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{{Short description|Retirement fund}}
{{distinguish|Pension (lodging)|Pension (film)}}
{{Use dmy dates|date=March 2020}}
{{Personal finance}}

A '''pension''' ({{IPAc-en|ˈ|p|ɛ|n|ʃ|ən}}; {{etymology|la|{{Wikt-lang|la|pensiō}}|payment}}) 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. A pension may be either a "[[Defined benefit pension plan|defined benefit plan]]", where defined periodic payments are made in retirement and the contributions to the pension are adjusted to support these defined retirement payments, or a "[[defined contribution plan]]", under which defined amounts are paid in during working life, and the retirement payments are whatever can be afforded from the fund.<ref name="ReferenceA">{{cite book|last1=Thomas P. Lemke|first1=Gerald T. Lins|title=ERISA for Money Managers |date=2010|publisher=[[Thomson Reuters]]|isbn=9780314902023|url=https://books.google.com/books?id=af-_YgEACAAJ|access-date=11 October 2015}}</ref>

Pensions should not be confused with [[severance pay]]; the former is usually paid in regular amounts for life after retirement, while the latter is typically paid as a fixed amount after involuntary termination of employment before retirement.

The terms "[[Retirement plans in the United States|retirement plan]]" and "[[Superannuation in Australia|superannuation]]" tend to refer to a pension granted upon retirement of the individual;<ref>{{cite web|url=http://wordnetweb.princeton.edu/perl/webwn?s=superannuation|title=WordNet Search - 3.1|work=princeton.edu}}</ref> the 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'' (or ''super''<ref>{{cite web|url=http://www.industrysuper.com/ |title=Industry SuperFunds - Home |publisher=industrysuper.com |access-date=2010-09-17}}</ref>) in [[Superannuation in Australia|Australia]] and [[New Zealand]]. 

A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. [[Labor union]]s, the government, or other organizations may also fund pensions. Occupational pensions are a form of [[deferred compensation]], usually advantageous to employee and employer for [[tax]] reasons. Many pensions also contain an additional [[insurance]] aspect, since they often will pay benefits to survivors or disabled beneficiaries. Other vehicles (certain [[lottery]] payouts, for example, or an [[Annuity (financial contracts)|annuity]]) may provide a similar stream of payments. Individuals without access to employer-sponsored pensions sometimes use annuities to create a guaranteed income stream similar to a traditional pension.<ref>{{cite web |last=Haithcock |first=Stan |title=How to Set Up Your Own Pension |url=https://www.stantheannuityman.com/learn/how-to-set-up-your-own-pension |access-date=2025-09-09 |website=Stan The Annuity Man}}</ref>

The common use of the term ''pension'' is to describe the payments a person receives upon retirement, usually under predetermined legal or contractual terms. A recipient of a retirement pension is known as a ''[[pensioner]]'' or ''retiree''.

==Types==
===Employment-based pensions===
A retirement plan is an arrangement to provide people with an income during retirement when they are no longer earning a steady income from employment. Often retirement plans require both the employer and employee to contribute money to a fund during their employment in order to receive defined benefits upon retirement. It is a tax deferred savings vehicle that allows for the tax-free accumulation of a fund for later use as retirement income. Funding can be provided in other ways, such as from labor unions, government agencies, or self-funded schemes. Pension plans are therefore a form of "deferred compensation". A [[Small Self Administered Scheme|SSAS]] is a type of employment-based Pension in the UK. The [[401(k)]] is the iconic self-funded retirement plan that many Americans rely on for much of their retirement income; these sometimes include money from an employer, but are usually mostly or entirely funded by the individual using an elaborate scheme where money from the employee's paycheck is withheld, at their direction, to be contributed by their employer to the employee's plan. This money can be tax-deferred or not, depending on the exact nature of the plan.

====Military====
Some countries also grant pensions to military veterans. Military pensions are overseen by the government; an example of a standing agency is 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. Pensions may extend past the death of the veteran himself, continuing to be paid to the widow.

In the U.S., retired military receive a ''[[military retirement pay]]'', not called a "pension" as they can be recalled to active duty at any time. Military retirement pay is 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.<ref>{{Cite web |title=Retired Pay |url=https://myarmybenefits.us.army.mil/Benefit-Library/Federal-Benefits/Retired-Pay |access-date=2022-06-26 |website=myarmybenefits.us.army.mil |language=en-us}}</ref>

==={{anchor|State pension}}<!-- [[State pension]] redirects here-->State pension===
Many countries have created schemas for their citizens and residents to provide income when they retire (or in some cases 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, and depends on an individual's contribution history. For examples, see [[National Insurance]] in the UK, or [[Social Security (United States)|Social Security]] in the United States of America.

===Social pensions===
Social pensions are intended to prevent economic deprivation at old age. Over 80 countries have [[social pension]]s.<ref>{{cite web|url=http://www.pension-watch.net/country-fact-file/ |title=Country map|work=pension-watch.net}}</ref> Examples of universal pensions include [[New Zealand]] Superannuation<ref>{{cite web |url=http://www.workandincome.govt.nz/individuals/a-z-benefits/nz-superannuation.html|title=New Zealand Superannuation |work=workandincome.govt.nz}}</ref> and the Basic Retirement Pension of [[Mauritius]].<ref>{{cite SSRN|first=Larry|last=Willmore |title=Universal Pensions in Mauritius: Lessons for the Rest of Us |date=April 2003 |ssrn=398280}} United Nations DESA Discussion Paper No. 32. {{doi|10.2139/ssrn.398280}}.</ref> Most social pensions are [[means test]]ed, such as [[Supplemental Security Income]] in the United States of America or the "older person's grant" in [[South Africa]].<ref>{{cite web |title=Old age pension |publisher=GCIS |url=http://www.services.gov.za/services/content/Home/ServicesForPeople/Socialbenefits/oldagegrant/en_ZA |access-date=7 April 2013}}</ref>

