A months-long political crisis in Kiev came to an end on April 14, when Ukraine’s Rada (parliament) approved a new prime minister. Expectations that the government will move on needed reforms and anti-corruption measures, however, are low.

Kamikaze prime minister?

The previous prime minister, Arseniy Yatsenyuk, had served since the Maidan Revolution in February 2014. Early on, Yatsenyuk equated his tenure to a kamikaze mission, noting that the reforms the government would adopt would carry heavy political costs. He proved right. By early 2016, his National Front party, which won over 22 percent in the October 2014 party-list vote in the Rada elections, polled in the low single digits. 

Reports of a widening rift between Yatsenyuk and President Petro Poroshenko grew last autumn, though they still had reason to stay together. The National Front party and Poroshenko Bloc formed the core of the majority coalition in the Rada, and neither party could expect to fare well in early parliamentary elections.

Early on, Yatsenyuk equated his tenure to a kamikaze mission, noting that the reforms the government would adopt would carry heavy political costs.

The crisis took a twist in mid-February, when the Rada passed a resolution expressing disapproval of the work of Yatsenyuk and his cabinet…but then failed to pass a vote of no-confidence that would have led to Yatsenyuk’s dismissal.

Speculation nevertheless intensified over his looming replacement, with American-born Finance Minister Natalie Jaresko mooted as a possibility. Volodymyr Hroysman’s name also came into play. Hroysman, a member of the Poroshenko Bloc, is closely connected to the president. He had a reputation as a reformer and effective mayor of the city of Vinnytsia, though his performance as Rada speaker was mixed. For example, he opposed the finance ministry’s proposed tax reform, even though it was a requirement of Ukraine’s program with the International Monetary Fund. 

When Yatsenyuk announced his resignation on April 10, Hroysman appeared the front-runner to succeed him. His appointment took longer than expected, however, as he reportedly rejected some suggestions from the president’s camp for ministers, seeking to put in place his own people instead. Backroom negotiations and a fair amount of horse-trading as parties jockeyed for ministerial positions took place April 11 to 13. Finally, the Rada approved Hroysman on April 14.

Low reform expectations

At first glance, the composition of the new cabinet is a far more political group than its predecessor, which comprised many technocrats. It is devoid of names with established reputations for pressing reform or fighting corruption. My conversations on the margins of the Kiev Security Forum on April 14 to 15 turned up few expectations that the new cabinet will proceed with the kinds of reform actions and, in particular, measures to combat corruption that the country needs.

The International Monetary Fund will watch the cabinet’s actions before it considers releasing an additional tranche of funding for Ukraine. One unsettling sign: The incoming finance minister suggested that some adjustments might be sought in the IMF’s criteria. Historically, when Ukrainian finance ministers seek adjustments to IMF criteria and programs, they do not aim for changes that will accelerate reform.

At first glance, the composition of the new cabinet is a far more political group than its predecessor.

Some in Kiev worry about the close relationship between Hroysman and Poroshenko. But that relationship may have one upside: it ties Poroshenko more closely to the prime minister and his success or failure. Too often in the past, Ukrainian presidents have stood some distance from the prime minister, positioning themselves to escape responsibility for difficult government policies rather than throwing their full political weight behind the prime minister’s efforts.

Poroshenko did not fully back Yatsenyuk. As one Ukrainian observer put it, the president often seemed more interested in explaining or rationalizing the status quo rather than trying to change it. Now, if Hroysman and the new cabinet fail to deliver, it will reflect more directly on Poroshenko.

A friendly push

If my Ukrainian interlocutors are correct, the new government will pursue the needed reforms at best only half-heartedly. Among other things, that could leave in place the current system in which oligarchs exercise outsized and unhealthy political influence. That will impede Ukraine’s prospects of getting on the path to becoming a modern European state. 

The International Monetary Fund, United States, and European Union should help the Ukrainian president and prime minister make the right decisions: to press forward a program of genuine reform and, at long last, a real anti-corruption campaign. The West should make clear that further assistance will depend on such actions. 

Steven Pifer joined Bernard Gwertzman to discuss Vice President Joseph Biden's recent trip to Ukraine and Georgia and how it was meant to balance President Barack Obama's Moscow summit earlier in the month.

