumulated contribution rate e4 stands for the NEF. The numerical computation of
the aforementioned parameters requires to take into account (i) the Malaysian population
size; (ii) the unemployment rate; (iii) formal-employees-to-total workforce rate; and (iv)
non-formal-employees-to-total-workforce rate.
Funds are subject to minimum funding requirements in order to funds to deliver
benefits. The amount of the minimum required contribution for the funds depends on
whether the value of plan assets equals or exceeds the plan’s funding target for the plan
year. If the plan’s assets are less than the funding target, the minimum required
contribution for the year is equal to the plan’s target normal cost plus the amortization of
the funding shortfall. If the plan’s assets equal or exceed the funding target, the minimum
required contribution is the target normal cost, which is reduced by the plan assets in
excess of the funding target. Plan assets must be reduced by any credit balance, if
applicable. In the case of NISFF, the Minimum Social Protection Fund (λ) shows a single
equation under the uses of e1, e2, and e3:

=�= + +
=

Simulation findings show that the minimum monthly contributions per capita for
the formal employees’ fund α1 amount to RM 600, for the informal employee’s fund α2
amount to RM 150, and for the unemployed insurance fund α3 amount to RM 100.
Differentiate expression (13) will give us the maximum values of the social security
micro-structures (MS) for Malaysia:

��
= + +
�
=

124
��
= + +
�
=

��
= + +
�
=

The second differentiation of the expressions (14), (15) and (16) build the final social
protection sub-structure (SS) in Helix-1:

�
=∑ = + +
�
=

�
=∑ = + +
�
=

�
=∑ = + +
�
=

Forming the matrix representation of the expressions (17), (18) and (19), we
obtain a social protection sub-structure (SS) final result equal to 18,000,000.

=[ ]

Inserting expression (20) into (21), we estimate the Helix-1 basic coefficient H1:

−√
log

which is 0.63. Then, we calculate the minimum social protection fund λ in equation (13):

=�= × . + × . + × .
= .

The above results suggest that the minimum monthly average fund requirements
for the social protection fund amount to RM 535.50, contributions paid by approximately

125
18 million members. Similarly, the social security micro-structure maximum values MS1,
MS2 and MS3 are RM 757.50, RM 591.00 and RM 572.50, respectively:

��
= = + × . + × .
�
= .

��
= = × . + + × .
�
=

��
= = × . + × . +
�
= .

Then, we obtain the social protection sub-structure (SS) for Helix-1:

∑=
=
= .

and inflection critical point

�= × × %

= .

Expression (27) indicates the minimum contributions of RM 170 are required to

paid by the action Malaysian workforce (between 18 years and 60 years old) illustrates
the NSPF sustainability benchmark of attaining its medium- and long-term objectives.
The Minimum Education Fund (Đ) is a single equation that evaluate how much
Malaysian parents must pay each month in the future for the high school education of
each child (see Expression 28). The equation depends on two variables, namely, the
minimum education monthly spending (β1) and the minimum salary monthly (β2), both
expressed in real terms:

=�= +
=

with values 100 and 150, respectively. Differentiate expression (28) with respect to y1
and y2

��
= +
�
=

126
��
= +
�
=

The second differentiation of the expressions (29) and (30) build the final social
protection sub-structure (SS) in Helix-2:

�
=∑ = +
�
=

�
=∑ = +
�
=

Forming the matrix representation of the expressions (31) and (32), we obtain a social
protection sub-structure (SS) final result equal to 15,000.

=[ ]

Inserting expression (33) into (34), we estimate the Helix-2 basic coefficient H2:

−√
log

which is 0.51. Then, we calculate the minimum social protection fund SST in equation
(35):

� = + × . + × . +
= .

The above results suggest that the minimum monthly average fund requirements
for the social protection fund amount to RM 188.75, contributions paid by approximately
18 million members. The national social protection fund (NSPF) is given by the following
formula:

= { + [√ × × %] × }
× −

where Y represents the collectable contribution years and R represents the risk
rate. Holzmann (2014) found that only one third of EPF members with active positive
balances have sufficient accumulated savings at retirement, with 73.2% with balances

127
less than RM 50,000 (Asher, 2012). The aforementioned connotations imply that there is
approximately a probability of 73 percent of the Malaysian active population that is either
no longer able or not willing to pay – in partial or in full – their contributions. Then, the
calculation of the expression (36) is

� = { + [√ + . × + . × %] × }
= .

� = { + [√ + . × + . × %] × }× − .
≈ .