===Disability pensions===
{{Main|Disability pension}}
Some pension plans will provide for members in the event they suffer a [[disability]]. This may take the form of early entry into a retirement plan for a disabled member below the normal retirement age.{{Citation needed|date=March 2024}}

==Defined benefit plans==
{{Main|Defined benefit pension plan}}
A defined benefit (DB) pension plan is a plan in which workers accrue pension rights during their time at a firm and upon retirement the firm pays them a benefit that is a function of that worker's tenure at the firm and of their earnings.<ref>Gruber, J. (2010) Public Finance and Public Policy, Worth Publishers. G-3 (Glossary)</ref> In other words, a DB plan is a plan in which the benefit on retirement is determined by a set formula, rather than depending on investment returns. Government pensions such as [[Social Security (United States)|Social Security]] in the United States are a type of defined benefit pension plan. Traditionally, defined benefit plans for employers have been administered by institutions which exist specifically for that purpose, by large businesses, or, for [[government]] workers, by the government itself. A traditional form of defined benefit plan is the ''final salary'' plan, under which the pension paid is equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by a factor known as the ''accrual rate''. The final accrued amount is available as a monthly pension or a lump sum, but usually monthly.

In the US, {{uscsub|26|414|j}} specifies a defined benefit plan to be any pension plan that is not a defined contribution plan (see below) where a defined contribution plan is any plan with individual accounts. A traditional pension plan that ''defines'' a ''benefit'' for an employee upon that employee's retirement is a defined benefit plan. In the U.S., corporate defined benefit plans, along with many other types of defined benefit plans, are governed by the Employee Retirement Income Security Act of 1974 (ERISA).<ref>Lemke and Lins, ''ERISA for Money Managers'', §1:2 (Thomson West, 2013 ed.).</ref>

In the [[United Kingdom]], benefits are typically indexed for inflation (known as [[Retail Prices Index (United Kingdom)|Retail Prices Index]] (RPI)) as required by law for registered pension plans.<ref>{{cite web |url=http://www.pensionsadvisoryservice.org.uk/Pension_Rights/Pension_Increases/ |title=The Pensions Advisory Service |publisher=The Pensions Advisory Service |access-date=2010-09-17 |archive-date=28 May 2010 |archive-url=https://web.archive.org/web/20100528052454/http://www.pensionsadvisoryservice.org.uk/Pension_Rights/Pension_Increases |url-status=dead }}</ref> Inflation during an employee's retirement affects the purchasing power of the pension; the higher the inflation rate, the lower the purchasing power of a fixed annual pension. This effect can be mitigated by providing annual increases to the pension at the rate of inflation (usually capped, for instance at 5% in any given year). This method is advantageous for the employee since it stabilizes the purchasing power of pensions to some extent.

If the pension plan allows for early retirement, payments are often reduced to recognize that the [[retiree]]s will receive the payouts for longer periods of time. In the United States, under the [[Employee Retirement Income Security Act|Employee Retirement Income Security Act of 1974]], any reduction factor less than or equal to the [[actuarial]] early retirement reduction factor is acceptable.<ref>{{cite web|title=Early Retirement Provisions in Defined Benefit Pension Plans|first=Ann C.|last=Foster|url=http://www.bls.gov/opub/cwc/archive/winter1996art3.pdf |archive-url=https://web.archive.org/web/20031206135537/http://www.bls.gov/opub/cwc/archive/winter1996art3.pdf |archive-date=2003-12-06 |url-status=live|website=bls.gov}}</ref>

Many DB plans include early retirement provisions to encourage employees to retire early, before the attainment of normal retirement age. Companies would rather hire younger employees at lower wages. Some of those provisions come in the form of additional ''temporary'' or ''supplemental benefits'', which are payable to a certain age, usually before attaining normal retirement age.<ref>{{cite book|title=Qualified Domestic Relations Order Handbook|first=Gary A.|last=Shulman|pages=199–200|publisher=Aspen Publishers Online|year=1999|isbn=978-0-7355-0665-7}}</ref>

Due to changes in pensions over the years, many pension systems, including those in [[Retirement Systems of Alabama|Alabama]], [[CalPERS|California]], [[Indiana Public Retirement System|Indiana]], and [[New York State Common Retirement|New York]], have shifted to a tiered system.<ref>{{cite web|last=Bauer|first=Elizabeth|url=https://www.forbes.com/sites/ebauer/2019/06/07/more-cautionary-tales-from-illinois-tier-ii-pensions-and-why-actuaries-matter/|title=More Cautionary Tales From Illinois: Tier II Pensions (And Why Actuaries Matter)|work=Forbes|date=7 June 2019|access-date=19 July 2020}}</ref> For a simplified example, suppose there are three employees that pay into a state pension system: Sam, Veronica, and Jessica. The state pension system has three tiers: Tier I, Tier II, and Tier III. These three tiers are based on the employee's hire date (i.e. Tier I covers 1 January 1980 (and before) to 1 January 1995, Tier II 2 January 1995 to 1 January 2010, and Tier III 1 January 2010 to present) and have different benefit provisions (e.g. Tier I employees can retire at age 50 with 80% benefits or wait until 55 with full benefits, Tier II employees can retire at age 55 with 80% benefits or wait until 60 for full benefits, Tier III employees can retire at age 65 with full benefits). Therefore, Sam, hired in June 1983, would be subject to the provisions of the Tier I scheme, whereas Veronica, hired in August 1995, would be permitted to retire at age 60 with full benefits and Jessica, hired in December 2014, would not be able to retire with full benefits until she became 65.

===Criticisms===
{{more citations needed section|date=October 2015}}
Traditional defined benefit plan designs (because of their typically flat accrual rate and the decreasing time for interest discounting as people get closer to retirement age) tend to exhibit a J-shaped accrual pattern of benefits, where the present value of benefits grows quite slowly early in an employee's career and accelerates significantly in mid-career: in other words it costs more to fund the pension for older employees than for younger ones (an "age bias"). Defined benefit pensions tend to be less [[Portability (social security)|portable]] than defined contribution plans, even if the plan allows a lump sum cash benefit at termination. The open-ended nature of these risks to the employer is the reason given by many employers for switching from defined benefit to defined contribution plans over recent years. The risks to the employer can sometimes be mitigated by discretionary elements in the benefit structure, for instance in the rate of increase granted on accrued pensions, both before and after retirement.

