From Wikipedia, the free encyclopedia

A social pension is a stream of payments from state to an individual that starts when someone retires and continues to be paid until death. [1] It is a part of the pension system of most developed countries, specifically the so-called zero or first pillar of the pension system, which is a part of the state social security system. [2] The social pension is different from other types of pensions are not funded directly by the individual's former contributions of an individual.

History

The need for a social pension dates back to the Industrial Revolution, when the new economic system boosted the mobility of workers, but loosened ties between family members, whose solidarity was protecting people from personal economic deprivation. This, along with impractical voluntary thrift and insurance, resulted in many workers retiring without any source of income. [3]

The first attempt at cash transfers to the elderly population was seen at the end of the 19th century. One of the first countries that introduced a social pension was Germany in 1889, when Chancellor Otto von Bismarck enacted a policy to connect[ clarification needed] ordinary workers in the newly created German state and granted every worker who reached the age of 65 a small flat pension. [3] At first it was funded by taxes on the tobacco monopoly.

In the 1890s Denmark (1891) and New Zealand (1898) adopted social pensions, and were followed in the early 20th century by Australia (1908) and Sweden (1913), along with many other countries. Throughout the 20th century, most countries were deciding between two paths based on the strategy of the system – a minimum pension for the elderly or securing income maintenance either by taxed subsidized voluntary pension and compulsory income-related pension. [4] This resulted in convergence to a dual system where both of those strategies were included.

Today, more than 100 countries [5] provide social pension to their citizens in various forms and on average OECD countries spend 7 – 8 per cent of their GDP on pensions for elderly care. [6]

Reasons

The reasons for implementing a social pension and government involvement include issues that arise when individuals voluntarily save insufficient funds for retirement or when market failures create societal inequalities. [7] Common social pensions worldwide include orphan's pensions, which protect minors who have lost parents and are too young to work, and widow's pensions, which support non-working spouses without the skills or qualifications for the mainstream job market. Another factor might be individuals' shortsightedness, leading to inadequate savings or additional income for retirement. This may also relate to an information gap, where individuals cannot accurately evaluate the financial stability of savings and insurance companies or the effectiveness of investment programs. Additionally, insurance market failures, such as moral hazard or adverse selection, can prevent the availability of insurance against risks like longevity or disability.

Financing

Financing the social pension is a part of national, fiscal, and public finance policies and therefore is linked to the general government budget. Generally, the social pension schemes as a part of the first pillar of pension systems use the pay-as-you-go scheme (PAYG), which collects contributions in the form of social security taxes [8] every year in an amount which should be equal to the expected expenditures in the same year. This means that the system does not accumulate any reserves and if so, then only to avoid liquidity problems. [9] The PAYG system is sometimes subject to demographic and political problems (e. g. aging of population). [10]

The impact on poverty of reducing pension benefits

Public transfers in Organization for Economic Cooperation and Development (OECD) countries, which include earnings-related pensions and means-tested benefits, typically constitute about 60 percent of the total income for the elderly population. For instance, coverage in voluntary funded pension plans among workers in the poorest decile averages between 10 and 20 percent, significantly lower than in higher-income deciles. Projections indicate a further decline in replacement rates between 2010 and 2060. On average, this decline is estimated to be nearly 20 percent. With an elasticity of -0.8 between the public pension replacement rate and elderly poverty, it is projected that elderly poverty would increase by approximately 0.5 percentage points (3 percent) between 2010 and 2030. One direct approach to mitigate the impact of pension reforms on old-age poverty is to reduce pension benefits only for those with higher incomes, thereby increasing the progressivity of public pension benefits. Efforts to better target these benefits to the poor could have a substantial effect on elderly poverty while also helping contain the fiscal costs. However, increasing voluntary pensions and other private savings during working lives may pose a challenge, particularly for the low-skilled and less educated due to their lower earnings and participation in voluntary pension plans. [11]

The Impact of the COVID-19 Pandemic on public pension plans

United States

The COVID-19 pandemic has had significant effects on public pension plans in the U.S. It has disrupted daily life and the economy, causing investment markets to decline sharply in March. While some struggling plans may face crises, many are positioned to recover over time. However, the pandemic's ongoing impact on investment markets and government revenues poses a significant threat, particularly to poorly funded plans. Some governments have already canceled or reduced contributions intended to support pension funding.