Bernard Gwertzman: Vice President Joseph Biden has just completed a trip to Ukraine and Georgia to reassure both of those former Soviet republics that the American desire to "reset" relations--Biden's words in Munich last February--with Russia were not meant at their expense. But he also had what one Biden aide called "tough love" for both of them. Could you elaborate on this trip?

Steven Pifer: That was the first point of the trip: to reassure Kiev and Tbilisi that the United States remains interested in robust relations with Ukraine and Georgia, and that we will work to keep open their pathways to Europe and the North Atlantic community. When I was in Ukraine about five or six weeks ago, what I heard from the Ukrainians was a concern--and I suspect there is a parallel concern in Georgia--that the effort to reset relations with Russia would somehow come at Ukraine's expense. So part of the trip by the vice president was to assure both Ukraine and Georgia that the United States is not going to undercut relations with those two countries as it tries to develop relations with Russia. You've seen points made by this administration, indeed going back to the Munich speech itself, saying the reset of relations would not mean recognition of a Russian "sphere of influence" over the former Soviet states, and then repeated assurances that the United States supports the rights of countries such as Ukraine and Georgia as sovereign states to choose their own foreign policy course.

Gwertzman: What was also interesting to me was that in his speech in Ukraine, Biden was virtually demanding that the Ukrainian leadership get their act together. In Georgia, I don't think he was publicly as tough. Can you elaborate on the "tough love" part of the visits?

Pifer: Let me start with Ukraine. Certainly the primary goal of the visit was to reassure Ukraine, but there was also a tough message there. In Ukraine, it's not only due to the presidential election, but you've had a situation in the past year and a half where the government really hasn't functioned because of infighting between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko. It's meant that Ukraine has passed up opportunities to accomplish some important things. A big part of the vice president's message in Kiev was to say, "You need to put aside political differences, come together as mature political leaders, find compromises, and get things done."

He also singled out the importance of Ukraine getting serious about reforming its energy sector. This is a huge national security vulnerability for Ukraine because they have a distorted price structure where people buy natural gas at prices that don't begin to cover the cost of the gas that Ukraine buys from Russia. As a result, Naftogaz, the national gas company, is perpetually in debt to Russia and on the verge of bankruptcy. That creates vulnerabilities for Ukraine.

Part of the vice president's message was, "You need to get serious about this." Part of the problem in Ukraine is if you are a household, you are probably paying a price that amounts to less than 30 percent of the actual cost of the gas bought from Russia. It's no wonder why Naftogaz is always in financial straits. But it's not just an economic problem because of the way it factors into the Ukraine-Russia relationship. It creates a national security issue for Ukraine. So there are two aspects to the tough message: One, the need for political leaders to get together, compromise, and produce good policy; and second, the special importance of tackling this energy security issue.

Read the full interview » (external link)

Event Information

Recent events in Ukraine have raised important questions about Russian ambitions in the former Soviet space and the future political perspectives of the countries caught between Russia and the European Union. These countries are facing substantial obstacles in their efforts to maintain balanced relations with the United States, the European Union and the Russian Federation because of increased Russian political, economic and military pressures. In Ukraine, the annexation of Crimea and the ongoing turmoil in the East threaten the Ukrainian government's ability to maintain its independence and the sovereignty of Ukraine. Georgia and Moldova have expressed their intention to sign Association Agreements with the European Union, but increasingly face the prospects of destabilizing Russian economic sanctions and even the possible rekindling of their “frozen conflicts” in Abkhazia, South Ossetia and Transnistria.

On April 29, the Center on the United States and Europe at Brookings (CUSE) will host the ambassadors of Georgia, Moldova and Ukraine—Ambassadors Archil Gegeshidze, Olexander Motsyk and Igor Munteanu—as well as Eric Rubin, U.S. deputy assistant secretary of State for European and Eurasian Affairs, to discuss the dilemmas of these countries and possible solutions. Fiona Hill, director of CUSE, will introduce the speakers and moderate the discussion.

After opening remarks, panelists will take questions from the audience.

Audio

• A Discussion with the Ambassadors of Georgia, Moldova and Ukraine

Transcript

• Transcript (.pdf)

Event Materials

• 20140429_ambassadors_transcript

British debates about welfare reform have often been influenced by American ideas. The Clinton-era welfare reforms were echoed in some of Tony Blair’s alterations to British benefits. Gordon Brown, as Chancellor, introduced a new Working Tax Credit as a direct result of studying the Earned Income Tax Credit. Brown particularly liked the political advantages of a ‘tax cut for hard-working families’, as opposed to a ‘benefit handout to welfare families’.