The age bias, reduced [[Portability (social security)|portability]] and open ended risk make defined benefit plans better suited to large employers with less mobile workforces, such as the public sector (which has open-ended support from taxpayers). This coupled with a lack of foresight on the employers part means a large proportion of the workforce are kept in the dark over future investment schemes.

Defined benefit plans are sometimes criticized as being paternalistic as they enable employers or plan trustees to make decisions about the type of benefits and family structures and lifestyles of their employees. However they are typically more valuable than defined contribution plans in most circumstances and for most employees (mainly because the employer tends to pay higher contributions than under defined contribution plans), so such criticism is rarely harsh.

The "cost" of a defined benefit plan is not easily calculated, and requires an actuary or actuarial software. However, even with the best of tools, the cost of a defined benefit plan will always be an estimate based on economic and financial assumptions. These assumptions include the average retirement age and lifespan of the employees, the returns to be earned by the pension plan's investments and any additional taxes or levies, such as those required by the Pension Benefit Guaranty Corporation in the U.S. So, for this arrangement, the benefit is relatively secure but the contribution is uncertain even when estimated by a professional. This has serious cost considerations and risks for the employer offering a pension plan.

One of the growing concerns with defined benefit plans is that the level of future obligations will outpace the value of assets held by the plan ([[Unfunded mandate]]). This "underfunding" dilemma can be faced by any type of defined benefit plan, private or public, but it is most acute in governmental and other public plans where political pressures and less rigorous accounting standards can result in excessive commitments to employees and retirees, but inadequate contributions. Many states and municipalities across the United States of America and Canada now face chronic pension crises.<ref name="ReferenceA"/><ref>{{Citation| last1 =Tufts| first1 =William| last2 =Fairbanks| first2 =Lee| title =Pension Ponzi: How Public-sector Unions are Bankrupting Canada's Health Care, Education and Your Retirement| place =Mississauga, Ontario| publisher =Wiley| year =2011| pages =210| url =http://fairpensionsforall.net/book/| isbn =978-1118098738| access-date =28 May 2014| archive-date =28 May 2014| archive-url =https://web.archive.org/web/20140528054920/http://fairpensionsforall.net/book/| url-status =dead}}</ref><ref>{{cite web | url =https://www.nytimes.com/2018/04/14/business/pension-finance-oregon.html | title =A$76,000 Monthly Pension: Why States and Cities Are Short on Cash | last =Walsh | first =Mary | date =14 April 2018 | website =The New York Times | access-date =1 May 2018 | quote =Oregon – like many other states and cities, including New Jersey, Kentucky and Connecticut – is caught in a fiscal squeeze of its own making. Its economy is growing, but the cost of its state-run pension system is growing faster. }}</ref>

==Defined contribution plans==
{{Main|Defined contribution plan}}
A defined contribution (DC) plan, is a pension plan where employers set aside a certain proportion (i.e. contributions) of a worker's earnings (such as 5%) in an investment account, and the worker receives this savings and any accumulated investment earnings upon retirement.<ref>Gruber, J. Public Finance and Public Policy, Worth Publishers. G-3 (Glossary)</ref> These contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. Defined contribution plans have become widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of defined benefit plans in the U.S. has been steadily declining, as more and more employers see pension contributions as a large expense avoidable by disbanding the defined benefit plan and instead offering a defined contribution plan.

Money contributed can either be from employee salary deferral or from employer contributions. The [[Portability (social security)|portability]] of defined contribution pensions is legally no different from the portability of defined benefit plans. However, because of the cost of administration and ease of determining the plan sponsor's liability for defined contribution plans (you do not need to pay an actuary to calculate the lump sum equivalent that you do for defined benefit plans) in practice, defined contribution plans have become generally portable.

In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer, and these risks may be substantial.<ref>{{cite journal |last=Cannon |first=Edmund |author2=Ian Tonks |title=The Value and Risk of Defined Contribution Pension Schemes: International Evidence |journal=Journal of Risk and Insurance |volume=80 |pages=95–119 |year=2012 |doi=10.1111/j.1539-6975.2011.01456.x |hdl=10036/86956 |url=http://www.bristol.ac.uk/efm/media/workingpapers/working_papers/pdffiles/dp09610.pdf |s2cid=7975555 |archive-url=https://web.archive.org/web/20190430181403/http://www.bristol.ac.uk/efm/media/workingpapers/working_papers/pdffiles/dp09610.pdf |archive-date=2019-04-30 |url-status=live}}</ref> In addition, participants do not necessarily purchase annuities with their savings upon retirement, and bear the risk of outliving their assets. (In the United Kingdom, for instance, it is a legal requirement{{update inline|date=April 2020}} to use the bulk of the fund to purchase an annuity.)

The "cost" of a defined contribution plan is readily calculated, but the benefit from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the ''contribution is known'' but the ''benefit is unknown'' (until calculated).

Despite the fact that the participant in a defined contribution plan typically has control over investment decisions, the plan sponsor retains a significant degree of fiduciary responsibility over investment of plan assets, including the selection of investment options and administrative providers.

===Examples===
In the United States, the legal definition of a defined contribution plan is a plan providing for an individual account for each participant, and for benefits based solely on the amount contributed to the account, plus or minus income, gains, expenses and losses allocated to the account (see {{uscsub|26|414|i}}). Examples of defined contribution plans in the United States include [[individual retirement account]]s (IRAs) and [[401(k)|401(k) plans]]. In such plans, the employee is responsible, to one degree or another, for selecting the types of [[investment]]s toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined [[mutual fund]]s to selecting individual [[capital stock|stock]]s or other financial assets. Most self-directed retirement plans are characterized by certain [[tax advantage]]s, and some provide for a portion of the employee's contributions to be matched by the employer. In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain age—typically the year the employee reaches 59.5 years old (with a small number of exceptions)—without incurring a substantial penalty.