Investment Returns

Many public pension plans heavily rely on investment returns. Despite speculation about how the severe drop in capital markets in March 2020 might have affected solvency, most plans were not immediately endangered. Plans that are well-funded have more resilience to investment losses. While a 10% investment loss would reduce a fully funded plan to 90%, it would only decrease a plan that is 30% funded to 27%. Insolvency risk primarily depends on sponsors' ability to make sufficient contributions, not just investment returns.

Additionally, public pension plans typically operate on a fiscal year ending on June 30. The March 2020 market drop was preceded by significant gains, and by June 30, 2020, median plan returns were about 3.2%. While this is less than the assumed return of 7.25%, the impact over many years may be relatively small compared to total plan contributions.

Furthermore, investment returns in the following months exceeded expectations. Just as the drop in March did not significantly increase near-term insolvency risk, the subsequent rise in capital markets did not reduce it significantly either. Solvency concerns should focus on sponsors' ability to make contributions, not immediate investment returns. [12]

Economic Disruption

The pandemic has disrupted various industries, causing economic activity to decline and state and local government revenues to drop. Projected revenue shortfalls range from about 1% to over 25%, with an estimated aggregate state government budget shortfall of $290 billion for the 2021 fiscal year.

Governments are implementing measures such as layoffs, furloughs, and salary freezes to balance budgets. Some are considering early retirement programs to reduce payroll costs. Reductions in payroll directly affect pension plan contributions.

Plans funded through fixed statutory contribution rates may face challenges, as reductions in contributions may not be made up in the future, potentially deteriorating funded status. Plans funded on an actuarially determined basis will see contribution reductions made up with interest over time.

There is pressure to further reduce pension contributions to free up resources for essential services. However, this may prevent additional layoffs and stabilize the economy. Poorly funded plans could face sustainability issues, while maintaining full contributions may require undesirable reductions to essential services.

Most public pension plans are in a better position, but funding them while maintaining essential services may become increasingly challenging if revenue shortfalls persist. Some governments are borrowing to make pension contributions, but this could lead to further financial challenges if actual pension returns do not exceed borrowing costs. [12]

Demographic Impacts

The most significant and immediate impacts of the pandemic on public pension plans are indirect, affecting the sponsor’s ability to make contributions. However, there are also direct impacts expected to have a smaller effect on plan finances.

During November, the U.S. averaged over 1,200 reported COVID-19 deaths per day. The distribution of these deaths across the population is uneven, making it unclear how many public pension plan members are affected. It's also uncertain how long this increased mortality rate will continue. Plans with higher concentrations of at-risk populations may experience greater impacts from COVID-19 mortality.

In some jurisdictions, COVID-19 deaths and disabilities are presumed to be job-related for front-line workers, entitling them to higher benefits. The number of COVID-19-related deaths and disabilities and the impact of these presumptions vary depending on the severity of the pandemic locally and the plan provisions for job-related benefits.

There are emerging signs of increased retirements and terminations related to the pandemic. These changes may stem from budget reductions, childcare responsibilities, concerns about workplace safety, or other factors. The extent, duration, and financial effects of these trends on public pension plans are yet to be determined. [12]

Potential Long-Term Implications

The long-term effects of the pandemic on public pension plans bring uncertainty. If the economy and tax revenues recover slowly, ongoing budgetary pressures may add challenges to maintaining effective funding policies.

