PENSION SYSTEM IN THE US: THE LESSONS FOR KAZAKHSTAN

148

 - Inadequate parameters of formation and investment of voluntary pension savings.

Thus,  from  the  perspective  of  improving  the  pension  system  of  Kazakhstan,  the  issue  of 

optimization mechanisms for various pension plans and pension annuities as a flexible tool remains 

one of the most pressing.

The USA pension system: problems and ways of reforming

Currently, a reliable source of pensions is the U.S. government social insurance (social security).

Every working citizen who pays his taxes and has worked in the U.S. more than 10 years (with a 

few exceptions) is entitled to a basic pension from the federal fund. The amount of payment depends 

on the average salary and years of service, but it is limited.

1

 

During the work, a citizen earns «credits» for entitlement to a basic pension. All persons born after 

1929 need 40 credits (10 years) before receiving their pension. Upon termination of employment 

until a significant number of points, all credits are retained on the individual pension account. Thus, 

in the event of a resumption of work, points accumulation continues. However, the worker will not be 

paid a basic pension with less than 40 credits.

In addition, the amount received is affected by the age of retirement. For example, the earliest 

possible retirement age is 62. However, the basic pension will be less (about 25%) than retiring at the 

generally established retirement age. Also, in the basic pension will increase by 1% for each year.

Feature of the U.S. pension system is the establishment of the retirement age. The following table 

contains the full retirement age, depending on the year of birth.

Table 1

The retirement age in the U.S.

Birth year 

Retirement age, years

1943–1954

66

1955

66,2

1956

66,4

1957

66,6

1958

66,8

1959

66,10

1960 and more

67

Source: http://www.ssa.gov/pubs/10035.html#a0=1

In addition to the basic pension, the Americans have the right to pension benefits from private 

pension plans.

An integral part of the pension plans are pension from an employer. In the U.S., there is a federal 

law (ERISA), which sets standards for the majority of employers and unions that sponsor pension 

plans, and the responsibilities of workers.

There are two main types of pension plans with defined benefits and defined contribution plans, 

which are described in Table 2.

Table 2

Characteristics of Pension Plans

Defined benefit plan

(guaranteed a specific amount of 

the monthly pension at retirement)

A defined contribution plan

(adding a specific amount for an 

individual retirement account (IRAs))

Employer contributions

Federal law limits the amount of 

payments for the achievement 

of full payment of occupational 

pensions on time. There are 

penalties for non-compliance.

Legal requirements for the minimum 

size has been established. This fee 

depends on the pension plan.

In some plans, employer 

contributions may be in the form of 

shares of the employer.

Employee contributions.

Have been made.

Many plans require that you make a 

contribution to the employee IRA.

1

  http://www.ssa.gov/

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149

Investing.

Investment management 

of pension assets is the 

responsibility of the employer to 

ensure the adequacy of pensions.

The employee manages its pension 

assets, based on the options offered 

by the financial manager.

The amount of pension at 

retirement.

Depends on the worker’s 

labor contribution for a specific 

employer.

Pension depends on contributions 

from the employee and / or employer, 

the amount of investment.

Types of pension benefits.

Traditionally pensions are paid in 

monthly annuity payments for the 

duration of life.

Retired can pass savings on an 

individual retirement account (IRA), 

or can get it at a time. Some plans 

also offer monthly payments through 

an annuity.

Warranty.

The federal government 

guarantees certain payments from 

corporate benefits.

no

In case of termination of labor 

activity up to pension age 

achievement.

If employee leaves before 

reaching pension age of 

accumulation of are saved prior to 

the filing employee of lawsuit.

The worker can translate assets on 

the an individual retirement account 

(IRA) or, and to another to the 

employer.

Source: http://www.dol.gov/ebsa/publications/wyskapr.html#DefinedBenefitPlan

There are many different features of pension plans.

One of them is the Individual Retirement Account (Personal Retirement Account) (hereinafter – 

IRA), used for long-term savings that will ensure the individual’s income after retirement.

Most employers offer their employees retirement savings plans. These savings plans can be used 

simultaneously with the opening of an individual retirement account IRA. Professional savings plans, 

also known as 401k accounts or 401a, aer similar to traditional IRA accounts. These accounts are 

not taxed as long as you do not start to withdraw from them. Some employers bolster each of your 

pension contributions with some amount from the company.

1

 

However, the steady increase in life expectancy of Americans, along with the increasing federal 

budget deficit has required changes to the pension system in the United States.

Today, Americans who use certain contribution pension savings, such as 401 (k) or 403 (b) plans 

or IRAs, can choose one of the following innovations in the legislation.

1.  Department  of  the  Treasury  (IRS)  offers  new  four  rules  requiring  the  purchase  of  pension 

annuities or other insurance products that guarantee lifetime income.

2

 

The first rule involves lowering the minimum requirements for the purchase of annuity. e legislation, 

people have annuity or all pension assets, or do not annuity. It is now proposed annuity of pension 

assets. This will save a part of the pension assets  to use them for other purposes.

The second rule would eliminate technical barriers to the use of many years of pension annuities 

that are purchased in pre-retirement age, and the payment will be made only up to the age of 85. 

Years of annuities allow retirees to manage their assets over a period of time up to the experienced 

assets.

The third rule allows a citizen to begin partial annuitization of their pension assets long before 

retirement age. Early annuitization allows you to buy some “juice” for more than twenty years, which 

allows investors to spread interest rate risk over time.