Advocates of defined contribution plans point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not possess the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts.

In the US, defined contribution plans are subject to [[Internal Revenue Service|IRS]] limits on how much can be contributed, known as the section 415 limit. In 2009, the total deferral amount, including employee contribution plus employer contribution, was limited to $49,000 or 100% of compensation, whichever is less. The employee-only limit in 2009 was $16,500 with a $5,500 catch-up. These numbers usually increase each year and are indexed to compensate for the effects of inflation. For 2015, the limits were raised to $53,000 and $18,000,<ref>{{Cite web|url=https://www.irs.gov/uac/Newsroom/IRS-Announces-2015-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$18,000-to-their-401(k)-plans-in-2015|title=IRS Announces 2015 Pension Plan Limitations; Taxpayers May Contribute up to $18,000 to their 401(k) plans in 2015}}</ref> respectively.

Examples of defined contribution pension schemes in other countries are, the UK's personal pensions and proposed [[National Employment Savings Trust]] (NEST), Germany's Riester plans, Australia's Superannuation system and New Zealand's KiwiSaver scheme. Individual pension savings plans also exist in Austria, Czech Republic, Denmark, Greece, Finland, Ireland, Netherlands, Slovenia and Spain.<ref>{{cite book |author1=((Economic Policy Committee)) |name-list-style=and |author2=((European Commission)) |title=The impact of ageing on public expenditure |year=2006 |publisher=EU}}{{full citation needed|date=April 2023|reason=If this is really a book, the ISBN would be nice.}}</ref>

[[Notional Defined Contributions]] are defined contribution plans where contributions are tracked as a [[notional amount]] for each individual, for example in Italy, Latvia, Poland and Sweden.<ref name="Belloni"/>

==Risk sharing pensions==
In collective risk sharing schemes members pool their contributions and to a greater or less extent share the investment and [[longevity risk]]. There are multiple naming conventions for these plans reflecting the fact that the future payouts are a ''target'' or ''ambition'' of the plan sponsor rather than a guarantee, common naming conventions include: 
* Defined Ambition Plans
* [[Target benefit plan]]s
* Collective Defined Contribution Schemes
* [[Tontine]] Pensions

===Risk sharing pension sponsor examples===
* US: [[State of Wisconsin Investment Board]]
* US: [[TIAA]]
* UK: [[Royal Mail]] Pension Fund 
* Netherlands: [[Stichting Pensioenfonds ABP]]
* Denmark: [[Arbejdsmarkedets Tillægspension]]

==Life annuity==
On retirement, the member's account can be used to purchase an [[life annuity]] which then provides a regular pension income until [[death]]. [[Life annuity]] insures against the [[risk of longevity]] and outliving retirement savings. Due to generally longer [[Life expectancy#Sex differences|female life expectancy]] women have to contribute more to pensions to reach the same pension annuities in case of identical retirement age.<ref>{{Cite journal |last=Jefferson |first=Therese |date=2009-10-01 |title=Women and Retirement Pensions: A Research Review |url=https://doi.org/10.1080/13545700903153963 |journal=Feminist Economics |volume=15 |issue=4 |pages=115–145 |doi=10.1080/13545700903153963 |issn=1354-5701}}</ref>

==Funded==
In a [[Defined benefit pension plan#Funded pension plans|funded pension plan]], contributions are invested in a fund towards meeting the future pension benefits. All plans must be funded in some way, so this type of plan is more accurately known as '''pre-funded''' or '''fully-funded'''. The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an [[actuary]] 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.

Occupational pensions are typically provided through employment agreements between workers and employers, and their financing structure must meet legislative requirements. In common-law jurisdictions, the law requires that pensions be pre-funded in trusts, with a range of requirements to ensure the trustees act in the best interests of the beneficiaries. These jurisdictions account for over 80% of assets held by private pension plans around the world.<ref>{{Cite web|title=Pensions - Private pension assets - OECD Data|url=http://data.oecd.org/pension/private-pension-assets.htm|access-date=2021-08-01|website=theOECD|language=en}}</ref>  Of the $50.7 trillion of global assets in 2019, $32.2T were in U.S. plans, the next largest being the U.K. ($3.2T), Canada ($2.8T), Australia ($1.9T), Singapore ($0.3T), Hong Kong and Ireland (each roughly $0.2T), New Zealand, India, Kenya, Nigeria, Jamaica, etc.{{Citation needed|date=March 2024}}

Civil-law jurisdictions with statutory trust vehicles for pensions include the Netherlands ($1.8T), Japan ($1.7T), Switzerland ($1.1T), Denmark ($0.8T), Sweden, Brazil and S. Korea (each $0.5T), Germany, France, Israel, P.R. China, Mexico, Italy, Chile, Belgium, Spain and Finland (each roughly $0.2T), etc. Without the vast body of common law to draw upon, statutory trusts tend to be more uniform and tightly regulated.{{Citation needed|date=March 2024}}

Canadians have the option to open a [[registered retirement savings plan]] (RRSP), as well as a range of employee and state pension programs. This plan allows contributions to this account to be marked as un-taxable income and remain un-taxed until withdrawal. Most countries' governments will provide advice on pension schemes.{{citation needed|date=July 2016}}

Several countries have hybrid systems which are partially funded. Spain set up the Social Security Reserve Fund and France set up the [[Pensions Reserve Fund (France)|Pensions Reserve Fund]]; in Canada the [[Canada Pension Plan|wage-based retirement plan]] (CPP) is partially funded, with assets managed by the [[CPP Investment Board]] while the U.S. [[Social Security (United States)|Social Security]] system is partially funded by investment in special U.S. Treasury Bonds.

