Pension

A pension (also known as superannuation) is a retirement plan intended to provide a person with a secure income for life. Although a lottery may provide a pension, the common use of the term is to describe the payments a person receives upon retirement.

Financing

There are various ways in which a pension may be financed.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

In a funded defined contribution pension, contributions are paid into a fund during an individual's working life. The fund will be invested in assets, such as stocks, bonds and property, and grow in line with the return on these assets. (An unfunded defined contribution pension is an oxymoron.)

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers' contributions and taxes. This method of financing is known as Pay-as-you-go. It has been suggested that this model bears a disturbing resemblance to a Ponzi scheme.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

In a funded defined benefit arrangement, an actuary calculates the contributions that the plan sponsor must make to ensure that the pension fund will meet future payment obligations. This means that in a defined benefit pension, investment risk and investment rewards are typically assumed by the sponsor/employer and not by the individual. If a plan is not well-funded, the plan sponsor may not have the financial resources to continue funding the plan. In the United States, private employers must pay an insurance-type premium to the Pension Benefit Guaranty Corporation, a government agency whose role is to encourage the continuation and maintenance of voluntary private pension plans, provide timely and uninterrupted payment of pension benefits.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

A growing challenge for many nations is population ageing. As birth rates drop and life expectancy increases and ever larger portion of the population is elderly. This leaves fewer workers for each retired person. In almost all developed countries this means that the pension system will eventually go broke unless reformed. The three exceptions are Australia, Canada, and the United Kingdom where the pension system will be solvent for the foreseeable future. In Canada, for instance, the annual payments were increased by some 70% in 1998 to achieve this. These three nations also have an advantage from their relative openness to immigration.

Related Topics:
Population ageing - Life expectancy - Australia - Canada - United Kingdom

~ ~ ~ ~ ~ ~ ~ ~ ~ ~