In recent decades, due to the rapidly increasing economic growth rate and the advancements in medical technology, there has been a significant increase in the life expectancies of Taiwanese population. Like in many developed countries, the ageing population has now become a major policy concern in Taiwan because of the prolonging life expectancy and the lower fertility rates1. Until 2010, the number of the senior citizens (above 65 years old) in Taiwan has risen over 2,480,0002, which accounts for 10.7% of overall population (Table1-1). In comparison with the seven percent standard by which the United Nations labels as the “aging society” that Taiwan has entered since 1993. The population projection under medium variant assumption released by the Council for Economic Planning and Development shows the proportion of senior citizens will exceed 14% in 20173
Table11-1: ageing population
. Society would then reach the definition of what is internationally known as the “aged society”.
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year population above age 65
Population (thousands) proportion of total population (%)
1989 1,201 6.0
1 The fertility rate of Taiwan with the lowest fertility worldwide is 1.2 births per woman in 2004.
Source: “2004 World Population Data Sheet”, Population Reference Bureau.
2 “Population Statistical Yearbook ”, Ministry of the Interior.
3 “Population Projections for Taiwan: 2010-2060”Council for Economic Planning and Development.
4 “Population Projections for Taiwan: 2010-2060”Council for Economic Planning and Development.
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According to the abridged life table in 2009, we know the male’s and female’s life expectancies are 75.9 and 82.5 years respectively. Compare with ten years ago, the male’s life expectancy has increased 2.6 years and female’s has increased 3.5 years. The study which is presented by the Council for Economic Planning and Development points out that the male’s life expectancy will be 80.7 years and female’s be 87.1 years under medium variant assumption in 2034 (Table1-2, Figure 1-1).
Table21-2: Life expectancy at age 05 year
Life expectancy at age 0 (years)
total male female
5 “Population Projections for Taiwan: 2010-2060”, Council for Economic Planning and Development.
The data from 1989-2009 is from the “Population Statistical Yearbook ” published by Ministry of the Interior, and 2014-2034 is the estimate value projected by the Council for Economic Planning and Development.
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Figure11-1: Life expectancy at age 0 (1990~2060)6
World Bank Group (2005) proposed that the sound pension system should consist of five pillars
Base on the above data, elderly population raise fast in Taiwan and how could let people maintain the basic living after retire is an important topic we should concern.
Therefore, the government has focus on old-aging issues in many years. One of the main topics of old-ageing issues is the pension system. Pension schemes are the most important part of the social security, like in many developed countries, they have sound and well-organized pension systems. In Taiwan, the government established the predominant pension systems and there are two basic pension systems which are the social insurances and the employee pension plans.
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6 Data of 1990~2009 are from the abridged life table released by Ministry of the Interior; Data of 2010~2060 are from the projection by Council for Economic Planning and Development.
7 Robert Holzmann and Richard Hinz, Old-age income support in the 21st century, The Word Bank, 2005.
. Zero or basic pillar is the non-contributory social assistance to deal with the poverty alleviation objective in order to provide all of the elderly with a minimal level of protection. For example, there are the old-age farmers welfare allowance and the old-age citizens welfare allowance in Taiwan. The first pillar is in
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form of social insurance, participants have to take the responsibilities with the government to pay the premium to get the old-age payment when they retire and the systems include the National Pension, the Labor Insurance, and the Government Employee and School Staff Insurance. The second pillar is occupational pension plan, such as the Labor Pension and the Public Service Pension in Taiwan. These second pillar pension systems are called employee pension schemes and the main contributors are the employers. After the employee retired, they can obtain the retirement benefits from the employee pension schemes. The third pillar compensates for rigidities in the other systems, like individual saving, personal commercial insurance. The forth pillar emphasizes the family and inter-generational support for elderly.
Table31-3: Pension systems in Taiwan
Items Eligible recipients
First pillar
(Social Insurance)
Labor Insurance labors Government Employee and
School Staff Insurance
government employee ,school staff Military Personnel Insurance military personnel
National Pension the nations are not participating the other social insurance
Second pillar
(Occupational pension)
Labor Pension labors
Public Service Pension government employee, school staff, military personnel
Third pillar Individual financing, saving, investment
individual
Table 1-3 displays the first to third pillar of pension systems and the eligible recipients of each in Taiwan. After implementing National Pension on October 1, 2008, the whole nation is covered in social pension system, that Taiwan’s pension system is complete and sound till then.