==Pay-as-you-go==
{{Main|Pay-as-you-go pension plan}}
In an [[Defined benefit pension plan#Unfunded pension plans|unfunded]] or pay-as-you-go ([[PAYGO]]) pension plan current pension benefits are paid from current pension contributions. Pension arrangements provided by the state in many countries in the world are at least partially unfunded, with benefits paid directly from current workers' contributions and taxes. This method of financing is known as '''pay-as-you-go''', or '''[[PAYGO]]'''.<ref>{{cite web|url=http://stats.oecd.org/glossary/detail.asp?ID=5310|title=Unfunded Pension Plans|work=[[OECD]] Glossary of Statistical Terms|access-date=26 January 2009|archive-date=10 August 2011|archive-url=https://web.archive.org/web/20110810022211/http://stats.oecd.org/glossary/detail.asp?ID=5310|url-status=dead}}</ref> The social security systems of many European countries are unfunded,<ref>[https://www.economist.com/special-report/2011/04/09/falling-short "Falling Short"] ''The Economist'' 7 April 2011. Retrieved 30 September 2012.</ref> having current benefits paid directly out of current taxes and social security contributions.
Social and state pensions depend largely upon legislation and future taxes for their sustainability. Some have identified funds, but these hold essentially [[government bond]]s—a form of [[IOU]].<ref>{{Cite web|last=AARP|title=How is Social Security Funded?|url=https://www.aarp.org/retirement/social-security/questions-answers/how-is-social-security-funded.html|access-date=2021-08-01|website=AARP|language=english}}</ref>
Some countries, such as Germany, France, Italy and Spain, have very little saved pension assets and depend the pay-as-you-go approach. Nevertheless, in terms of typical net income replacement in retirement, these countries rank well relative to those with pension assets.<ref>{{Cite web|title=Pensions at a Glance : Pension replacement rates|url=https://stats.oecd.org/index.aspx?queryid=69535|access-date=2021-08-02|website=stats.oecd.org}}</ref> The pay-as-you-go financing depends on [[Intergenerationality|intergenerational]] solidarity and the future [[dependency ratio]].<ref>{{Cite web|last=Bauer|first=Elizabeth|title=What Is Intergenerational Solidarity, And Why Does It Matter For The French - And For Us?|url=https://www.forbes.com/sites/ebauer/2020/02/18/what-is-intergenerational-solidarity-and-why-does-it-matter-for-the-frenchand-for-us/|access-date=2021-08-02|website=Forbes|language=en}}</ref><ref>{{Cite web|date=2015-07-23|title=Securing Employer-Based Pensions: An International Perspective|url=https://pensionresearchcouncil.wharton.upenn.edu/publications/books/securing-employer-based-pensions-an-international-perspective/|access-date=2021-08-02|website=Pension Research Council|language=en-US}}</ref><ref>{{Cite book|last1=Klein |first1=James P|title=Foreign pension plans, 1985: the new rules under IRC section 404A |last2=Practising Law Institute|date=1985|publisher=Practising Law Institute |location=New York, N.Y.|language=English|oclc=12414718}}</ref><ref>{{Cite book|url=https://books.google.com/books?id=lwG1AAAAIAAJ&q=%22security+contract%22|title=Foreign Pension Plans, 1985: The New Rules Under IRC Section 404A |date=1985|publisher=Practising Law Institute|pages=search "security contract"|language=en}}</ref><ref>{{Cite book |url=https://books.google.com/books?id=zOQWAQAAMAAJ&q=85-5242|title=Taxes International|date=1985|publisher=Taxes International|language=en}}</ref>
In Pay-as-you-go pension systems working adults pay for the current pensions of their parents and grandparents [[generation]]s, while the pensions of people above [[retirement age]] are paid by child and grandchild [[generation]]s. 

== Actuarial fairness==
For pension schemes with actuarial fairness the [[Discounted utility|discounted]] total of contributions for each individual is equal to the discounted total of expected pension benefits received.<ref>{{Cite journal |last=Augusztinovics |first=Maria |date=2002 |title=Issues in pension system design |url=https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-246X.00112 |journal=International Social Security Review |language=en |volume=55 |issue=1 |pages=21–35 |doi=10.1111/1468-246X.00112 |issn=1468-246X}}</ref><ref name="Belloni">{{Cite journal |last=Belloni |first=Michele |last2=Maccheroni |first2=Carlo |date=2013 |title=Actuarial Fairness When Longevity Increases: An Evaluation of the Italian Pension System |url=https://doi.org/10.1057/gpp.2013.27 |journal=The Geneva Papers on Risk and Insurance - Issues and Practice |language=en |volume=38 |issue=4 |pages=638–674 |doi=10.1057/gpp.2013.27 |issn=1468-0440}}</ref> Pensions can [[Redistribution of income and wealth|redistribute]] within a generation and between generations.<ref name="l134">{{cite journal |last1=Klos |first1=Jonas |last2=Krieger |first2=Tim |last3=Stöwhase |first3=Sven |date=2022 |title=Measuring intra-generational redistribution in PAYG pension schemes |url=https://link.springer.com/content/pdf/10.1007/s11127-021-00914-w.pdf |journal=Public Choice |volume=190 |issue=1–2 |pages=53–73 |doi=10.1007/s11127-021-00914-w |issn=0048-5829 |access-date=18 July 2025 |doi-access=free}}</ref> 

== Underfunding ==
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. For example, in 2009, the majority of states have unfunded pension liabilities exceeding all reported state debt. [[Bradley Belt]], former executive director of the PBGC (the [[Pension Benefit Guaranty Corporation]], the federal agency that insures private-sector defined-benefit pension plans in the event of bankruptcy), testified before a Congressional hearing in October 2004, "I am particularly concerned with the temptation, and indeed, 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. Unfortunately, the current calculation appears to be that shifting pension liabilities onto other premium payers or potentially taxpayers is the path of least resistance rather than a last resort."{{Citation needed|date=March 2024}} Challenges have further been increased by the post-2007 credit crunch. Total funding of the nation's 100 largest corporate pension plans fell by $303bn in 2008, going from a $86bn surplus at the end of 2007 to a $217bn deficit at the end of 2008.<ref>{{cite news|title=Largest U.S. pension plans assets fall $217 billion short|url=https://www.usatoday.com/money/perfi/retirement/2009-03-11-pension-plan-assets-short_N.htm|newspaper=USA Today, citing a report by Watson Wyatt|date=10 March 2009}}</ref> 