The optimal value of the NSPF is RM 3.22 billion on average in real terms 3. The
significant reduction of the NSFP value due to contribution evasion amount to RM 0.87
billion per year, which is translated for the Malaysian government an annual injection of
additional funds RM 2.35 billion.

9.6. Concluding Remarks

In view of the complex and diverse challenges EPF is experiencing, it would be
appropriate to engage various forms of normative action that correspond to EPF’s needs
and objectives. Study findings undoubtedly provide insightful connotations in this
respect, justifying a series of specific policy initiatives. The switch-status of EPF fund
from a pension vehicle to an integrated multi-pillar funds with assistance features can
help the vulnerable Malaysian populations groups in the short run. Furthermore,
additional mandatory contributions mandatory will greatly affect retirement finances and
it can therefore be expected to affect savings significantly and prevent poverty in old age.
Household lifecycle disposable low-income will be increased by the amount of pension
payments received after retirement. Finally, the financial sustainability of NSFP requires
additional per capita monthly contributions amount to RM 415.00. The inclusion of the
foreign workforce – 1.5 million workers – is mandatory. Poverty reduction requires the
transformation of the informal sector of Malaysia into a sustainable formal sector: a
poverty annual cut by 35 percent can lead to a minimum monthly pension of RM 2500.00.

9.7. References
Asher, G. M. (2012). Malaysia: pension system overview and reform directions. In D. Park
(Ed.), Pension Systems and Old-Age Income Support in East and Southeast Asia -
Overview and reform directions (pp. 101-123). New York: Routledge, Asian
Development Bank.
Employee Provident Fund (EPF). (2014). Malaysia EPF Benefits.
http://www.kwsp.gov.my/index.php?ch=p2members&pg=enp2membersgeneral&ac=15
05
Feldstein, M. (1998). Transition to a fully Funded Pension System: Five Economic Issues. In
Horst Sielbert (Ed.), Redesigning Social Security. Kiel: Kiel Institute of World
Economics.
Holzmann, R. (2014). Old-Age Financial Protection in Malaysia: Challenges and Options.
SSRC Working Paper No. 2014-3. Social Security Research Centre (SSRC), University
of Malaya. Kuala Lumpur.

3
Authors do not take into account interest and inflation rates, ceteris paribus.
128
Koutronas, E., & Ismail, N. A. (2016). Savings Adequacy Assessment: The Case of Malaysian
Employees Provident Fund Members. SSRC Working Paper Series No. 2016-2. Social
Security Research Centre (SSRC), Faculty of Economics & Administration, University
of Malaya. Kuala Lumpur, Malaysia. Retrieved from http://ssrc.um.edu.my/savings-
adequacy-assessment-the-case-of-malaysian-employees-provident-fund-members/
Mansor, B. N., Syed Salleh, S. N., Tan, L. Y., Koutronas, E., & Aikanathan, S. (2014). Social
Security in Malaysia: Stock-take on Players, Available Products and Databases. SSRC
Working Paper No. 2014-2. Social Security Research Centre (SSRC), Faculty of
Economics & Administration, University of Malaya. Kuala Lumpur. Retrieved from
http://ssrc.um.edu.my/social-security-in-malaysia-stock-take-on-players-available-
products-and-databases/
Mitchell, S. O., & Fields, S. G. (1995). Designing Pension Systems for Developing Countries.
Retrieved from Philadelphia, PA:
Ong, F. S. (2001). Ageing in Malaysia: National Policy and Future Direction. University of
Malaya. Kuala Lumpur.
Othman, S. H. (2010). Malaysia's Pension System From Multi-Pillar Perspective. Paper
presented at the International Social Security Seminar, July 13-14, Kuala Lumpur.
Peng, T. N., & Tengku Hamid, T. A. (2014). Gender differentials in work and income among
older Malaysians. In W. T. Devasahayam (Ed.), Gender and Ageing: Southeast Asian
Perspectives (pp. 267-287). Singapore: Institute of Southeast Asian Studies.
Ruiz Estrada, M. A. (2011). Policy Modeling: Definition, Classification, and Evaluation.
Journal of Policy Modeling, 33(4), 523-536.
Ruiz Estrada, M. A., Chandran, V., & Tahir, M. (2014). An Introduction to Multidimensional
Real-Time Economic Modeling. Journal of Contemporary Economics, 10(1), 55-70.