But now the transatlantic traffic in ideas on welfare is going the other way. The U.K.’s introduction of a single, unified system of transfer payments – the Universal Credit – is getting quite a bit of attention in the wonkier regions of D.C. politics. Paul Ryan, at a Brookings summit on social mobility, mentioned the Universal Credit (UC) as a possible inspiration for a new round of welfare reform. (Ryan is giving a speech at AEI in a couple of weeks: we’re likely to hear more about his thinking then.) When the architect of the UC, Iain Duncan Smith, visited D.C. recently, he held a series of meetings with leading Republicans to discuss his reforms.

The main attractions of the Universal Credit are fourfold:

1. Simplicity. By unifying five cash benefits and an ‘in kind’ benefit (Housing Benefit) into a single, monthly payment, the complexity of the system from the point of view of the recipient will be greatly reduced.
   
   
2. Cost control. Housing Benefit is paid directly to the landlord, which reduces the tenant’s incentive to control costs.  Add that to the crazily overheated U.K. housing market, and should come as no surprise that Housing Benefit has become a major strain on the system, quintupling in cost in real terms over the last two decades to hit £24 billion a year (c. $41bn), to become the second-biggest element of the U.K.’s system, after pensions.  By including an allowance for housing in the single cash payment in UC, the recipient will be incentivized to control their own housing costs.
    
3. Stronger work incentives. The UC has a flatter ‘taper’ than existing benefits, meaning that cash payments are reduced more slowly as earnings rise. In particular, the UC will allow benefit recipients to work part-time (less than 16 hours a week), and still keep claiming. On the downside, incentives for second earners in two-adult families will be reduced. 
   
   
4. Tighter and more targeted work requirements. The UC will contain stronger requirements to seek work than existing benefits, and importantly, has a ‘sliding scale’ of requirements, depending on the position of the recipient. For example, parents with children under the age of 1 will be exempt from work requirements; those with children aged between  1 and 5 will be obliged to attend for interviews with a case worker to prepare for a return to work; those with children at school will be required to ‘actively seek work’.

Sounds pretty good, doesn't it? And in fact it is, on paper at least. In practice the introduction of UC has been marked with huge overspend and delay on the required new IT system. The whole exercise has also been made much harder by cuts in many of the relevant cash benefits, as well as the introduction of a ‘household cap’ on total welfare receipts. The Universal Credit as an idea has a lot of support. As so often, it has been putting the idea a reality that has been difficult.

What—if anything—can the U.S. take from the UC? Short answer: not much. 

Many of the problems the UC addresses do not really apply in the U.S. Work incentives are already pretty strong in the U.S., thanks to the relative generosity of the EITC, and the relative meanness of out-of-work welfare supports. Also, there are already much stronger work requirements in the U.S. system. Some want to go further, and add work requirements to the receipt of food stamps, for example. But this would not require a major overhaul.  As Melissa Boteach and her colleagues at the Center for American Progress write,“the primary problem that the Universal Credit is supposed to address in the United Kingdom—the lack of incentive for jobless workers to enter the labor force—is far less of an issue in the United States”.

The UC also further centralizes an already highly centralized system, by getting rid of Housing Benefit, which is currently administered by Local Authorities. The U.S. system is much less centralized, with states and cities having a high degree of control over the way TANF and SNAP are administered. It is hard to see how anything like a UC could work in the U.S. at anything higher than State level. A Wisconsin Universal Credit makes sense in a way that a U.S. Universal Credit does not.  But if shifting towards block grants to states is really what this is about (see Marco Rubio’s ‘flex fund’ idea),that’s a whole different debate.

A final point. Simplicity and ease of use for the recipient is a key goal of the UC, and a worthy one. The stress and difficulties faced by low-income families just in applying for assistance is unacceptable in the 21st century. But it is not clear that the whole system has to be upended to achieve this goal. Technology ought to allow a single access point to the system, with the complexity out of sight of the user. 

In the U.K. the Universal Credit has a strong rationale, despite the implementation challenges. In the U.S., it is a solution in search of a problem. 

