Pension

• 1. Defining The Pension Fund

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  A pension is a fund into which amounts are paid regularly during an individual's working career, and from which periodic payments are made to support the person's retirement from work. This financial arrangement may take two distinct forms. A defined benefit plan guarantees specific periodic payments in retirement while adjusting contributions to support those fixed payouts. In contrast, a defined contribution plan requires workers to pay defined amounts during their working life, leaving the final retirement payment dependent on what the accumulated fund can afford. These structures create different levels of risk for both employers and employees. Employers often bear the investment risk in defined benefit plans, whereas employees assume that burden in defined contribution arrangements. The terms retirement plan and superannuation tend to refer to a pension granted upon retirement of the individual, though terminology varies between countries. Retirement plans may be set up by employers, insurance companies, the government, or other institutions such as employer associations or trade unions. Called retirement plans in the United States, they are commonly known as pension schemes in the United Kingdom and Ireland and superannuation plans in Australia and New Zealand.

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• 2. Global System Variations

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  Many countries have created schemas for their citizens and residents to provide income when they retire or become disabled. Typically this requires payments throughout the citizen's working life in order to qualify for benefits later on. A basic state pension is a contribution based benefit that depends on an individual's contribution history. For examples, see National Insurance in the UK, or Social Security in the United States of America. Over 80 countries have social pensions intended to prevent economic deprivation at old age. Examples of universal pensions include New Zealand Superannuation and the Basic Retirement Pension of Mauritius. Most social pensions are means tested, such as Supplemental Security Income in the United States of America or the older person's grant in South Africa. In the U.S., retired military receive a military retirement pay calculated on number of years on active duty, final pay grade and the retirement system in place when they entered service. Members awarded the Medal of Honor qualify for a separate stipend. Retirement pay for military members in the reserve and US National Guard is based on a point system. Some countries also grant pensions to military veterans overseen by government agencies like the United States Department of Veterans Affairs. Ad hoc committees may also be formed to investigate specific tasks, such as the U.S. Commission on Veterans' Pensions commonly known as the Bradley Commission in 1955, 56.

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• 3. Historical Evolution Of Pensions

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  In the classical world, Romans offered veteran legionnaires military pensions typically in the form of a land grant or a special often semi-public appointment. Augustus Caesar introduced one of the first recognisable pension schemes in history with his military treasury. In 13 BC Augustus created a pension plan in which retired soldiers were to receive a pension of minimum 3,000 denarii in a lump sum after 16 years of service in a legion and four years in the military reserves. The retiring soldiers were in the beginning paid from general revenues and later from a special fund established by Augustus in 5 or 6 AD. Widows' funds were among the first pension type arrangement to appear. For example, Duke Ernest the Pious of Gotha in Germany founded a widows' fund for clergy in 1645 and another for teachers in 1662. Modern forms of pension systems were first introduced in the late 19th century. Germany was the first country to introduce a universal pension program for employees. As part of Otto von Bismarck's social legislation, the Old Age and Disability Insurance Bill was enacted and implemented in 1889. The Old Age Pension program originally designed to provide a pension annuity for workers who reached the age of 70 years was lowered to 65 years in 1916. The first American pensions came in 1636 when Plymouth Colony offered the first colonial pension.

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• 4. The Funding Crisis Debate

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  Another growing challenge is the recent trend of states and businesses in the United States purposely under-funding their pension schemes in order to push the costs onto the federal government. In 2009, the majority of states have unfunded pension liabilities exceeding all reported state debt. Total funding of the nation's 100 largest corporate pension plans fell by $303bn in 2008 going from an $86bn surplus at the end of 2007 to a $217bn deficit at the end of 2008. A growing challenge for pay-as-you-go pensions is the dependency ratio. As birth rates in most countries drop and life expectancy increases, an ever-larger portion of the population is elderly. This leaves fewer workers for each retired person. Low interest rates can make it more difficult for pension funds to generate returns on their investments which can in turn lead to lower benefits for pensioners. Economic downturns can lead to higher unemployment rates which can result in lower contributions to pension plans. The share of people who don't contribute or contribute less to pensions can rise for example in the gig economy. Balancing pension funding can include a decrease of real pensions, increases in pension contributions, reducing the expected years in retirement by increasing the retirement age or reforming the pension system.

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• 5. Gender And Social Inequality

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  The gender pension gap the difference between genders in average pensions varies by country. In OECD countries the gender pension gap varied from 3% in Estonia to 47% in Japan according to data between 2013 and 2018. Eastern European countries tend to have a smaller pension gender gap due to less pronounced gender differences in part-time jobs. Possible contributions to the pension gender gap include gender pay gaps differences in employment rates parental leave unpaid care work and gender roles. There is a gender gap in expected years in retirement with 22.8 years for women and 18.4 years for men on average as reported by the OECD in 2022 contributed by sex differences in life expectancy. The difference in years in retirement contribute to gender-differentiated pension rates. Due to generally longer female life expectancy women have to contribute more to pensions to reach the same pension annuities in case of identical retirement age. The social security systems of some countries such as Germany France Italy and Spain are mostly unfunded having current benefits paid directly out of current taxes and social security contributions.

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• 6. Multi-Pillar Frameworks

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  Most national pension systems are based on multi-pillar schemes to ensure greater flexibility and financial security to the old in contrast to reliance on one single system. According to the report by the World Bank titled Averting the Old Age Crisis countries should consider separating the saving and redistributive functions when creating pension systems placing them under different financing and managerial arrangements into three main pillars. Pillar 1 sometimes referred to as the public pillar or first-tier answers the aim to prevent the poverty of the elderly provide some absolute minimum income based on solidarity and replace some portion of lifetime pre-retirement income. It is financed on a redistributive principle without constructing large reserves and takes the form of mandatory contributions linked to earnings such as minimum pensions within earnings-related plans or separate targeted programs for retirement income. These are provided by the public sector and can be pay-as-you-go financed. Pillar 2 or the second tier built on the basis of defined benefit and defined contribution plans with independent investment management aims to protect the elderly from relative poverty and provides benefits supplementary to the income from the first pillar to contributors. Therefore the second pillar fulfils the insurance function. In addition to DB's and DC's other types of pension schemes of the second pillar are the contingent accounts known also as Notional Defined Contributions implemented for example in Italy Latvia Poland and Sweden or occupational pension schemes applied for instance in Estonia Germany and Norway.

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