129
Chapter X
The Evaluation of ASEAN-Members Social Security
Plans Performance from 1990-2017
By Mario Arturo Ruiz Estrada and Evangelos Koutronas

10.1. Introduction
Pension schemes broadly operate on pay-as-you-go or fully funded basis. Pay-as-you-go
pensions employ redistribution mechanisms that allow intergeneration transfers between
cohorts or across periods. Pay-as-you-go systems are subject to, among others,
demographic risk (Feldstein & Liebman, 2002). In anticipation of future cash flows, the
state does not have to proceed on asset accumulation4; benefits simply paid out as they
become due. Pension fund is in balance as long as replacement rates remain high or
constant5. This assumption holds as long as the economy experiences sustain
technological progress, constant population growth, and excessive capital accumulation
(Aaron, 1966). Empirically, the scarcity of natural resources constitutes sustain economic
growth implausible6, so a pay-as-you-go scheme of compulsory saving, insurance of
earning capabilities, and redistribution could only be financially sustainable (Diamond,
1977). Fully-funded arrangements alternatively rely upon capital contributions and
investment returns7. Main concern of fully funded systems is investment risk8 (Miles &
Timmermann, 1999). Upon retirement, beneficiaries are entitled to receive their
accumulated contributions plus the expense deducted, after-tax investment gains that
coming from interest payments, dividends, or capital gains9. Investment earnings can be
continually reinvested, until such time as the funds need to be paid out in the form of
pension benefits. Early withdrawals are usually restricted or forbidden, so pension funds
have long term liabilities, allowing holding of relatively higher risk and higher return
instruments. A fully funded pension scheme is viable as long as asset market values equal
the present value of promised pensions (Novy-Marx & Rauh, 2009). Conservative

4
Contribution accumulation may be observed to be invested on low-risk low-yielding investments due to persistent
(and unexpected) inflation. However, investment capital gains are intended to use to meet short-term financial
obligations and not for the payment of future pension benefits (European Commission, 2004).
5
It is possible, theoretically, for every generation to obtain higher benefits than contributions paid, given that, the
pension rate of return exceeds the market rate of return indefinitely (Samuelson, 1958). In the case of actuarial
imbalance, the state bears the financial risk for benefits payments.
6 The use of alternative abundant natural resource substitutes, recycling, and, resource optimization can result of

purposeful activity in response to signals of increased scarcity (Krautkraemer, 2005).

7
In contrast to pay-as-you-go schemes, fully-funded schemes are dissociated from demographic risks. Oksanen (2001)
claimed that this argument is somehow misleading because ageing affects savings, which in turn, it should also affect
interest rates. Brooks (2000) and Merrill Lynch (2000) produced simulations showing that long-lived retiree
population can suffer significant losses to their pension wealth due to an interest rate shock. Certain occupation
schemes though, can be subject of demographic risks (Brooks, 2000; Stevens, 2001).
8 Fully-funded schemes are subject to liquidity risk. For instance, a potential interest rate rise or stock price fall, may
force fund management to liquidate part of its portfolio at unfavorable prices and incur losses. This is normally
translated into lower investment returns for the retirees; the fund cannot fully meet its obligations. If pension
management exercises the ability to borrow the amount needed in order to meet its liquidity target, portfolio
liquidation can be avoided. However, the fund would still bear the cost of borrowing (McLeod, Moody, & Phillips,
1993). If pension fund chooses to diversify its asset holdings abroad, in principle, it can increase investment returns
given the same level of risk (Pfau, 2011; Solnik & McLeavey, 2004), but asset diversification comes with certain
economic and political risks (Leinert & Eche, 2000).

9
Risk differentials of portfolio performance falls on scheme members.
130
investment strategies may preserve capital and protect against inflation; however, they
are likely to lead in inadequate pension benefits in the long-run. Hence, actual funding
ratios – the ratios of assets to accrued benefit obligations – fluctuate and are often less
than 100 percent (Bohn, 2010).
Whatever financing mechanism is used, both pension schemes have exhibited
cash flow irregularities, increasing thereby the need to monitor fund efficiency and
effectiveness in terms of benefit coverage, pension adequacy and financial sustainability.
Thorough, timely and accurate evaluation determines whether contribution and
investment performance objectives being achieved, facilitating in decision-making. Only
then, policymakers will reevaluate current requirements of regulations and standard
actions, implementing tailored policies closely related to their specific context. Periods
of prolonged economic and financial distress may put into sharper focus underlying
structural issues regarding the sustainability of pension schemes. Empirical literature has
identified pension adequacy and financial sustainability as the key evaluation criteria of
pension schemes. The first criterion concerns of the ability of pension schemes to enable
individuals to maintain their living standards at retirement. The second criterion refers to
fund performance. Notwithstanding, the above evaluation methods are monotonic in
principle, providing inadequate information about scheme’s overall performance.
Developing a performance measurement framework specific for pension funds is a
relatively new topic in the literature. It is anticipated given that most of the pension
schemes in the developing countries are still in their development phase, whereas the
well-established pension schemes in developed countries experiencing administrative,
regulatory, and political issues. This paper formulates an analytical framework for
evaluating the overall performance of pension schemes. The Pension Scheme
Performance Index (PSP-Index) introduces a comprehensive evaluation tool to study the
coverage, performance, efficiency, effectiveness, current trends, and future possibilities
of pension schemes. The model investigates the pension scheme performance of five
ASEAN-member countries – Singapore, Malaysia, Indonesia, Thailand and Philippines.
The paper is organized as follows. Section Two review the evaluation methods that has
been proposed and used in the literature. Section Three describes the underlying model.
Section Four presents findings in regard to ASEAN pension schemes. Section Five
concludes. The Appendix contains tables and figures.

