Pension

• 1. Introduction

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  A pension is a promise: pay in during your working years, and the money will be there when you stop. That bargain sounds simple. But behind it lies a centuries-long argument about who bears the risk, who keeps the books, and who is left holding the bill when the numbers don't add up.

  Augustus Caesar introduced one of the first recognizable pension schemes in history in 13 BC, promising retired Roman soldiers a lump sum of at least 3,000 denarii after sixteen years of service in a legion. That figure represented roughly thirteen times a legionnaire's annual salary. He was not being generous out of sentiment. The Roman Empire was facing military unrest, and the pension was a tool to keep soldiers loyal.

  More than two thousand years later, the same tensions persist. Who should fund a pension: the individual worker, the employer, or the state? What happens when a fund runs dry? And who decides when retirement begins? The answers vary by country, by century, and by how much political courage any given government can muster. This documentary follows those questions from ancient Rome to a bankruptcy filing in the Northern Mariana Islands.

• 2. Two Promises, Different Risks

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  Every pension in the modern world falls into one of two broad categories, and the difference between them is not technical but philosophical: who carries the uncertainty?

  In a defined benefit plan, the employer promises a specific payout at retirement. That payout is typically calculated using a formula that weighs salary and years of service. The employer, not the worker, absorbs the risk that investments underperform or that the retiree lives longer than expected. Government pensions such as Social Security in the United States operate on this principle.

  A traditional version of the defined benefit plan known as the final salary plan sets the pension equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by an accrual rate. The result is usually paid as a monthly pension, though a lump sum is sometimes available.

  Defined contribution plans work in reverse. Employers set aside a fixed percentage of a worker's earnings into an individual account. In the United States, contributions plus employer contributions were capped at $49,000 or 100 percent of compensation in 2009; by 2015, that ceiling had risen to $53,000. Whatever that account grows to by retirement is what the worker receives. If markets fall, the worker bears the loss. If the worker outlives the account balance, there is no backstop.

  The shift away from defined benefit plans in the United States and many other western countries has been steady since the 1980s. Employers prefer defined contribution plans partly because the cost is easier to calculate and partly because, once the contribution is made, the liability ends.

• 3. The State Steps In

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  Germany became the first country to introduce a universal pension program for employees, and it did so not out of generosity but crisis management. Otto von Bismarck's Old Age and Disability Insurance Bill was enacted in 1889. The program was originally set to pay benefits to workers who reached the age of 70, a threshold that was lowered to 65 in 1916. Unlike the accident and health insurance programs that preceded it, this one covered industrial workers, agrarian workers, artisans, and servants from the start.

  Germany's system has operated on a pay-as-you-go basis ever since: contributions from current workers and employers are not invested but are used immediately to pay current retirees. France, Italy, and Spain follow the same model. Social security systems in these countries are largely unfunded, sustained by the assumption that future workers will fund future pensions.

  The United Kingdom took a different path. Parliament established disability payments for soldiers wounded in Crown service during its 1592-93 session, setting a maximum annual pension of twenty pounds for a lieutenant and ten pounds for a private soldier. The modern state pension began with the Old Age Pensions Act 1908, which paid 5 shillings a week to people over 70 whose annual means did not exceed 31 pounds 50 pence. That act was part of the Liberal welfare reforms that eventually produced the National Insurance Act 1911.

  After the Second World War, the National Insurance Act 1946 extended contributory state pension coverage to everyone, with men eligible at 65 and women at 60. The Pensions Act 2008 later introduced automatic enrolment for occupational pensions and created the National Employment Savings Trust, a low-cost public fund manager.

• 4. The Dependency Ratio Problem

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  Pay-as-you-go systems rest on a ratio: the number of working adults relative to the number of retirees. When birth rates fall and life expectancy rises, that ratio shifts. Fewer workers are left to support each retired person.

  Emigration of working-age adults and immigration of older persons worsen the calculation further. The uncertainty in future fertility rates makes pension funding forecasts difficult to pin down, and a high old-age dependency ratio can tip into a pension crisis.

  In 2009, the majority of US states had unfunded pension liabilities exceeding all reported state debt. Bradley Belt, former executive director of the Pension Benefit Guaranty Corporation, testified before a Congressional hearing in October 2004 that he was concerned about a "growing tendency to use the pension insurance fund as a means to obtain an interest-free and risk-free loan to enable companies to restructure." He described the strategy of shifting pension liabilities onto other premium payers or taxpayers as "the path of least resistance rather than a last resort."

  The scale of the problem became concrete in 2008. Total funding of the nation's 100 largest corporate pension plans fell by $303 billion in that single year, moving from an $86 billion surplus at the end of 2007 to a $217 billion deficit at the end of 2008. The post-2007 credit crunch deepened the wound.

  In April 2012, the Northern Mariana Islands Retirement Fund filed for Chapter 11 bankruptcy protection, carrying $268.4 million in assets against $911 million in liabilities. It was described by Pensions and Investments as apparently the first US public pension plan to declare bankruptcy.

• 5. The Gender Gap in Retirement

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  Women live longer than men on average, which means they need their retirement savings to stretch further. In OECD countries, women were expected to spend 22.8 years in retirement on average compared to 18.4 years for men, based on 2022 figures.

  That gap in years translates directly into a gap in pension wealth. In OECD countries between 2013 and 2018, the gender pension gap ranged from 3 percent in Estonia to 47 percent in Japan. Eastern European countries tended to show smaller gaps, partly because gender differences in part-time employment are less pronounced there.

  The causes are layered. Gender pay gaps reduce the contributions women make over their careers. Differences in employment rates, parental leave, and unpaid care work all reduce the years and amounts women can contribute. Some pension structures compound these disadvantages: in countries where women and men face identical retirement ages, women must contribute more to fund a longer retirement.

  In the United Kingdom, it is a legal requirement to use the bulk of a defined contribution fund to purchase an annuity at retirement. Life annuities insure against the risk of outliving savings, and because of longer female life expectancy, women generally must contribute more than men to purchase annuities of equivalent value.

• 6. Pillars, Tiers, and the Architecture of Security

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  A World Bank report titled "Averting the Old Age Crisis" proposed that countries separate the saving and redistributive functions of pension systems, placing them under different financing arrangements organized into three main pillars.

  The first pillar is publicly managed and mandatory, focused on preventing poverty and ensuring a minimum income. It is typically financed on a redistributive basis without building large reserves. The second pillar is privately managed and also mandatory, built on defined benefit and defined contribution plans with independent investment management; its role is to supplement first-pillar income and fulfil an insurance function. The third pillar is voluntary, consisting of occupational or private savings plans.

  A zero pillar was added more recently: a non-contributory tier financed by the state and aimed at alleviating poverty among the elderly regardless of contribution history. A fourth pillar, generally excluded from formal classifications because it lacks a legal basis, covers informal support such as family assistance, health care, housing, and individual assets including home ownership.

  Examples span nearly every corner of the world. New Zealand's KiwiSaver scheme and Germany's Riester plans represent second- and third-pillar designs. Notional defined contribution schemes, where contributions are tracked as a notional amount for each individual rather than actually invested, operate in Italy, Latvia, Poland, and Sweden.

  Of the $50.7 trillion in global pension assets recorded in 2019, $32.2 trillion sat in US plans. The next largest pools were in the UK at $3.2 trillion, Canada at $2.8 trillion, and Australia at $1.9 trillion. Those four countries alone accounted for the overwhelming majority of global pension wealth.