The leaked information in the Panama Papers from the law firm Mossack Fonseca has captured the headlines for weeks and will continue to do so as further names are exposed. The scandal has placed Panama in the limelight and provided an unprecedented glimpse into the world of hidden money and tax avoidance. To understand its broader context, it is vital that we distinguish between legal corruption, like that exposed by the Panama Papers, and illegal corruption, like that exposed by the Unaoil scandal. Governments must seize the moment to take decisive action against both.  

The U.S., the U.K., and a range of other countries will announce commitments to combat corruption at the Anti-Corruption Summit on May 12, championed by Prime Minister David Cameron as a game-changing event. The question is whether these commitments will deliver concrete actions that target the most costly kinds of corruption that flourish globally today.  

Unfortunately, the world often engages in “summitry” filled with communiques, calls for coordination and exchanging information, or creating another toothless generic initiative, which offer media and photo opportunities that fulfill particular political objectives for some leaders. Let us see if it’s different this time.

Mossack Fonseca, and its home country Panama, are just a couple nodes in the vast and complex set of “enablers” of corruption and tax evasion around the world.     

For those seeking secret shelters and corporate shells, the mighty U.S. (which unsurprisingly doesn’t feature much in the Panama Papers) is one of the world’s most appealing destinations: Setting up a shell corporation in Delaware, for instance, requires less background information than obtaining a driver’s license. As seen in the chart below, this opacity, coupled with the size of the U.S. as a haven, means that it has been ranked the third most secretive jurisdiction among close to 100 assessed by the Financial Secrecy Index. Panama is 13th.

Figure 1: Financial Secrecy Index 2015 (Select jurisdictions, from the Tax Justice Network)

Source: The Tax Justice Network’s Financial Secrecy Index http://www.financialsecrecyindex.com/introduction/fsi-2015-results

This graph depicts the top 40 worst performing jurisdictions as well as four select better performing jurisdictions (right of dashed line). The Index combines a qualitative secrecy score based on 15 indicators and a quantitative measure of a jurisdiction's share in global financial services exports. 

And the U.K. is an important enabler of corruption: It has stood by as its offshore jurisdictions and protectorates operate as safe havens for illicit wealth, which the Panama Papers make clear. The British Virgin Islands, for example, were the favored location for thousands of shell companies set up by Mossack Fonseca.  

The Panama Papers speak only indirectly to core aspects of today’s global corruption challenge, which are neither about Panama nor taxes. We ought to view the resulting scandals in a broader light, and recognize the immense, complex webs of corruption that increasingly link economic and political elites around the globe.

Grand corruption

The most powerful figures who engage in high-level or “grand” corruption are hardly running scared following the Panama leak. These figures include kleptocrat leaders as well as oligarchs who wield enormous influence on government affairs. Often, these players interact and collude, forming high-powered public-private networks that make the traditional notion of corruption as an illegal transaction between two parties look like child’s play.

Corruption in these elite networks far transcends the unethical behavior of the typical tax avoider, as it involves the abuse of power to accumulate power and assets, often via the direct plunder of public resources, asset stripping, or large-scale bribery. The multi-billion-dollar scandal embroiling the Brazilian oil giant Petrobras illustrates the complexity of colluding networks, and how grand such corruption can inflict political and economic damage of historical proportions on a country. 

The oil sector provides many more illustrations of grand corruption. Few company officials may have been more relieved by the Panama Papers leak than those at Unaoil, whose own scandal had just erupted. Unaoil is an “enabler” company incorporated in Monaco that bribed and influenced government officials in various countries on behalf of multinational companies vying for lucrative procurement contracts. While overshadowed by the Panama leaks, the Unaoil case is at least as emblematic of the challenges in tackling global corruption. For instance, it shows the deeply ingrained practice of Iraqi government officials seeking bribes for the award of contracts and the willingness of companies to provide them.

Corrupt elites, including those embroiled in the Unaoil scandal, often use structures like shell corporations and tax havens (along with real estate and other investments) to hide their ill-gotten funds. However, even if the Panama Papers leak prompts more scrutiny on illicit financial flows and the reform of these opaque financial structures, grand corruption will continue in many locations.  It is noteworthy that the political fallout has been concentrated in relatively well-governed countries that do have accountability and anti-corruption systems in place, as illustrated by the resignations of the prime minister of Iceland, the industry minister of Spain, and the head of Chile’s Transparency International chapter. 