=== Dependency ratio ===
A growing challenge for pay-as-you-go pensions is the [[dependency ratio]].<ref name="i599">{{cite journal | last1=Hyndman | first1=Rob J. | last2=Zeng | first2=Yijun | last3=Shang | first3=Han Lin | title=Forecasting the old-age dependency ratio to determine a sustainable pension age | journal=Australian & New Zealand Journal of Statistics | volume=63 | issue=2 | date=2021 | issn=1369-1473 | doi=10.1111/anzs.12330 | doi-access=free | pages=241–256 | url=https://figshare.com/articles/journal_contribution/Forecasting_the_Old-Age_Dependency_Ratio_to_Determine_a_Sustainable_Pension_Age/21529356/1/files/38163588.pdf | access-date=19 January 2025}}</ref> As [[List of countries by total fertility rate|birth rates in most countries drop]] and [[life expectancy]] increases, an ever-larger portion of the [[Population ageing|population is elderly]]. This leaves fewer workers for each retired person. In many developed countries this means that government and [[public sector]] pensions could potentially be a drag on their economies unless pension benefits are reduced or pension contribution are increased. Higher [[Dependency ratio#Old-age dependency ratio|old-age dependency ratio]] can result in a [[pensions crisis]].<ref name="l812"/>

=== Economic challenges ===
Low [[interest rate]]s can make it more difficult for pension funds to generate returns on their investments, which can in turn lead to lower benefits for pensioners. In addition, economic downturns can lead to higher [[Unemployment|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 worker|gig economy]].<ref>{{Cite web |title=Self-employment on the rise {{!}} Knowledge for policy |url=https://knowledge4policy.ec.europa.eu/foresight/topic/changing-nature-work/self-employment-rises-women-are-more-solopreneurs-then-men_en |access-date=2023-04-28 |website=knowledge4policy.ec.europa.eu}}</ref>

===Pension crisis===
{{Excerpt|Pension crisis|paragraphs=1|only=paragraphs}}

== Balancing pension funding ==
{{See also|Welfare reform}}
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.<ref>{{Cite news|date=2003-01-21|title=Perspectives : Réforme des retraites : les leviers d'action|language=fr|work=Le Monde.fr|url=https://www.lemonde.fr/societe/article/2003/01/21/perspectives-reforme-des-retraites-les-leviers-d-action_306332_3224.html|access-date=2021-04-13}}</ref> Low [[total fertility rate]]s and high [[Dependency ratio#Old-age dependency ratio|old-age dependency ratio]]s lead to forecasts of further pension reforms.<ref name="i599"/> Some software allow to predict the effect of pension policies.<ref name=":0">{{Cite web |title=Les effets macroéconomiques des leviers d'équilibrage du système de retraite à l'aide du modèle e-mod.fr de l'OFCE |url=https://www.cor-retraites.fr/sites/default/files/2019-12/Doc_6a_Emod.fr_OFCE.pdf |url-status=live |archive-url=https://web.archive.org/web/20191210225130/https://www.cor-retraites.fr/sites/default/files/2019-12/Doc_6a_Emod.fr_OFCE.pdf |archive-date=2019-12-10}}</ref> The electoral costs of pension reforms can depend on [[financial literacy]].<ref name="z416">{{cite journal | last1=Fornero | first1=Elsa | last2=Lo Prete | first2=Anna | title=Voting in the aftermath of a pension reform: the role of financial literacy | journal=Journal of Pension Economics and Finance | volume=18 | issue=1 | date=2019 | issn=1474-7472 | doi=10.1017/S1474747218000185 | doi-access=free | pages=1–30 | url=https://iris.unito.it/bitstream/2318/1671311/2/PREF%20aperTO_March2018%20post%20print.pdf | access-date=2 March 2025}}</ref><ref>{{Cite journal |last1=Barr |first1=Nicholas |last2=Diamond |first2=Peter |date=Spring 2006 |title=The Economics of Pensions |journal=Oxford Review of Economic Policy |volume=22 |issue=1 |pages=15–39 |doi=10.1093/oxrep/grj002 |issn=0266-903X}}</ref> 

=== Increase of pension contributions ===
This approach involves the increase of employee or employer pension contributions. This decreases the employee's [[disposable income]] and the rise of the [[direct labor cost]] degrades the labour demand and increases the costs of production, reducing [[Competition (economics)|competitivity]].<ref name=":0" /> 

=== Decrease of real pensions ===
One pension reform approach is to decrease the amount of [[Real and nominal value|real]] pensions paid to retirees<ref name=":0" /> or to decrease the length of pensions by increasing the [[retirement age]] closer to the [[life expectancy]].<ref name=":0" />

===Balancing total fertility rate===
Another pension reform approach is changing the pension system to be intrinsically balanced regardless of the [[total fertility rate]].<ref name="Banyár"/> One proposed pension system extends the [[overlapping generations model]] to balance the life-cycle of [[human capital]] formation through [[parenting]] and pensions.<ref name="Banyár">{{Cite journal |last=Banyár |first=József |date=2021 |title=The Outlines of a Possible Pension System Funded with Human Capital |journal=Risks |language=en |volume=9 |issue=4 |pages=66 |doi=10.3390/risks9040066 |doi-access=free |issn=2227-9091}}</ref>
The size of pension contributions can depend on the [[Parental dividend|children's pension contributions]], which balance out the pension system.<ref name="x314">{{cite journal | last=Adams | first=Paul | title=Children as Contributions in Kind: Social Security and Family Policy | journal=Social Work | volume=35 | issue=6 | date=1990 | issn=1545-6846 | doi=10.1093/sw/35.6.492 | pages=492–498 | url=https://academic.oup.com/sw/article/1891776/Children | access-date=20 July 2025}}</ref>