10.2. Relevant Literature

The methodologies and techniques emerged in the field of pensions focused on the
classification of fund performance viewed through a qualitative and quantitative prism.
A content analysis of 100 papers issued by five different journals on pension performance
from 1990 to 2016 (JSTOR, 2018). Studies employed econometric methods to apply
either benefit/cost, probabilistic or forecasting analyses to assess the efficiency of pension
schemes in regards to the level of contributions and investment performance.

10.3. Funding of pension schemes

Most of the developed countries have undertaken substantial pension reforms the
last 40 years due to demographic, economic, social and financial changes. The spectrum
of reform arrangements was mainly parametric and systemic in nature encompassing
fiscal consolidation policies that include the retrenchment of public pension systems and
131
lower entitlements for current and future retirees. In principle, pension schemes should
“provide adequate, affordable, sustainable and robust benefits” (Holzmann & Hinz,
2005) within fifteen years of retirement (Ehnsson, 2008; Schwarz, 2006) given the benefit
replacement rate of 60 percent (Grech, 2013). A broad stream of literature therefore
started to delve into the broader implications of policy reforms to retirement income
adequacy and how best to measure whether pension entitlements will remain adequate.
Replacement rates are considered by researchers as appropriate measures of pension
adequacy comparing preretirement with postretirement individual consumption.
However, the diversity of perspectives in the definition of pension adequacy is also
reflected in the range of indicators used to assess retirement-income adequacy. Goodin
et. at. (1999) compared effective replacement rates for Germany, the Netherlands and
United States10. Blondell and Scarpetta (1999) studied cross-country theoretical
replacement rates. Later studies suggested diversification of replacement rates
(Clingman, Burkhalter, & Chaplain, 2016; European Commission, 2006; Mandatory
Provident Fund Schemes Authority, 2010; Mitchell & Phillips, 2006; Pang &
Warshawsky, 2013) between income levels (Biggs & Springstead, 2008) and between
gross and net income (Holzmann & Guven, 2009).
Undoubtedly, income replacement varies across countries, individuals and
periods. Income divergence is also extended to the preretirement standard of living as
well as to the expected costs required to maintain that standard at retirement. The former
refers to target replacement rates, whereas the latter to budgeting (Chybalski &
Marcinkiewicz, 2016). In the target replacement rates context, Cole and Liebenberg
(2008) associated preretirement income with income replacement rate and consumption
replacement rate. Hurd and Rohwedder (2008) included consumption patterns for the
estimation of expected pension earnings. VanDerhei (2006) and Bajtelsmit et al. (2013),
among others, incorporated broader economic assumptions in the estimation of expected
pension income. Borella and Fornero (2009) compared pre- and postretirement standard
of living with the use of comprehensive replacement rates. Chybalski (2012) introduced
a synthetic indicator of adequacy of pension system for cross-country analysis. In regards
to budgeting, the Mandatory Provident Fund Schemes Authority (2010) employed this
methodology for the estimation of replacement rates. Mutchler et al. (2014) proposed the
Elder Economic Security Standard Index as a cost of standard of living benchmark.
Bialowolski and Weziak-Bialowolska (2014) on the other hand questioned budget
approach’s usefulness since it is based on survey data.
Replacement rates have their limitations. At first, they are historical measures; it
requires the retirement of the work population in order to be verified. Second, they are
individual performance measures and thus they cannot provide accurate information
about the overall assessment of pension funds. Third, they are single-point-in-time
indicators that do not take into account longitudinal data and how they affect individuals.
Fourth, pension adequacy measures are static, ignoring benefit indexation, changes in
pension age and life expectancy. Overestimation / underestimation of fund performance
would reveal concerns about allowing cost information, and particularly benefit-cost
analysis, to play a prominent role in policy reform decisions in regards to poverty
alleviation and income replacement. Finally, replacement rates exhibit methodological

10 In fact, Goodwin used did not the ‘effective replacement rate’ as an adequacy indicator but as a measure of the
extent to which welfare systems promote stability over an individual’s life course.
132
heterogeneity, which constitutes national and international comparative analysis trivial
(Grech, 2013; Mitchell & Turner, 2009).