Persistent low interest rates may hinder achieving current assumed investment returns. Historically, public pension plans have adjusted their expected rate of return and increased investment risks to offset declining interest rates. With interest rates declining again due to the pandemic, plans may face the choice of further increasing portfolio risks or accepting lower expected returns. The extent to which sponsors can bear additional investment risk is unclear, and any reductions in future investment returns will require additional contributions to sustain the pension plan. [12]

If governmental budgetary challenges persist, there may be pressure to reduce pension benefits to lower costs over the long term. Some jurisdictions may act quickly to obtain immediate financial relief through raising employee contributions or reducing certain benefits like cost-of-living adjustments. However, changes to benefits may take many years to materialize in many jurisdictions, as they may only apply to newly hired employees. [13]

Categories

  1. Universal pension (also referred to as "demogrant", "categorical pension" or "citizens pension") is a pension where the only criteria for receiving it is age and citizenship, resp. residence. Some countries are specifying these criteria further, like The Netherlands which requires 50 years of residency between ages of 15 and 65 for a full pension and discounts it for every missing year by 2 per cent. This type of pension might be taxable. [14]
  2. Universal minimum pension overlaps the universal pension. The main difference is that the purpose of this system is to grant additional financial resources to those who did not or could not secure themselves income high enough from the contributory second pillar of the pension scheme, and therefore grants them minimum base income when they retire. The voluntary third pillar is not accounted for in this case. This system was first developed in Sweden in 1913. In addition, some countries, like Norway or Finland, have introduced a "taper" which grants pensioners some additional non-contributory income, even if they already earn the minimum pension. For example, in Finland with a 50% taper, you can earn a pension double the amount of the minimum pension before you lose the right to the non-contributory benefit.
  3. Recoverable social pension is a universal pension in terms of eligibility. The difference is that this pension is added to other taxable income and is subject to recovery by a surcharge.
  4. Social assistance pension covers all other types of social pension. It can be further divided by its means test, based on whether it is applied only on the individual or his entire household. Since the most important test considers the total income and assets possessed by an individual or the household, there can be a huge difference between those two types. In the individual means test, only the wealth of the individual matters and therefore it can better address individual poverty issues. The household means test considers the capability of other family members to take care of their retired family members.

Coverage across the world

Since 2000, the coverage of legal and effective social pension has been constantly increasing, especially in recent years. [15] Between 2015 and 2017 more than 90% of the elderly population were receiving their benefits in 34 countries. The number of countries where the effective social pension coverage was less than 20% fell to 36. In the same period, universal social pensions were established in many developing countries in Africa ( Botswana, Lesotho, Namibia and Zanzibar), Asia ( East Timor), and Latin America ( Bolivia). In contrast, Azerbaijan, Albania and Greece experienced a reduction in social pension coverage by 12 to 16%.

Philippines

Social Pension Program for Indigent Senior Citizens (SPISC) is a program for funding indigent senior citizens in Philippines. The government gives them a monthly payment of five hundred pesos which are intended to be used for medical equipment and services. [16] The program has been in place since 2011 and has since been modified several times; it currently offers assistance to senior citizens who are 60 years old and above.

Sweden

The Swedish social pension is administered by the Swedish Pensions Agency, and ensures a minimum level of pension for all residents [17]. It covers everyone who has worked or lived in Sweden [18]. The social pension consists of several different parts, such as the income pension, income pension complement, premium pension and guarantee pension [19]. It serves as a safety net, guaranteeing financial support to retirees who may not have substantial private savings or occupational pension benefits. The amount of the social pension varies based on an individual’s circumstances [20] and is payed out for as long as an individual is alive. The longer a person works, the higher the person's pension payment will be as a person continues to earn towards their pension throughout their lives. [21]

Denmark

The Danish social pension is a regular income paid to people who have reached retirement age by the Danish government. [22] Those who are residents of Denmark are entitled to the social pension. [23] The minimum age to receive the pension is determined by a person's date of birth: [24]

Birth Date Retirement age
31 December 1953 or earlier 65
1 January 1954 – 30 June 1954 65.5
1 July 1954 – 31 December 1954 66
1 January 1955 – 30 June 1955  66.5
1 July 1955 – 31 December 1962 67
1 January 1963 – 31 December 1966 68
1 January 1967 or later 69

A full public pension requires 40 years of residence in Denmark. [25] As of 2024, the basic amount of the social pension is DKK 6,928 per month [24], however this basic amount may be reduced if it is determined than an individual makes more than DKK 348,700 per year. [26] There is also a pension supplement of DKK 8,016 per month for single individuals, and DKK 4,102 per month for married couples. [24]

Czech Republic

The pension framework in the Czech Republic is bifurcated into two distinct segments.