==Effects==
===Risk and responsibility===
The benefits of defined benefit and defined contribution plans differ based on the degree of financial security provided to the retiree. With defined benefit plans, retirees receive a guaranteed payout at retirement, determined by a fixed formula based on factors such as salary and years of service.<ref>{{Cite web |title=Employee Retirement Income Security Act (ERISA) |url=https://www.dol.gov/general/topic/retirement/erisa |access-date=2023-04-28 |website=DOL |language=en}}</ref> The risk and responsibility of ensuring sufficient funding through retirement is borne by the employer or plan managers. This type of plan provides a level of financial security for retirees, ensuring they will receive a specific amount of income throughout their retirement years. However this income is not usually guaranteed to keep up with inflation, so its purchasing power may decline over the years.

On the other hand, defined contribution plans are dependent upon the amount of money contributed and the performance of the investment vehicles used.<ref>{{Cite web |title=Defined-Benefit vs. Defined-Contribution Plans Explained |url=https://www.investopedia.com/ask/answers/032415/how-does-defined-benefit-pension-plan-differ-defined-contribution-plan.asp |access-date=2023-04-28 |website=Investopedia |language=en}}</ref> Employees are responsible for ensuring that their contributions are sufficient to provide for their retirement needs, and they face the risk of market fluctuations that could reduce their retirement savings. However, defined contribution plans provide more flexibility for employees, who can choose how much to contribute and how to invest their funds.

Hybrid plans, such as cash balance and pension equity plans, combine features of both defined benefit and defined contribution plans. These plans have become increasingly popular in the U.S. since the 1990s. Cash balance plans, for example, provide a guaranteed benefit like a defined benefit plan, but the benefit is expressed as an account balance, like a defined contribution plan. Pension equity plans are a type of cash balance plan that credits employee accounts with a percentage of their pay each year, similar to a defined contribution plan.{{Citation needed|date=March 2024}}

===Incentives for parental investment===
Pay-as-you-go pensions can [[Incentive#Misaligned incentives|misalign incentives]] between [[parental investment]] and [[elderly care]].<ref name="q893">{{cite journal | last=Sinn | first=Hans-Werner | title=The pay-as-you-go pension system as fertility insurance and an enforcement device | journal=Journal of Public Economics | volume=88 | issue=7–8 | date=2004 | doi=10.1016/S0047-2727(03)00015-X | doi-access=free | pages=1335–1357 | url=https://epub.ub.uni-muenchen.de/938/1/sinn-pay-as-you-go-system-fertility.pdf | access-date=10 May 2025}}</ref><ref name="l812">{{cite journal | last=Cigno | first=Alessandro | title=Children and pensions | journal=Journal of Population Economics | volume=5 | issue=3 | date=1 August 1992 | issn=1432-1475 | doi=10.1007/BF00172091 | pages=175–183 | url=https://link.springer.com/article/10.1007/BF00172091 | access-date=11 April 2025| url-access=subscription }}</ref> According to the [[old-age-security hypothesis]], the [[elderly care]] by the [[child]] generation can offset the [[cost of raising a child]].<ref name="cigno07">{{Cite book|last1=Cigno|first1=Alessandro|url=https://books.google.com/books?id=TgBRYo-7tD0C|title=Children and Pensions|last2=Werding|first2=Martin|date=2007|publisher=MIT Press|isbn=978-0-262-03369-5|language=en}}</ref>

=== Gender pension gap ===
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.<ref>{{Cite book |last=OCDE |date=2021 |title=Towards Improved Retirement Savings Outcomes for Women |chapter=Chaper 1: Assessing the gender gap in retirement saving arrangements |chapter-url=https://www.oecd-ilibrary.org/sites/f7b48808-en/1/3/1/index.html?itemId=/content/publication/f7b48808-en&_csp_=4c6990cb7cb9191a176361e0f07511b4&itemIGO=oecd&itemContentType=book |publisher=OCDE Publishing}}</ref> Eastern European countries tend to have a smaller pension gender gap due to less pronounced gender differences in [[part-time job]]s.<ref>{{Cite book |last1=Samek Lodovici |first1=Manuela |title=The gender pension gap: differences between mothers and women without children |last2=Drufuca |first2=Serena |last3=Patrizio |first3=Monica |last4=Pesce |first4=Flavia |publisher=Policy Department of the European Parliament's Committee on Women’s Rights and Gender Equality. |year=2016 |pages=28–32}}</ref> Possible contributions to the pension gender gap include [[gender pay gap]]s, differences in employment rates, [[parental leave]], [[unpaid care work]] and [[gender role]]s.<ref>{{Cite journal |last1=Frericks |first1=Patricia |last2=Maier |first2=Robert L. |last3=De Graaf |first3=Willibrord |date=2007 |title=European Pension Reforms: Individualization, Privatization and Gender Pension Gaps |journal=Social Politics |volume=14 |issue=2 |pages=212–237 |doi=10.1093/sp/jxm008 |ssrn=1447686|doi-access=free }}</ref><ref>{{Cite journal |last1=Frericks |first1=P. |last2=Maier |first2=R. |last3=De Graaf |first3=W. |date=October 2006 |title=Shifting the Pension Mix: Consequences for Dutch and Danish Women |doi=10.1111/j.1467-9515.2006.00500.x |journal=Social Policy and Administration |volume=40 |issue=5 |pages=475–492|doi-access=free }}</ref><ref>{{Cite book |last=OCDE |title=Towards Improved Retirement Savings Outcomes for Women |publisher=OCDE Publishing |year=2021 |chapter=Chapter 2: Understanding the gender pension gap beyond labour market drivers through a literature review}}</ref> 