10.4. Investment performance of pension schemes

Theoretical and empirical considerations have employed various techniques and
methodologies to measure the performance of professionally-managed investment funds.
Professionally-managed investment funds use common basic investment approaches of
involving long-term objectives with due regard to principal safety, yield volatility, and
investment diversification. Investment risk refers to the uncertainty arises when the
expected level of investment return is not produced due to abnormal market behavior,
inefficient investment strategies, or poor individual investment decisions. The main
concern for pension funds entails funding risk: fund’s inability to meet its financial
obligations due to lack of sufficient assets to meet liabilities, or plan sponsor’s failure to
finance the plan. Respectively, the opposite applies for credit risk where pension fund is
endangered by the potential loss of the counterparty or the bond issuer to meet its
financial obligations. Concentration risk is also part of investment risk when fund
portfolio is overexposed in terms of issuer, geographical area, industry and type of
instrument, and, more broadly the risk of insufficient diversification of investment. Early
empirical studies focused their attention on the investment performance of mutual funds
(Farrar, 1962; M. Grinblatt & Titman, 1989; Henricksson, 1984; Irwin, Blume, &
Crockett, 1970; Irwin & Vickers, 1965; Jensen, 1968; Mains, 1977; Sharpe, 1966;
Treynor, 1965). Pension funds have not been the subject of extensive research due to data
availability, especially for pension plan portfolios in their entirety (Beebower &
Bergstrom, 1977; Berkowitz, Finney, & Logue, 1988; Voorheis, 1976).
Prior to 1965 fund performance was based on Markowitz’s (1952;1959) seminal
work on portfolio theory followed by his successors Sharpe (1964), Litner (1965) and
Mossin (1966)11. Beta coefficient measures volatility of an individual security or a
portfolio of financial instruments in comparison to the market average. The
aforementioned development on portfolio theory quantified and measured risk with
respect to variability of returns, no single tool essentially considered risk and return
simultaneously. Alpha Ratio measures abnormal return per unit of risk that in principle
could be diversified away from holding a market index portfolio. Treynor’s ratio (1965)
considers the excess return relative to risk-free-return per unit of systematic risk. The
Jensen’s alpha (1968) also evaluates performance in terms of systematic risk and shows
how to determine whether the difference in risk-adjusted performance is statistically
significant. Jensen’s alpha expects to be zero in an efficient market and positive in an
above-the-average portfolio performance. Close to Treynor’s ratio, Sharpe’s ratio (1994)
examines the average differential return relative to the portfolio’s benchmark divided by
the standard deviation of the differential return. The two measures provide identical
estimates for completely diversified portfolios. Leah and Franco Modigliani (1997)
focused on risk-adjusted measure of portfolio performance with the use of total volatility.
Goodwin’s (1998) information ratio calculates excess return per unit relative to a specific
benchmark index instead of risk free return. The aforesaid five techniques are popularly
used to measure risk-adjusted performance of mutual funds. Table 1 provides a detailed

11 Alternative asset pricing models introduced multi-factor approaches. See Feeney and Hester (1964); Ross (1976);
Chen, Roll, and Ross (1986); Ingersoll (1987); and Fama and French (1992).
133
summary of the other most important portfolio performance evaluation measures and
techniques.

[Insert Table 1 here]

These evaluation measurements provide useful benchmark to evaluate fund

performance that would considerably improve the value of performance measurement in
relation to the methods now used that are derived from evaluation of other types of
investment management with very different attributes from pension funds. However,
investment performance measures do not provide insightful connotations about the fund
overall performance (Bohl, Lichewski, & Voronkova, 2011; Huang & Mahieu, 2012;
Kumar & Perumal, 2016; Lieksnis, 2010). Without comprehensive performance
measurement criteria that are explicitly derived from consideration of the particular
nature of pension funds, reliance on market competition with minimal criteria for
investment strategies will not result in an investment portfolio that will effectively
achieve the goal of consumption smoothing and income replacement.