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Since the ageing population is increasing fast in Taiwan, the government pays a lot of attention to revise and improve the pension schemes. The main reforming features are delaying the timing of retiring and annuitization. In order to decrease the financial burden of the government, the revision of the pension schemes is to postpone the retirement age. For instance, nations could draw the old-age benefit until 65 years old under the National Pension scheme. In pension systems, the Labor Insurance8
Since most pension schemes provide the choices between lump-sum payment and annuitized pension benefit, retirees have to concern which one is better. For example, if the insured person has Labor Insurance coverage before January 1, 2009, he/she could select the one-time old-age benefit or the old-age pension benefit
, National Pension, Labor Pension, and Public Service Pension all already have included annuitized payments. In addition, the Ministry of Civil Service proposes the draft about adding annuitized old-age benefit under Government Employee and School Staff Insurance in 2009. Hence, knowing the difference between the lump-sum payment and annuitized payment is the important issue for retirees and that is what we want to analyze in this paper.
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For instance, an insured who retire at age sixty has thirty coverage years and
$43,900 average monthly insurance salary. In case of selecting the annuitized pension . If the insured person chooses the pension benefit, he/she could select the better one from the following two methods: (1) average monthly insurance salary × coverage years × 0.775% + 3,000; (2) average monthly insurance salary × coverage years × 1.55%.
Otherwise, the insured person chooses the one-time benefit then he/she could take the product of average monthly insurance salary and issued months.
8 After the enforcement of Labor Insurance Pension on January 1, 2009, the monthly pension approach for claiming disability, old-age and death benefits has been added.
9 Since the revision of Labor Insurance Act is launched on January 1, 2009. Bureau of Labor Insurance http://www.bli.gov.tw/sub.aspx?a=fNYWGQMXNOw%3d
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benefit, he could obtain 20,414 monthly, or he could get 1,975,500 for the one-time benefit. It’s obvious that if the insured have been receiving monthly payments for nine years, the all amount of payments (2,204,712) would exceed the one-time benefit (1,975,500). However, we should incorporate the time value of money when we compare the cash flows under different time. The pension benefit is a long-term scheme, thus, we should take the interest rate, mortality rate, and the concept of liquidity into consideration.
From the longevity risk perspective, the annuitized payment is better than the lump-sum payment. The retirees are advised to purchase the annuity and annuitize their wealth for the living support after retiring (Boardman, 2006). However, Modigliani (1986), Friedman and Warshawsky (1990), Mirer (1994), Milevsky and Young (2007a) point out very few people would let their wealth be annuitized in reality. According to the statistical data, the number of people select one-time benefit is more than who select pension benefit under Labor Insurance in 2009 and 2010 (Table1-4). Therefore, we want to provide the methodology to compare these two types of benefit, and then recommend retirees to choose pension benefit, that is the same as what government encourages labors.
Table41-4: Number of application cases10
one-time benefit proportion pension benefit proportion
2009 86,691 57% 65,943 43%
2010 68,466 56% 53,682 44%
In this study we apply the financial theory to investigate the difference between the old-age pension benefit and one-time old-age benefit under the Labor Insurance in Taiwan. We take the concept of the liquidity to compare the two types of payments. If
10 Annual Report 2009&2010, Bureau of Labor Insurance.
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the retiree chooses the one-time benefit, he/she could manager his/her own account and do individual investment strategy. When the market performs well, he/she will earn the rate of return. On the other hand, if the retiree chooses the annuitized payment, then he/she would lose the opportunity to join the financial market and has liquidity constraints. Hence, the pension benefit should provide additional premium to compensate the retiree caused by its illiquidity feature. This premium is called the
“liquidity premium” (Browne et al, 2003). The liquidity premium is the theoretical rate of return which annuitized benefit should compensate to the holder. We apply the implied longevity yield (Milevsky, 2005) to measure the actual return of the annuity.
In this paper, we estimate the liquidity premium and compare to the actual rate of return provided by the annuitized pension benefit. The numerical analysis could help the retiree with making decision to take the pension benefit or the one-time benefit.
Also, while estimating the liquidity premium, we use utility function and consider different risk preference of retirees. We could understand how the level of risk aversion and the market conditions affect the liquidity premium.
This paper is organized as follows. In Section 2, we introduce the previous literature related to the annuitization theme and our methodology. Section 3 proposes the model and in Section 4, we present numerical results. Finally, Section 5 would make a brief conclusion and summarize the paper.