In sharp contrast, President Vladimir Putin brushed off the leaked Russian information as a Western anti-Putin conspiracy; in China, discussion and dissemination were muffled by media censorship; and, in Azerbaijan, exposure of details on President Aliyev’s family mining interests will hardly dent his hold on power. While reforms leading from the Panama leaks will hopefully deter tax dodgers and unethical corporations and individuals from hiding dirty assets, powerful corrupt leaders will continue to enjoy impunity.

Legal corruption and state capture   

The Panama Papers shed a sliver of light on the type of corruption that is perhaps most damaging and difficult to tackle: legal corruption and state capture. Around the world, powerful economic and political elites unduly influence laws and policies, shaping the rules of the game for their own benefit, or what has been called the “privatization of public policy and lawmaking.” This generates huge rents for the elite, increases their power, and exacerbates a country’s political and economic inequality.

Resource-rich countries provide many illustrations. In Angola, the Democratic Republic of Congo, Nigeria, and Venezuela, for example, political elites have used state-owned resource companies to serve patronage agendas, often—though not exclusively—through legal means.

In many industrialized countries, an example of state capture is the tax system itself. It is in the interest of elites to safeguard a worldwide network of secret offshore companies and tax havens as places to hide wealth—whether acquired legitimately or illicitly. The evidence on tax avoidance from the U.S. is telling: According to Zucman, since the 1950s the effective rate of corporate tax has decreased from 45 to 15 percent, whereas the nominal rate has only decreased from 50 to 35 percent. And U.S. companies make full use of foreign tax havens: According to a new Oxfam report, the top 50 American multinationals reported in 2008 that 43 percent of their foreign earnings came from five tax havens, accounting for only 4 percent of the companies’ foreign workforces. Further, Bourguignon reports that federal tax rates on the richest Americans fell by 15 percent between 1970 and 2004.

Risks of legal corruption in the U.S. run high because private money can so easily sway public affairs. Following the 2010 Citizen United ruling by the Supreme Court, private funds from deep pockets increasingly dominate the conduct of electoral campaigns. The avenues for private money to influence public officials may widen further, if forms of bribery traditionally considered illegal become legalized. A forthcoming Supreme Court decision could make it legal for public officials to receive gifts and other benefits from private individuals (potentially overturning the corruption conviction of a former Virginia governor for doing exactly that).  

Upfront, there are no easy solutions, especially because powerful decision-makers benefit from this status quo. But there is the opportunity, and public pressure, to reform.  As mentioned, the cause of tackling corruption often attracts token gestures, and David Cameron’s announcement of a new global anti-corruption agency could be at high risk of falling into this category. Rather, countries like the U.S. and U.K. must take firm action to reform their own practices, and push for the same from their partners such as the U.K. crown dependencies and overseas territories, the European Union and G20 members, and the recipients of overseas aid.

First, take legal corruption and state capture seriously. 

Transparency can be one game changer, especially if it addresses the channels of influence through which policy becomes “privatized.” Disclosures of campaign finance contributions, conflicts of interests, assets held by (and tax returns filed by) politicians and public officials, and parliamentary deliberations and votes can all discourage abuse and reveal hidden networks at play. Encouragingly, the Organisation for Economic Co-operation and Development (OECD) recently issued their first salvo, the report “Financing Democracy,” focusing on a few selected case studies, and as a next step it should be empowered to develop standards and carry out assessments on political finance for all OECD countries.

Transparency will only help if citizens can actively scrutinize and engage with their governments. Civic space is under attack in many jurisdictions, with activists and journalists facing intimidation, prosecution, or worse. Securing rights of expression and assembly should be the business of any international actor concerned with anti-corruption or economic governance. For instance, when considering funding requests from governments with weak records on protecting civil society—like Angola and Azerbaijan—the World Bank and International Monetary Fund as well as donors like the U.S. should prioritize civic accountability as well as broader transparency reforms.