10.5. The Pension Scheme Performance Index

Consider a pension scheme with T number of registered members. These
individuals can be effective members, A, paying regularly their earnings contributions,
and ineffective members, P, who do not pay regularly or at all their earnings contributions
to pension fund. Let = ∑∞= be the total number of effective fund members and =
∞
∑= be the total number of ineffective fund members, the to the total number of fund
members within a year is given by

∞ ∞

= + = ∑ +∑
= =

Differentiation of expression (1) in respect the previous year will give us the marginal
pension scheme performance growth rate

′ ′ ′
�∆ �∆
∆ =∆ +∆ = +
�∆ − �∆ −

Where �∆�∆ �
and �∆��
�∆��−
are the marginal effective pension scheme members growth rate
�−

and the marginal ineffective pension scheme members growth rate, respectively. Pension
scheme is highly effective when ∆ ′ > ; exhibit stagnation when ∆ ′ = ; and performed
low when ∆ ′ < . In the case of ineffective members, pension scheme exhibits expansion
when ∆ ′ > ; stagnation when ∆ ′ = ; and contraction when ∆ ′ < . The second
differentiation in expression (6) determines the critical point (inflection point) of the
pension scheme performance

′′ ′′ ′′
� ∆ � ∆
∆ =∆ +∆ = +
� ∆ − � ∆ −

2
 Intuitively, pension effectiveness is associated with the level of contribution rate.
Higher degree of contributions means more people will save through their pension
scheme and this might lead to a higher aggregate saving rate. Capital market development
could be stimulated as more resources come available for the capital market when pension
schemes are funded. Finally, labor market distortions might be partly taken away because
funded pension systems have a less distorting effect on labor supply decisions than
unfunded systems. These effects could all be growth-enhancing. Pension’s fund resources
are usually allocated to certain pillars of economic activity such as education, healthcare.
Consider workforce productivity measured in terms of intensity/quality of labor and
capital associated with the aforementioned pillars of the economy. The national TFP L
level (∆TFPL) is based on nine variables: education infrastructure growth rate (∆↑1);
training programs growth rate (∆↑2); diet improvement growth rate (∆↑3): health coverage
growth rate (∆↑4); expansion of life expectation growth rate (∆↑5); pensions coverage
growth rate (∆↑6); labor market demand growth rate (∆↑7); total tax collection growth rate
(∆↑8); and capital expansion growth rate (V9). Hence, the national TFPL level is a
determinant from a matrix three by three according to expression (4):

∆ ∆ ∆
� � = [∆ ∆ ∆ ]
∆ ∆ ∆

The marginal national TFPL growth rate (ΔTFPL’) is accordingly

′
�∆ �
� � =
�∆ � −

The second differentiation of expression (5) gives similarly the critical (inflection point)
for TFPL

′′ � ∆���� �
� � =
� ∆�����−

Figure 1 shows that the on the on the Marginal Total Pension Scheme Performance
Growth Rate (ΔT’) is directly connected to the Marginal National TFPL Growth Rate
(ΔTFPL’) in the long run.

2
Figure 1. The Impact of the Marginal National TFP Growth Rate (ΔTFP ’) on the Marginal Total Pension
Scheme
Performance Growth Rate (ΔT ’)

ΔTFP’
Performance Levels
ΔT’

High Performance

Low Performance

ΔTF’

ΔTFP’

Source: Authors’ Elaboration

The performance of the marginal national TFPL level in different periods is given by

∞ ∞
′ ′
∫ � � (� � )+⋯+∫ � �∞ (� � ∞) + ⋯+ � �, � � ≠
= =∞

However, the Marginal Total Pension Scheme Performance Growth Rate (ΔT’) is directly
connected to the Marginal National TFPL Growth Rate (ΔTFPL’):

∞ ∞
′ ′ ′ ′ ′
∫ � (� � ) + ⋯+ ∫ � (� � ∞) + ⋯ + � ′, � � ≠
= =∞

Thus, performance of any pension scheme is represented by

′ ′ ′
� ={ | − ∈ ℝ+ ∀ � � > ≠� � − }

Both labor productivity and pension scheme follow a parallel trajectory that
gradually their critical points converge to a steady state in the long run. As it is shown in
figure 2, a pension scheme in its initial development phase grows in the short run as the
economy grows. In the long run, pension scheme’s performance will stabilize or decline
as it reaches the maturity phase, ceteris paribus.