The fourth rule will be relatively rare. In the presence of  an occupational pension benefit plan, 

employees could purchase inexpensive retirement annuity payments as specified by the employer.

2.  The  mandatory  requirements  of  the  employer  for  complete  information  on  the  amount  of 

contributions.

This rule requires providers to provide information on all direct and indirect fees employers that 

sponsor 401 (k). The regulations shall provide necessary guidance to all charges, which will increase 

competition for the best results for both employers and employees.

1

  http://www.irs.gov/Retirement-Plans/401(k)-Plans

2

  http://www.socialsecurity.gov/OP_Home/ssact/title02/0209.htm

M Kozzhanova

Pension system in the US: 

the lessons for Kazakhstan

150

Thus, the measures taken to stabilize the situation on pensions of U.S. citizens

Recommendations

Today,  Kazakhstan  is  working  to  further  reform  the  pension  system.  The  main  purpose  and 

especially the modernization of the pension system is:

1. Ensuring that pension payments follow previously received revenues and the rising standard 

of living in the country.

2. Financial sustainability of the pension system (continuous line of current income and reserves 

generated by pension contributions, as well as budget and other income expenditure on pensions).

 Modernization will be carried out while maintaining the tiered pension system. Necessary and 

related changes will occur at the basic level, necessarily – in solidarity and funded pillar, and voluntary.

Thus, the most relevant in the framework of the process, it is proposed, using the experience 

of the United States, the introduction in Kazakhstan of a cash balance pension plan (cash balance 

plan), which is a hybrid pension plan.

In terms of the balance of the money, the employer agrees to contribute a certain percentage 

of the salary, and thus guarantees a certain rate of return. Under the plan, you can easily calculate 

the exact amount of pension savings which will be available to the employee at retirement, as the 

employer guarantees contributions and returns.

One of the most common pension plans is a defined contribution plan, or «purchase money.» 

Under this plan, the employer guarantees only the amount of the annual fee, but not investment 

income. Unlike pension plans with defined benefit plans, where the employer keeps all the money in 

the only retirement account plans, defined contribution pension savings involves storage in separate 

accounts for each employee. Investing pension funds use a limited number of financial instruments 

(issuers), defined by the employer. Investment risk is entirely the responsibility of the employee.

Another common kind of hybrid plan is the so-called target retirement plan (target pension plan), 

which is preferred for workers close to retirement age.

For employers who want to reduce the burden of obligation, the decision is a profit-sharing plan 

(the profit sharing). This plan has a defined contribution, which is not formally a pension plan. There 

are no requirements for regular (even minimal) funding. These plans are popular in the U.S., such 

as the 401 (k), in which employees make regular contributions to a tax free pension. The plan is not 

classified as an employer’s contribution as an employer may make or not make a contribution. Total 

contribution of the employee and the employer may not exceed 25% of the salary. Nearly two-thirds 

of all large U.S. employers use 401 (k) as the main pension scheme for its employees.

Based on the above, pension provision for the citizens of Kazakhstan under a similar system 

would contribute to ensure a decent retirement.

Conclusion

In  this  work  was  studied  in  detail  by  the  U.S.  pension  experience.  The  study  can  be  a  brief 

overview of the system.

In the United States, equal pay pension contributions by employers provides a strong incentive 

for the expansion of voluntary employee participation in company-sponsored 401 (k) plans. State 

employees’ contribution to the so-called universal savings accounts can also be seen as a system 

of credit transfers. The pension plan is a discount plan established by employers, where employees 

can send part of their salaries to their retirement plan, and the payment of income tax on that part of 

the salary will be delayed. Employers offering a 401 (k) retirement plan can contribute to the plan to 

carry out on behalf of their employees. Employers also provide the ability to make deductions from 

wages not only for employees, but also in the transfer of part of a company’s profits. Income on such 

pension plans is based on accumulated deferred tax.

Based on learned experience, wedraw three main conclusions: First, in all developed countries, 

the pension mechanism functions best with equal participation by employees, employers and the 

state, and secondly, through tax incentives the state encourages employers who, in turn, increase 

the pension payments to the limit, and third, equal participation in employee pensions not only leads 

to an increase in the replacement rate, but also to some extent reduces the burden on the budget.

Thus,  Kazakhstan  requires  the  creation  of  a  pension  system  that  contributes  to  the  creation 

of  a  socially-oriented  model  of  development  of  human  capital,  improving  the  social  protection  in 

accordance with international standards.

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ИССЛЕДОВАНИЯ МОЛОДЫХ УЧЕНЫХ

RESEARCHES OF THE YOUNG SCIENTISTS

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151

SOURCE

1  US pension reform: lessons from other countries. Martin Neil Baily, Jacob Funk Kirkegaard, Peterson 

institute for international economics, Washington, DC, 2009

2  Annuity Markets.  Edmund Cannon and Ian Tonks,  Published to Oxford Scholarship Online: 2009

3  Annuity Markets and Pension Reform. George A. (Sandy) Mackenzie, Cambridge university press, 2006

4  Pension Revolution. Keith P. Ambachtsheer, John Wiley&Sons, Inc., 2007

5  Pension in the US Economy. Zvi Bodie, John B. Shoven, David A. Wise, The University of Chicago 

Press, 1988

6  http://www.enbek.gov.kz/node/270383

7  http://www.dol.gov/ebsa/publications

8  http://www.ssa.gov/pgm/retirement.htm

9  http://www.socialsecurity.gov

10 http://www.irs.gov/Retirement-Plans/401(k)-Plans

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