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JULY 19, 2004
Comparing Pensions Around the World U.S. businesses do pay the most for employee retirement, but rising costs are now becoming a global phenomenon It's a familiar theme with corporate lobbyists in Washington: U.S. companies aren't playing on a level global field. One of the inequities regularly cited is retiree benefits. Many of the biggest U.S. companies pay millions toward retiree pensions and medical costs, and then must go to market against rivals based in countries where medical care and retirement are often state-run. Two recent analyses by pension experts at Mazars in the European Union and Watson Wyatt in the U.S. show that differences do exist from country to country. And while the U.S. appears the most expensive of these Western markets, in most developed economies, companies are footing a lot of the retirement bill, whether it's through state taxes or direct company pensions. The differences may be starker in developing economies, but there local data are scarce. Looking at a person making $72,000 a year, Mazars and Watson Wyatt analyzed how much an employer would contribute to his or her retirement here and abroad. According to Watson Wyatt's Syl Schieber, a U.S. company would put 6.2% of this worker's salary into Social Security and 1.45% into Medicare. So, these government programs would cost 7.65% of salary. RISING NUMBERS. Private costs, or employer plan costs, vary. But assuming this employer offers both an old-fashioned defined benefit pension plan and a 401(k), and that the employee contributes the maximum to his 401(k) and retires at age 65 after 40 years at the company, his employer would contribute a steady 3% to the 401(k) and a rising percentage of salary to the pension plan. At 30, it might be 1% of salary, by 65, 9.4%. Overall, making some assumptions about the age of the employer's average worker, Schieber finds the pension cost would be at least 3.1% of salary. If that employer offered retiree health care as well, the contribution would start at 2.2% of salary. All told, Schieber figures this employer would be paying at least 16% of salary, or $10,261 a year, on retiree benefits. And with more generous packages and a shorter tenure at the company, possibly as much as 29.7% of salary. By contrast, Mazars found a wide variety of corporate expense in the European markets they looked at, though all are somewhat cheaper than in the U.S. In Britain, the employer of a person in the same situation as the above example would put 12.8% of salary in excess of $7,200 a year into the state pension and health-care system. It would also typically contribute to private pensions, which cost anywhere from 4% of salary to 12%. ASIAN FOCUS. In Germany, the company contributes 9.75% of an employee's salary to the state pension system, the employee contributes another 9.75%, and the company often puts in an additional 5% to 10% of salary to a separate company pension. In France, the system is almost entirely state-run, and employers contribute 1.6% of total, plus 8.2% of pay up to $35,654. In the Netherlands, the state pension system is funded only by workers, but companies often have private pensions to which they contribute anywhere from 6% to 18% of a person's salary. And what of Asia? There, too, concerns are rising about the cost of retirement benefits, though it's hard to get figures on how much companies are putting toward supporting retirees, particularly in developing economies. In Japan, everyone over 20 is obliged to join the National Pension Plan, and personal savings rates are high. Company employees also join the employee pension plan, which entitles them to more pension benefits than are offered by the national pension plan alone. And some large Japanese companies also have their own pension fund. "If you're an employee of a large company, you can rely on the company benefits, but not with medium and small companies. And 80% of Japanese work for such medium and small companies," says Koji Endo, an auto analyst at Credit Suisse First Boston Securities (Japan Ltd.). That 80% will get national and employee pension benefits, but many are increasingly worried this will not be enough. SMALL WORLD. That's the problem for all of these systems. As populations age, funding retirement becomes more expensive. Schieber notes that when the U.S. baby boom was just entering the labor market, the average age of the workforce covered by a pension was about 35 years old. Assuming everyone worked 40 years at the same company and retired at 65, the average pension cost for that typical 35-year-old would have been 1.6% of salary. But as the boomers approach retirement, the average participant's age has steadily risen to 45, and that requires more money to be contributed each year, so the average now is 3.1% of wages, almost twice as much. And with widely aging populations worldwide, that's a problem every company faces, no matter where its home base.  By Nanette Byrnes in New York with Hiroko Tashiro in Japan
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