Furthermore, grand corruption will not decline without more effective prosecutions and other sanctions that target bribe-takers, as well as the facilitators and middlemen of corruption, be they lawyers, accountants, or fixers like Unaoil. Of course, law enforcement authorities should also remain vigilant against bribe-paying companies; and governments—including OECD members implementing to varying degrees the OECD foreign bribery convention—would do well to emulate the active enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) in this regard. But bribe-takers and facilitators have not faced sufficient scrutiny and sanction.

Second, get rid of shadowy corners.

Lessons yielded by recent events from the 2008 financial crisis to the Panama Papers suggest that major global players should not allow large corners of the global economy to escape scrutiny. The U.S. and the U.K. (with its offshores), should heed the calls for dismantling secrecy and tax havens. Seeds of effort, such as the U.S. government’s decision to require banks to know the identities of the individuals behind shell companies, are now coming to light, but broader efforts, including legislation, will also be required.  

Beneficial ownership transparency should become standard operating procedure, with governments following the example of the U.K., the Netherlands, and others in setting up public registries, and joining the movement toward a global registry. In the case of resource-rich countries, establishing sector-specific registries may be the right place to start. This practice is now mandated by the Extractive Industries Transparency Initiative.

Within the extractive sector, home country governments should subject commodity traders to payment disclosure requirements when doing business with governments and state-owned companies. Governments of countries like Switzerland, the U.K., and Singapore that are home to corporate actors shoulder significant responsibility, especially in the current era of low commodity prices, when traders are entering into profitable new deals with cash-strapped resource-producing countries. Shining light in dark corners like these will render them less susceptible to abuse.

Third, prioritize transparency and scrutiny when public resources are allocated.

Whenever a government allocates resources for exploitation, it ought to do so in a fully transparent fashion. The Open Contracting Partnership has made great strides in defining a gold standard for such reporting, including guidance on issues such as open data, corporate identifiers, and beneficial ownership reporting.

Natural Resource Governance Institute research on oil and mining sector corruption shows that multiple types of high-value allocations require scrutiny and contract disclosure. These include the allocation of exploration and production licenses, but also on export, import, or transport rights, which have been associated with corruption in countries such as Indonesia, the Republic of Congo, and Ukraine. And most of the oil sector cases prosecuted under the U.S. FCPA have arisen around the award of service contracts, a segment of the oil industry where the Unaoil and Petrobras scandals also took place. Transparency should be the default setting for any transactions that allocate public resources. Further scrutiny is also needed on the abuse of (mis-)managed exchange rate regimes that generates rents for the few and creates major economic distortions, such as currently in Nigeria, Venezuela, and Egypt.

Concrete impact will also require a major attack on impunity since transparency and freedom of expression are necessary, but insufficient. And governments including those of the U.S. and the U.K. should adopt reforms to address legal corruption and various forms of opacity—whether addressing the capture by money in politics or the “dark corners” among oil traders headquartered in Geneva and London. 

An ambitious commitment to tackling corruption and impunity is not only needed now, but demanded by societies, as events in Brazil and elsewhere show. This is a potentially “game-changing” global moment to make real progress.  

This piece is also available in Spanish and French. 

Editor's Note: this article originally appeared in the 2012 Print Version of AARP: The Journal.

Using one platform to offer a variety of services

Known in the UK under the term “corporate platform” to indicate that it expands options available on the employer’s benefit platform, the development allows employees to use the employer’s retirement savings mechanism to save and invest for additional nonretirement purposes. When the corporate platform is fully implemented, employees will be able to man­age almost all of their investments and savings plans from one location, thus giving them a con­solidated view of their entire financial status. If carried to its full potential, the expanded saving platform will allow employees to shop for sav­ings products, among options that are available on the platform, instead of having to seek them out from individual suppliers—a search that often takes up work hours. Of even greater value, it gives employees one source to go to for indi­vidualized advice or financial literacy training.

The enhancement has special significance in the UK, where by fall 2012, the larger employers that don’t offer any other type of pension or retirement savings plan, must begin to automatically enroll their employees into basic retirement savings accounts. This requirement is causing a great deal of discussion about the future role of employer-provided benefits, as well as recon­sideration of the fees and services included in a traditional package. The platform enhancements allow an employer to differentiate its employee benefit package from the required basic account structure. It also gives younger employees a benefit of more immediate value, than they would have from a retirement savings account that they won’t access for a good 40 years.