3
Figure 2. The Critical National TFPL (ΔTFPL”) and The Critical Pension Scheme Performance Growth Rate
(ΔT”)

ΔTFPL” = ΔT”

Source: Authors’ Elaboration

The evaluation of the relationship among these variables under sensitivity analysis
shows the following possible scenarios:

 If ΔTFP’ ΔT’ – pension scheme has consistent performance

 If ΔTFP’ ΔT’ – pension scheme has consistent performance
 If ΔTFP’ ΔT’ – pension scheme has inconsistent performance
 If ΔTFP’ ΔT’ – pension scheme has inconsistent performance

The Pension Scheme Performance Index (PSP-Index) is an indicator that evaluates

pension fund effectiveness:

∞ ∞

� � − �� � = ∑[ ∫
�= �=
�+
�� ��′� −
− ��� � ]
�� ′

where the mathematical constants e (e≈ 2.71) and π (π≈3.14) are used to minimize
logarithm variability. Pension performance is categorized by: high performance: [0.76,
1.00]; good performance: [0.51, 0.75]; low performance: [0.26, 0.50]; and poor performance:
[0.00, 0.25].

4
10.6. Application of the PSP-Index in ASEAN-Members Pension Schemes
We examine the pension schemes in the five large ASEAN-member countries –
Singapore, Thailand, Malaysia, Indonesia, and Philippines from 1990 to 2017 (see Table
2). We employ secondary data from different domestic and international institutions. The
five countries vary considerably in the sphere of infrastructure, economic development,
institution capacity and social policy. They have undergone welfare reforms recently
focusing in the following areas: informal labor markets, fiscal space on public finances
and social protection.

Table 2. SSPP-Index

Country ΔTFP’ ΔT’ SSPP-Index SSPP-Index Level

Singapore 0.99 1.00 0.99 High
Malaysia 0.72 0.78 0.77 High
Indonesia 0.55 0.45 0.47 Low
Thailand 0.60 0.45 0.49 Good
Philippines 0.51 0.41 0.45 Low

Source: Asian Development Bank (ADB)(2018), World Bank (WB)(2018), United Nations (UN)(2018),
Central Provident Fund Board (2018), (Singapore), Indonesia provident fund (BJPS Ketenagakarjaan) (2018),
Malaysia Employees Provident Fund (EPF)(2018), Republic of Philippines Social Security System(2018),
Thailand Social Security Office (SSO)(2018).

Findings show that the marginal total Pension Scheme Performance Growth Rate
(ΔT ) is directly connected to the marginal national TFPL growth rate (ΔTFPL’) in the long
’

run. In our analysis, Singapore pension fund exhibit relatively the highest performance
closely followed by Malaysia (high performance), Thailand (good performance),
Indonesia (lower performance), and Philippines (lower performance). Not surprisingly,
the pension classification reflects the economic dynamics across urban and rural areas of
those countries. Philippines and Indonesia low marginal national TFPL growth rate (ΔTFPL’)
are translated to a negative pension scheme performance; unable to meet its short and
long run objectives. It is imperative for both countries to take implement expansionary
welfare policies for the generation higher marginal national TFPL growth rate (ΔTFPL’) in
the short run. Governments should allocate a significant part of their budgets for welfare
expansion, in a context of education, healthcare, and retirement programs both in urban
and rural areas as key ingredients of the economic growth strategy. The creation of a
strong national pension scheme platform can generate a spillover effect to generate a
positive effect on both marginal national TFPL and growth rate (ΔTFPL’).

10.7. Concluding Remarks

Consistent with empirical evidence (Davis & Hu, 2008; Holzmann, 1997, 1999)
pension funding is associated with an increase in productivity growth rates. The Social
Security Plan Performance Index (SSPP-Index) suggest alternative methodological
evaluation directly linking pension performance with labor productivity. Changes in labor
markets undoubtedly affect pension scheme performance. Higher labor productivity lead
to a strong pension system able to adapt to internal and external uncertainties. The
marginal increase of labor productivity is determined is based on how the human capital
5
factor can be adapted to new technological changes and social issues (political and fast
economic transformations).

