Pension

A pension is a sum of money paid to an individual regularly after the individual retires from employment and has met the eligibility criteria. The individual typically has to work for an extended period of time with the same company to qualify for a pension. A pension is often part of a recruitment or incentive package to ensure that quality employees join and stay with an individual company or place of employment.

The first pension plans required the pensioner to be solely responsible for its growth and development. The next version of the pension plan was funded partly by the employer and partly by the pensioner. Contemporary pension plans support the retiree in three ways: support comes from the individual, the employer, and the state.

Background

Pensions have changed over time. The trend started with individuals funding their pensions. Later, companies or corporations began to supplement employee payments into the pension fund. As a result of late twentieth- and early twenty-first-century market and employment perspectives, the onus is now on the employee rather than the employer to provide post-employment financial security. Pension plans in the twenty-first century have many more options open to both employees and employers.

While monetary support packages for widows and retirees existed prior to the nineteenth century, the first named pension plan was established in 1884; the Baltimore and Ohio Railroad System in the United States was the first to provide a formal pension plan, which allowed employees over the age of sixty-five with more than ten years of service to retire with an annual pension of 20 to 35 percent of their salary and benefits.

In 1889, Otto von Bismarck of Germany enacted the Old Age and Disability Insurance Bill, granting a pension annuity to anyone over seventy. The first social security program was created in 1904 in Argentina, although an unofficial system had existed since the seventeenth century. The United Kingdom introduced the Old Age Pension Act in 1908, guaranteeing five shillings a week to anyone over seventy years of age whose annual income was less than £31.50.

Topic Today

The discussion of pensions in the twenty-first century is centered on two main points. The first is the type of pension plan that an individual seeks to obtain. The second point concerns the state's ability to fund a state-offered pension.

There are numerous options for a pension. The four primary variations of pension plans are personally-funded, employer-funded, state-funded, or combination-funded. The investment method used to fund each individual plan varies. IRAs (individual retirement accounts) are long-term investment plans to which an individual can contribute to prepare for retirement. Other investors may use stocks, bonds, or mutual funds to support themselves in postretirement years. Depending on the size and plan established between employee and employer, company pensions may be separate from individual employee accounts or jointly funded, as in the popular model of matching funds up to a predetermined amount. The state is also a large contributor to retirement. Several programs are used, the most common being Social Security. Many countries’ version of a pension plan is social security. These plans predate formal pension plans, often by centuries.

Social security programs raise several questions that relate to the viability of its success and longevity. These questions include the private–public funding issue, the eligibility age, and the underfunding/overdrawing consideration. The first concern is whether social security should be privately funded or funded by the state. A dedicated rate of payroll taxes funds social security. All monies levied from these taxes go into an account from which eligible individuals draw. Because of aging populations, many people currently contributing to each country’s social security could be unable to withdraw from the account. This is because the amount of money going into the account is less than the amount coming out.

Philosophical arguments are also a large part of the concern over pension plans. Conservative viewpoints entail that individuals should be responsible for managing their own futures and accounts. Additionally, according to conservatives, the responsibility for future success and stability during postretirement years is not the responsibility of other parties. That is, the state should not reallocate one person's assets to support another without the consent of the first. The liberal viewpoint entails that the state is responsible for supporting the people within its care. This means the state must provide a retirement or pension plan sufficient for caring for its people in their postretirement years.

The reality of this philosophical debate comes to whether the state should control retirement funds, or if the funds should be privately administered. Conservatives adopting a free-market perspective endorse privatized social security on the grounds that a private model allows the individual to pursue riskier and more lucrative retirement opportunities, as opposed to the safer and less lucrative avenue used by the state. Liberals, who claim that the state is responsible for supporting the people in postretirement years, want a state-run fund. In the event of a market crash, the state can still provide for the individual, as opposed to the lack of support individuals have during a recession or depression.

As the twenty-first century progressed, pensions evolved. Within private corporations, the traditional idea of employee-sponsored pensions with the guarantees of a specific retirement benefit continued to decline. Government and public sector jobs, along with union-supported industries, older private sector companies, and nonprofit groups were the industries where these pensions were most often still found. These traditional plans were largely replaced by defined contribution plans such as 401(k)s and 403(b)s. Hybrid plans, Individual Retirement Accounts (IRAs), Self-Invested Personal Pensions, and personal pension plans offered by insurance companies were also options. When choosing a pension plan, some issues to consider were tax implications, the degree of control over investments, fees, the ability to contribute and withdraw, employer matching contributions, and whether the pension could be carried from one place of employment to another.

Bibliography

Achenbaum, W. Andrew. Social Security: Visions and Revisions. Cambridge UP, 1988.

Betti, Gianni, et al. Unequal Ageing in Europe: Women’s Independence and Pensions. Palgrave Macmillan, 2015.

Clark, Gordon L., Alicia H. Munnell, and Michael Orszag. The Oxford Handbook of Pensions and Retirement Income. Oxford UP, 2006.

Cobb, J. Adam. "Risky Business: The Decline of Defined Benefit Pensions and Firms’ Shifting of Risk." Organization Science, vol. 26, no. 5, 2015, pp. 1332–50.

Gratton, Peter, et al. "What Is a Pension? Types of Plans and Taxation." Investopedia, 7 Aug. 2024, www.investopedia.com/terms/p/pensionplan.asp. Accessed 22 Oct. 2024.

Jackson-Kirby, Ruth, et al. "Personal Pensions: What Are They and How Do They Work?" NerdWallet, 15 Apr. 2024, www.nerdwallet.com/uk/pensions/what-is-a-personal-pension. Accessed 22 Oct. 2024.

Morris, Beverley. "The Most Radical Changes to Pensions in Almost a Century." Family Law, vol. 45, no. 3, 2015, pp. 290–93.

Munnell, Alicia H. State and Local Pensions: What Now? Brookings Institute, 2012.

Pension Research Council. Fundamentals of Private Pensions. Oxford UP, 2010.

Pension Research Council, and Steven Sass. The Promise of Private Pensions: The First Hundred Years. Harvard UP, 1997.

Waring, M. Barton, and Robert Merton. Pension Finance: Putting the Risks and Costs of Defined Benefit Plans Back Under Your Control. Wiley, 2011.

"What is a Pension?" Pension Benefit Guaranty Corporation, 26 Feb. 2021, www.pbgc.gov/about/who-we-are/retirement-matters/post/2013/04/17/What-is-a-Pension. Accessed 22 Oct. 2024.