Presentations from a variety of service providers at an October 2011 summit hosted by Pensions Insight, a UK trade journal, showed that the platform can be easily customized to meet the special needs of a specific workforce. Using a single computer interface, employees can select from a wide variety of savings and investment options that are appropriate for their income level and stage of life. Thus, an upper income manager who manages his or her own finances could see more sophisticated products, while an entry-level worker sees more basic sav­ings products. Live presentations by financial professionals who explain what is available on the computer platform add to the system’s value and increase its use.

A place to provide choice and to build financial literacy

The platform will have special value for moderate- and lower-income employees. While higher salaried employees may appreciate the opportunity to build their investments, the real value of the platform will be to enable moder­ate- and lower-income workers to find savings opportunities that they might otherwise miss because they don’t know where to go, are uncertain about what is a fair price, or for a variety of other reasons. Because employees tend to believe that services included on the corporate platform are implicitly endorsed by the employer, they usually have greater faith that the services are from legitimate providers at a fair price.

Employees at all levels can also use the site to receive guidance on individual products or basic financial literacy training. Individuals can choose from a range of options, from short videos on a specific topic by experts or fellow employees, to longer connected courses designed to meet the needs of specific age or income groups. Use is increased when employ­ees receive emails or text messages geared to birthdays or other life events, or generated after the employee visits a specific part of the website.

Understanding the value of peer evaluations to motivate others, some providers include a place where employees can post feedback about spe­cific products or savings choices. These postings help to guide other employees’ decisions and build the reputation of the platform as a source of unbiased information. The site can also include links to outside advisors who can answer specific questions, guide employees to another site for more information, or perform other services either online or over the telephone.

Differing age groups can be contacted and guided through different technologies. At the UK platform summit, David Harris, of Tor Financial Consulting, showed that younger employees preferred different communication methods than either older workers or the usual way employers provide information. However, the platform is able to use a wide variety of methods and is equally effective no matter which is used.

The platform’s value to international policy makers

Although the UK’s platform is intended as an enhancement to employer-provided benefits, it can also be used for a wide variety of policy goals, as the basic structure can be easily adapted to meet almost any nation’s specific tax and savings system. In the United States alone, policy experts have proposed dedicated savings accounts for nonretirement purposes ranging from unemployment benefits and retraining, home purchases, health care, and long-term health care coverage, to repaying student loans or building college balances for children or grandchildren. However, if all of these various accounts were established and funded, it is doubtful the employee would have any money left for food, clothing, and shelter.

Rather than having a host of specific savings programs, employees may be better served by more flexible accounts usable for a variety of purposes, as outside developments or chang­ing needs dictate. The platform concept would allow individuals to choose which purposes they need to save for and how much to save for each. Combined with targeted guidance or education, this structure could expose individuals to pos­sibilities they might not have considered before.

The structure is ideally suited to employment situations, but it could also be used by the self-employed or by consultants at sites aimed specifically at them and sponsored by trade associations, unions, or even government agen­cies. While their circumstances may preclude payroll deductions, the same products could be offered through direct debits to bank accounts.

The added value of nudge

The flexibility of the platform allows it to be used by employees with all levels of financial sophistication, but new participants would benefit from a variation on automatic enroll­ment that places certain amounts, in addition to the retirement savings amount, into a general savings account or similar vehicle. The automatic savings amounts deducted need not be large, and where the law allows, could vary according to employee age, with a larger proportion of the overall deduction going to nonretirement purpose for younger employees and to retirement for older ones.

As with automatic retirement enrollment, the employee would have the ability to vary amounts, divide the total among various accounts, and even stop all future contributions. However, automatic enrollment would offer workers direct experience with the nonretire­ment side of the platform. By varying enrollment in various accounts according to employees’ age, automatic enrollment could encourage them to consider saving for various purposes, such as a first home, college tuition for children, or additional health services.

Improving retirement security

Although the platform is applicable to a wide variety of other uses, its primary purpose is to build retirement security. Before retirement, the platform helps employees understand how to save, what they have, and how much more they need for a comfortable lifestyle. The other savings provide funds that can be used in the event of an emergency, thus helping to reduce leakage from retirement accounts in countries that allow early access to that money. At retire­ment, the platform helps individuals to see what other assets are available, and what loans or other liabilities must be factored in. In the UK, it is also being used to encourage individuals to use annuities and add them to their invest­ments. The UK experience can help to guide US policymakers in their efforts to increase the use of similar products.