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10.9. Appendix
Table 1. Performance Measures

A: Classical
Type Statistic Authors Observations Information Required
�̅ Treynor and Mazuy (1966): Treynor Ratio Purpose: rank portfolio managers and combine Nonoverlapping synchronized
=
Selectivity them into a single portfolio. Needs at least a portfolio, benchmark, and risk-free
Excess return per unit of benchmark for comparison purposes. returns
systematic risk Problems: statistical power; market timing; changes in
risk levels; oversimplification
Selectivity �̅ Sharpe (1966): Sharpe ratio Purpose: rank portfolio managers and choose a single Nonoverlapping synchronized portfolio
=
� one, combined with a riskless asset. Needs at least a and risk-free returns (HPRs)
Excess return per unit of total benchmark for comparison purposes.
risk Problems: statistical power; market timing; changes in
risk levels; oversimplification
Lo (2002) Provides statistical significance tests for the Sharpe Nonoverlapping return series
Selectivity √ + ( ) ratio and corrects for serial dependence
=
Annualized Sharpe and standard
errors; i.i.d. case

Selectivity = �̅ − �̅ Jensen’s alpha (1968) Purpose: detect value added by portfolio manager via Nonoverlapping synchronized
selectivity portfolio, benchmark, and risk-free
Problems: statistical power; market timing; changes in returns
risk levels; oversimplification; benchmark efficiency
Treynor and Black (1973): appraisal ratio Purpose: measure value created by selectivity per Nonoverlapping synchronized
Selectivity � unit of diversifiable risk. Implies an optimal way of portfolio, benchmark, and risk-free
forming portfolios. returns
Problems: same as Jensen´s alpha
Selectivity Goodwin (1998): information ratio Purpose: measure value created by selectivity Nonoverlapping synchronized
=
� ignoring beta portfolio and benchmark returns
= � − Problems: same as Jensen’s alpha

′ ′
Market Timing � = + � + � + Treynor and Mazuy (1966) Purpose: detect value added by portfolio manager via Nonoverlapping synchronized
selectivity and market timing portfolio, benchmark, and risk-free
Problems: statistical power; changes in risk levels; returns
oversimplification; benchmark efficiency; other
functional forms for changes in risk levels
Market Timing � = ′ + ′ � + ′ �+ + ′ Henriksson and Merton (1981) Problems: statistical power; changes in risk levels; Nonoverlapping synchronized
�+ = max ; � oversimplification; benchmark efficiency; other portfolio, benchmark, and risk-free
functional forms for changes in risk levels returns

17
 (continued)
B: Multiple Indices
Type Statistic Authors Observations Information Required
�̅ = +∑ �̅ Elton et al. (1996) and Sharpe (1992): asset Purpose: detect value added by portfolio manager via Nonoverlapping
Selectivity class indices; Lehmann and Modest (1987), selectivity synchronized
Connor and Korajczyk (1986), Grinblatt and Problems: inefficient indices; incomplete specification; portfolio, multiple
Titman (1989), Brown and Goetzman timing benchmarks, and risk-
(1997): empirical indices; Carhart (1997) free returns
Combines selectivity �̅ = +∑ �̅ Sharpe (1992) Purpose: detect value added by portfolio manager via Nonoverlapping
−
and market timing selectivity and market timing synchronized
Rolling regression for estimating weights Problems: incomplete specification; in principle it portfolio, multiple
represents a feasible strategy for the investor; assumes benchmarks, and risk-
that changes in portfolio composition add value, even if free returns.
they are based in public information, for example

C: Conditional Performance
Selectivity corrected for = + ′ Ferson-Schadt (1996) Purpose: detect value added via selectivity, correcting Nonoverlapping
seeming market timing for seeming market timing based on public information synchronized
′
based on public � = + � + � + Advantage: adjusts benchmarks on a timely basis. portfolio, multiple
information Disadvantages: asset-pricing model assumed; market benchmarks, and risk-
efficiency; functional form of the portfolio adjustment free returns and
conditioning
information
D: Other Performance Measures
Selectivity =∑ � subject to Grinblatt-Titman (1989): Purpose: measure welfare-enhancing portfolio decisions Nonoverlapping
positive period weighting Weights are interpreted as marginal utility of wealth for synchronized
measure power utility. portfolio, benchmark,
=∑ ��
and risk-free returns

(what proportions are needed over time to make the second

equation true)
Timing Grinblatt-Titman (1993): Purpose: measure whether portfolio changes add value; Actual portfolio
= ∑∑� � + =∑ (� ,�) portfolio change measure uses actual portfolio holdings; possible behavior holdings
�
involving taking increasing risks, combined with
traditional measures
Conditional � Ferson and Khang (2002) Purpose: decompose the Grinblatt-Titman PCM Actual portfolio
timing = [∑( ̅ , − − [̅, − ])( ̅ , − [ ̅ , | ]) − ] measure into components attributable to the manager holdings and
measure = and to public information conditioning
information
Source: (Walker & Iglesias, 2010)

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3