Ch10 - Method of financing benefits

[Jesoos]

Hi

I am not sure I understand the exact difference between the following methods of financing (i.e. set aside monies to pay for the benefits)

1. PAYG vs. Paying an amount when the benefit event happens - Both these methods pay when the event happens, right? But what is the exact difference between them?

2. Funding in advance vs. Regular payment building up a fund - Is the full amount for the expected benefit set aside at the start in the "Funding in advance option", while the regular payments is paid into a scheme/fund to build up over time?

Thanks!

 

[Oxymoron]

Hi

I am not sure I understand the exact difference between the following methods of financing (i.e. set aside monies to pay for the benefits)

1. PAYG vs. Paying an amount when the benefit event happens - Both these methods pay when the event happens, right? But what is the exact difference between them?

2. Funding in advance vs. Regular payment building up a fund - Is the full amount for the expected benefit set aside at the start in the "Funding in advance option", while the regular payments is paid into a scheme/fund to build up over time?

Thanks!

1) Let's take a benefit payment of $100 every month on retirement.

In PAYG, you pay $100 as it arises. In paying the amount at the time when the benefit happens, you reserve the lifetime equivalent of $100 a month and pay from that reserve every month.

2) Yes, that's right.

 

[kalky]

1) Let's take a benefit payment of $100 every month on retirement.

In PAYG, you pay $100 as it arises. In paying the amount at the time when the benefit happens, you reserve the lifetime equivalent of $100 a month and pay from that reserve every month.

2) Yes, that's right.

"paying the amount at the time when the benefit happens".

why don't they just say "pay the benefit from the set lifetime benefit-equivalent reserve"?

 

[Jesoos]

Thank you guys!

Ok so lets see if I understand this properly -

The first two options are effectively structured the same as the second two options, but only at time of the event happening?

Continuing with the example of a benefit payment of $100 every month on retirement.

1. PAYG vs. Paying an amount when the benefit event happens:

• PAYG - pay $100 every month until death (i.e. regular contributions), starting at the time event happens.
• Paying an amount when the benefit event happens - Pay the full amount of the expected benefit at the time event happens (i.e. start of retirement) into a reserve and then pay the $100 every month from the reserve.

2. Funding in advance vs. Regular payment building up a fund

• Funding in advance - full amount for the expected benefit set aside now (time of funding)
• Regular payment building up a fund - regular contributions (say $100) into a fund starting now until the benefit starts?

Thanks for the help!

 

[Oxymoron]

Thank you guys!

Ok so lets see if I understand this properly -

The first two options are effectively structured the same as the second two options, but only at time of the event happening?

Continuing with the example of a benefit payment of $100 every month on retirement.

1. PAYG vs. Paying an amount when the benefit event happens:

• PAYG - pay $100 every month until death (i.e. regular contributions), starting at the time event happens.
• Paying an amount when the benefit event happens - Pay the full amount of the expected benefit at the time event happens (i.e. start of retirement) into a reserve and then pay the $100 every month from the reserve.

2. Funding in advance vs. Regular payment building up a fund

• Funding in advance - full amount for the expected benefit set aside now (time of funding)
• Regular payment building up a fund - regular contributions (say $100) into a fund starting now until the benefit starts?

Thanks for the help!

In PAYG, it's not from the time the event happens but at the time the benefit is due. Otherwise, you are correct.