The enhanced information and flexibility of the corporate platform should help individuals to better understand their finances and how to meet their goals. It moves retirement savings plans from a minor part of employees’ financial lives, to a central feature that has many more uses than just an event many years in the future. This promotes regular use of the platform, and a fuller understanding of what is necessary for a comfortable retirement.

American experience strongly suggests that the coming UK pension freedoms sound better in theory than they will work in practice. After nearly a decade where the UK has been the gold standard for retirement savings policy, it is about to take a step that it may regret.

As annuity purchases are not required, very few Americans buy them, feeling that they are spending a great deal of money for a comparatively small monthly income. Even those in traditional DB pension plans usually take a lump sum if they are allowed to do so. As a result, many US retirees spend unwisely, trust the wrong financial advisor, or make other financial mistakes.

Many people greatly overestimate how long their savings will last. Most others assume (often wrongly) that they can manage their own money as well as anyone else or that they can live comfortably on Social Security alone. U.S. Social Security pays a benefit that depends on the retirees’ individual income history. The average annual amount is about $13,000 (GBP 8,700).

One survey found that in West Virginia, a state with a relatively low average income, 78% of those near retirement and 67% of those at retirement would likely outlive their financial assets. Workers with lower incomes are most at risk. A recent national study found that by the 20th year of retirement, more than 81% of Americans with incomes up to $27,000 would run short of money, as would 38% of those earning up to $42,000, and 19% of those with incomes up to $65,000.  Even 8% of those with the highest incomes could not meet their expenses.

Advice alone is not likely to help. US experience shows that literally every minute that passes after general advice is given reduces the chance that the consumer will act on it – even when they have decided to do so. And even a significant number of those who consult with a financial planner fail to act on that guidance.

What does show promise is income illustration. In a 2014 U.S. survey, 85% of plan participants found estimates of the income they could anticipate from their retirement savings useful, and 35% said that they would save more. Income illustrations change the framing of retirement saving from gross amounts saved to retirement income.  Annuity-like products become insurance against running out of money, something Americans are increasingly concerned about.

Two other potential developments may help. One is longevity insurance, an annuity that provides income only after a set age. Purchasing a policy defines how long one must make retirement savings last, and the retiree is protected against running out of money. Because longevity insurance is deferred, one can receive higher amounts of monthly income for a lower cost.  In 2014, $50,000 would buy $275 a month at age 65 or $1200 a month starting at age 80.

Another idea is an automatic enrollment trial annuity. As developed by several Brookings Institution colleagues and me, new retirees would automatically use part of their savings for a two year annuity unless the retiree refused it. The rest of their savings would be available as a lump sum. After the trial period, the annuity would become permanent if they did nothing or they could cancel it and take the rest of their money as a lump sum.

The many annuity horror stories from the UK show a definite need for change, but the coming reforms go too far. US experience suggests that too many UK retirees are likely to see their savings exhausted all too quickly. There are alternatives that could do a better job of protecting retirees.

Event Information

Ukraine faces critical challenges on a range of questions: shaping foreign and national security policies appropriate for a medium-sized country located between Europe and Russia; developing a strategy and policies to promote energy security and contribute to sustainable economic growth; and designing educational and cultural policies suitable for advancing the country’s European aspirations and its own national identity. The Ukraine 2020 Policy Dialogue—an initiative of the U.S.-Ukraine Foundation supported by the Democracy Grants Program of the U.S. Embassy in Kyiv—convened four U.S.-Ukrainian task forces earlier this year to discuss these questions and develop policy recommendations for the Ukrainian and U.S. governments.

On September 28, the Center on the United States and Europe at Brookings (CUSE) hosted a discussion of the recommendations developed by the Policy Dialogue. Panelists included four co-chairs of the Dialogue’s working groups: Edward Chow of the Center for Strategic and International Studies; William Miller of the Woodrow Wilson International Center for Scholars; Robert Nurick of the Atlantic Council; and Brookings Senior Fellow Steven Pifer. Brookings Nonresident Senior Fellow Angela Stent moderated the discussion. Copies of the Policy Dialogue recommendations were available. 

Audio

• Ukraine: Facing Critical Challenges

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• ukraine_2020_recommendations
• 20120928_ukraine