Taiwan's new 401k plan

[bhchao]

http://www.gti.com.tw/keyfuatures004.htm

Taiwan has a new pension law effective July 1 of this year. The current pension system allows an employee to start retirement if they have been with the company for more than 15 years and is at least age 55; or they have been with the company for 25 years.

This old system benefits older workers who value longevity at a company, but is a big disadvantage for younger workers who jump from company to company.

Employees who have been with the company prior to July 1, 2005 can elect to stay with the old system, or join the new one. However those who joined the company after July 1, 2005 must participate in the new system.

Under the new defined contribution system, employers are required to contribute 6% of the employee's pay into a pension fund account managed by the government. The employee can choose whether to make contributions, up to 6% of their salary. So if the employee decides to contribute 6% of their salary, he or she will have 12% of their monthly salary in the account at the end of each pay period. The good part is that the contributions are based on the gross pay (before taxes), rather than net pay (after taxes)

This new pension system would not be much of a problem for large-sized, profitable companies in Taiwan. However, small to medium-sized enterprises have complained about the new law because it would raise their labor costs for each employee. Under the new law, an employer who fails to contribute 6% of an employee's salary into the pension fund will be fined NT$20,000 to NT$50,000 per month per employee.

There is the possibility that these SME's will reduce their employees' salaries to offset the rise in labor costs associated with the required 6% contribution.

Employees will be the greatest benefactor of this new law, since the money accumulated in the pension fund under the new law will stay there even when an employee switches jobs. Under the old law, employees' retirement benefits are lost when they switch companies.

The new law will hurt SME"s the most. But whether they can really afford the required 6% contribution rate is another question.

[skylee]

Under the new defined contribution system, employers are required to contribute 6% of the employee's pay into a pension fund account managed by the government.

Managed by the government? This sounds weird to me. First, the government will have to grow to cater for this. Second, we all know that governments are inefficient. Third, the employees don't have the right to choose a better fund manager even if the return is poor.

Hong Kong has a system called the Manadatory Provident Fund Scheme (強制性公積金計劃). Both the employer and the employee each have to contribute at least 5% of the employee's salaries to a provident fund (run by the private sector) approved under the scheme. The employee can normally choose among different funds management companies shortlisted by the employer. People who already have pension or similar protection are exempted from this scheme. More information -> http://www.mpfahk.org/main.asp?nodeID=30&langNo=1

[skylee]

There is the possibility that these SME's will reduce their employees' salaries to offset the rise in labor costs associated with the required 6% contribution.

I remember what happened in HK was that many people were forced to become self-employed by their "employers" (無良僱主), i.e. they became agents to their original employers, so that the latter wouldn't have to contribute to the provident funds. The issues are quite complicated.

[gato]

There is the possibility that these SME's will reduce their employees' salaries to offset the rise in labor costs associated with the required 6% contribution.

According to economic theory, who pays a payroll/labor tax depends more on the type of the worker than on the size of the business. The key factor is the so-called elasticity of demand for a class of workers. Every company needs one CEO, so there's almost zero elasticity in the demand for CEOs, and therefore the company would bear almost the entire tax burden. Other workers are not so lucky.

This process would happen whether the original tax was levyed on the worker or on the company. If it was orginally levyed on the worker, a CEO, for instance, would just ask for a raise, assuming that the market for CEOs is inelastic. A worker in lesser demand would not have as much bargaining power.

If the tax was originally levyed on the company, the company could just cut salaries and transfer the tax to the workers if it has any flexibility in its need for workers.

[bhchao]

Managed by the government? This sounds weird to me. First, the government will have to grow to cater for this. Second, we all know that governments are inefficient. Third, the employees don't have the right to choose a better fund manager even if the return is poor.

I agree. Perhaps Taiwan is following the Chilean model where employer and employee contributions are invested in a government-managed fund, and then used as capital to be reinvested into the economy.

Hong Kong's system is similar to the US system where the employee bears the investment risk and gets to select from a choice of fund providers. This system allows greater potential for higher investment returns than a single fund managed by the government.

I have read some mixed results from the Chilean model. Employees in Chile, just like Hong Kong, are required by law to contribute a percentage of their salaries to the retirement fund. Taiwan's new pension law does not require workers to make contributions. Instead, employee contributions are voluntary in Taiwan just like they are in the US, regardless of your monthly income.

Based on the link you provided, it looks like Hong Kong requires mandatory employee contributions if the monthly salary is at least $5,000 HKD.

A difference between the Hong Kong/Taiwan's new pension system and the US's 401k system is that employees are immediately vested in their employer's contributions for the former. In the US, the law does not require employees to be immediately vested in their employer's 401k contributions.

[bhchao]

I remember what happened in HK was that many people were forced to become self-employed by their "employers" (無良僱主), i.e. they became agents to their original employers, so that the latter wouldn't have to contribute to the provident funds.

Seems like Hong Kong's MPF scheme and Taiwan's new plan resembles a "mandatory" cash balance defined benefits plan where employers must set aside a portion of the employee's salary each month as pay credits into a stable fund, where the balance earns interest monthly around the one-year Treasury bill rate. The employer bears the investment risk because the employee does not get to choose which fund the pay credits get invested in.

Hong Kong's MPF plan is similar to this except that employees select which funds their retirement money goes into.

Actually Hong Kong and Taiwan's pension systems are not actually the equivalent of the US's 401k, because employers and employees in the US are not required to contribute in the 401k. If an employee does decide to participate in the 401k, it is the employer's discretion whether to provide a matching amount for the employee's contributions.

Most employers do offer 401k and provide matching because it is an incentive to retain and attract talented people.

I think this system would be more attractive for employers in Hong Kong and SME"s in Taiwan because that will not force up labor costs. The only problem with this kind of system is that employers can still decide not to contribute even when the employee does so. But that would make these employers highly unpopular with their employees.