The primary segment encompasses the compulsory foundational pension coverage, which operates on a defined benefit (DB) structure and is financed through a pay-as-you-go (PAYGO) system. This segment is all-encompassing, catering to every economically active citizen without any industry-specific variations, except for minor differences in administrative processes within certain public service sectors such as the military and law enforcement. The benefits from this foundational pension coverage are claimed by over 99% of individuals who surpass the stipulated retirement age.

Additionally, the Czech pension model includes an elective supplementary pension insurance bolstered by governmental contributions. This is a defined contribution (DC) scheme and is capital-funded. Within the context of the European Union, this supplementary insurance is recognized as the pension system’s third pillar. It also encompasses life insurance products offered by private insurers. Despite its existence, the pensions from this third pillar currently constitute an insubstantial fraction of retirees’ income. Notably, this pillar falls under the purview of the Ministry of Finance, hence its absence from the Ministry of Labor and Social Affairs’ website. Contrary to the norm in other EU nations, the Czech pension scheme does not feature a second pillar typically associated with employer pension plans.

The core legal statute that delineates the rights to a pension from the basic pension insurance, the methodology for calculating pension benefits, and the terms of disbursement is Act No. 155/1995 Coll., on pension insurance. This act, subject to amendments, was enacted on January 1, 1996. [10]

The Netherlands

The Dutch social pension is known as the AOW pension, and is available to Dutch residents. [27] Each year an individual lives in The Netherlands they add an additional 2% to their AOW pension. [27] A full AOW pension can be obtained by living and working in the Netherlands and contributing towards the pension for 50 years before reaching retirement age [27]. The AOW pension amount varies depending on how much an individual has contributed towards their pension and their marital status [27]. The pension amount is adjusted every 6 months [27]. According to the OECD, as of 2022, the AOW pension amount for single individuals was EUR 1,344.94 per month and for couples the total amount was EUR 1,828.30 per couple [28]. The AOW pension age depends on a individual's birth-date, with those born before the 1st of January 1961 having a pension age of 67 years [29], while those born between the 1st of January 1961 and the 30th of September 1962 have a pension age of 67 years and 3 months [29], and those born after the 1st of October 1962 having a currently unknown pension age [29].

New Zealand

The social pension in New Zealand is called the New Zealand Superannuation [30]. The requirements for getting the pension are that you have to be at least 65 years old, be a citizen of New Zealand, a permanent resident of New Zealand, or hold a residence-class visa [30]. Additionally, an individual is required to have lived in New Zealand for a given time period after the age of 20 [30], and in particular to have lived in New Zealand for at least 5 years from the age of 50 to qualify for the Superannuation pension [30]. The exact amount of years required to have lived in New Zealand varies depending on an individual's date of birth [30]:

Date of Birth Required number of years lived in New Zealand to qualify
On or before June 30, 1959 10 years
1 July 1959 - 30 June 1961 11 years
1 July 1961 - 30 June 1963 12 years
1 July 1963 - 30 June 1965 13 years
1 July 1965 - 30 June 1967 14 years
1 July 1967 - 30 June 1969 15 years
1 July 1969 - 30 June 1971 16 years
1 July 1971 - 30 June 1973 17 years
1 July 1973 - 30 June 1975 18 years
1 July 1975 - 30 June 1977 19 years
On or after 1 July 1977 20 years

According to the OECD, as of 2022, the basic pension for a single (unmarried) individual was NZD 27,988.48 per year. [31] The pension rate is adjusted each year by movement in the Consumer Price Index (CPI) as well as the average net-of-tax weekly wage [31].

See also

References

  1. ^ Blake, David (2006). Pension Economics. Hoboken, NJ: John Wiley. ISBN  0-470-05844-7.
  2. ^ Holzmann, Robert (2005). Old Age Income Support In the 21st Century. Washington, DC: The World Bank.
  3. ^ a b "Social Security History". www.ssa.gov. Retrieved 2019-04-08.
  4. ^ Wilensky, Harold L. (2002). Rich democracies : political economy, public policy, and performance. Berkeley: University of California Press. ISBN  9780520928336. OCLC  52843450.
  5. ^ "Social protection in older age | Pension watch". www.pension-watch.net. Retrieved 2019-04-08.
  6. ^ Roser, Max; Ortiz-Ospina, Esteban (2016-10-18). "Government Spending". Our World in Data.
  7. ^ Bank, The World (1994-09-30). "Averting the old age crisis : policies to protect the old and promote growth". pp. 1–436.
  8. ^ "What is Social Security? | National Academy of Social Insurance". www.nasi.org. Retrieved 2019-04-08.
  9. ^ CICHON, Michael, et al. Financing social protection. International Labour Organization, 2004.
  10. ^ a b Ministry of Labour and Social Affairs (2024-03-16). "Pension Insurance". pp. 1–8.
  11. ^ Shang, Baoping, "Chapter 4. Pension Reform and Equity: The Impact on Poverty of Reducing Pension Benefits", Equitable and Sustainable Pensions, International Monetary Fund, ISBN  978-1-61635-950-8, retrieved 2024-04-25
  12. ^ a b c d "The Impact of the COVID-19 Pandemic on Public Pension Plans | American Academy of Actuaries". www.actuary.org. Retrieved 2024-04-25.
  13. ^ Jared Weiner Erica Orange Edie Weiner (April 2023). Megatrends Impacting the Future of Retirement Plans. pp. 6–9. {{ cite book}}: line feed character in |last= at position 13 ( help); line feed character in |title= at position 35 ( help)CS1 maint: date and year ( link)
  14. ^ Willmore, Larry (2012). "Types of Social Pension" (PDF).
  15. ^ "Social protection for older persons: Policy trends and statistics 2017–19" (PDF). International Labor Office. 2019.
  16. ^ "P23 B appropriated in 2019 for Indigent Senior Citizens' Social Pension". 23 August 2018.
  17. ^ "The Swedish pension system | Pensionsmyndigheten". www.pensionsmyndigheten.se. Retrieved 2024-04-19.
  18. ^ "The Swedish pension system and pension projections until 2070" (PDF). European Commission. 10 December 2020. p. 1. Retrieved 19 April 2024.
  19. ^ "The Swedish pension system | Pensionsmyndigheten". www.pensionsmyndigheten.se. Retrieved 2024-04-19.
  20. ^ "The Swedish pension system | Pensionsmyndigheten". www.pensionsmyndigheten.se. Retrieved 2024-04-19.
  21. ^ "The Swedish pension system | Pensionsmyndigheten". www.pensionsmyndigheten.se. Retrieved 2024-04-19.
  22. ^ "State Pension". life in denmark.dk. Retrieved 2024-04-20.
  23. ^ "Pensions at a Glance 2023" (PDF). OECD. 2022. p. 2. Retrieved 20 April 2024.
  24. ^ a b c "State Pension". life in denmark.dk. Retrieved 20 April 2024.
  25. ^ "Pensions at a Glance 2023" (PDF). OECD. 2022. p. 2. Retrieved 20 April 2024.
  26. ^ "Pensions at a Glance 2023" (PDF). OECD. 2022. p. 3. Retrieved 20 April 2024.
  27. ^ a b c d e "What is the AOW pension? | NetherlandsWorldwide". Netherlands Worldwide. 2021-10-22. Retrieved 2024-04-23.
  28. ^ "Pensions at a Glance 2023 - Netherlands" (PDF). OECD. p. 1. Retrieved 23 April 2024.
  29. ^ a b c "What is my AOW state pension age? | NetherlandsWorldwide". NetherlandsWorldwide. 2021-10-22. Retrieved 2024-04-23.
  30. ^ a b c d e MSD, Who can get NZ Super - Work and Income, MSD, retrieved 2024-04-24
  31. ^ a b "Pensions at a Glance 2023 - New Zealand" (PDF). OECD. p. 2. Retrieved 24 April 2024.
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