===Years in retirement===
There is a gender gap in expected years in retirement with 22.8 years for women and 18.4 years for men on average ([[OECD]], 2022), contributed by [[Life expectancy#Sex differences|sex differences in life expectancy]].<ref name="p857">{{citation | title=Society at a Glance 2024: OECD Social Indicators, Expected years after labour market exit | publisher=OECD | date=20 June 2024  | doi=10.1787/bb2c49e5-en | doi-access=free | page=}}</ref> The difference in years in retirement contribute to gender-differentiated pension rates.<ref>{{Cite web |title=The gender pay gap situation in the EU |url=https://commission.europa.eu/strategy-and-policy/policies/justice-and-fundamental-rights/gender-equality/equal-pay/gender-pay-gap-situation-eu_en |access-date=2023-04-28 |website=commission.europa.eu |language=en}}</ref>

==Pillars==
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. In general, there are three main functions of pension systems: saving, redistribution and insurance functions. 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, and placing them under different financing and managerial arrangements into three main pillars.

'''The Pillars of Old Age Income Security:'''<ref>{{cite report |publisher=Oxford University Press |year=1994 |title=Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth |series=A World Bank Policy Research Report |place=New York |isbn=0-19-520996-6 |issn=1020-0851 |url=http://documents.worldbank.org/curated/en/973571468174557899/pdf/multi-page.pdf}}</ref>
{|class="wikitable" style="text-align:left"
|-
! Properties 
! Mandatory publicly managed pillar 
! Mandatory privately managed pillar 
! Voluntary pillar
|-
| Financing 
| Tax-financed 
| Regulated fully funded 
| Fully funded
|-
| Form 
| [[Means test]]ed, minimum pension guarantee, or flat 
| Personal savings plan or occupational plan 
| Personal savings plan or occupational plan
|-
| Objectives 
| Redistributive plus coinsurance 
| Savings plus coinsurance 
| Savings plus coinsurance
|}

However, this typology is rather a prescriptive than a descriptive one and most specialists usually allocate all public programmes to the first pillar, including earnings-related public schemes, which does not fit the original definition of the first pillar.<ref name="auto6">{{cite book |author=OECD |year=2006 |chapter=Pension-system Typology |title=OECD Pensions at a Glance 2005: Public Policies across OECD Countries |pages=21–25 |publisher=OECD Publishing |place=Paris |doi=10.1787/pension_glance-2005-3-en|isbn=9789264018716 }}</ref>

===Zero pillar===
This non-contributory pillar was introduced only recently, aiming to alleviate poverty among the elderly, and permitting fiscal conditions. It is usually financed by the state and is in form of basic pension schemes or social assistance.<ref name="auto">Terziev, Venelin. (2019). Historical development and characteristics of pension systems. 5. 124-135.</ref><ref name="auto2">Holzmann, R., Hinz, R., von Gersdorff, H., Gill, I., Impavido, G., Musalem, A. R., … Subbarao, K. (2005). Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform (pp. 10–10). N.W. Washington, DC, USA: The International Bank for Reconstruction and Development / THE WORLD BANK. Retrieved from http://siteresources.worldbank.org/INTPENSIONS/Resources/Old_Age_Inc_Supp_Full_En.pdf</ref> In some typologies, the zero and the first pillar overlap.<ref name="auto6"/>

===First pillar===
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 [[PAYGO|pay-as-you-go]] financed.

===Second pillar===
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.<ref name="auto"/> 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).<ref name="auto"/>

===Third pillar===
The third tier consists of voluntary contributions in various different forms, including occupational or private saving plans, and products for individuals.

===Fourth Pillar===
The fourth pillar is usually excluded from classifications since it does not usually have a legal basis and consists of "informal support (such as family), other formal social programs (such as health care or housing), and other individual assets (such as home ownership and reverse mortgages)."<ref name="auto2"/><ref>{{Cite web|url=http://siteresources.worldbank.org/INTPENSIONS/Resources/395443-1121194657824/PRPNoteConcept_Sept2008.pdf |archive-url=https://web.archive.org/web/20130612091305/http://siteresources.worldbank.org/INTPENSIONS/Resources/395443-1121194657824/PRPNoteConcept_Sept2008.pdf |archive-date=2013-06-12 |url-status=live|title = Welcome to World Bank Intranet}}</ref>

These five pillars and their main criteria are summarised in the table below by Holzmann and Hinz.

'''Multipillar Pension Taxonomy:''' <ref name="auto2"/>
{|class="wikitable" style="text-align:left"
|-
! Pillar 
! Objectives
! Characteristics 
! Participation
|-
| 0
| Elderly poverty protection
| [[Social pension]], universal or means-tested
| Universal or residual
|-
| 1
| Elderly poverty protection and consumption smoothing
| Public pension plan, publicly managed, defined benefit or notional defined contribution
| Mandated
|-
| 2
| Consumption smoothing and elderly poverty protection through minimum pension
| Occupational or personal pension plans, fully funded defined benefit or fully funded defined contribution
| Mandated
|-
| 3
| Consumption smoothing
| Occupational or personal pension plans, partially or fully funded defined benefit or funded defined contribution
| Voluntary
|-
| 4
| Elderly poverty protection and consumption smoothing
| Access to informal (e.g. family support), other formal social programs (e.g. health) and other individual financial and nonfinancial assets (e.g. homeownership)
| Voluntary
|}

== Pension systems by country ==
{{Main|Pension systems by country}}
[[File:Pension system.svg|thumb|center|750px|'''First pillar of pension system by country:'''
{{Legend|#7ce07eff|Basic non-contributory pension}}
{{Legend|#5599ffff|Mandatory individual accounts}}
{{Legend|#2c8cbeff|[[Provident fund]] system}}
{{Legend|#ffdd55ff|Workers can switch between social insurance system or individual accounts}}
{{Legend|#fd8c3cff|Social insurance system}}
]]

==History==
{{see also|History of retirement}}
In the classical world, Romans offered veteran legionnaires (centurions) military pensions, typically in the form of a land grant or a special, often semi-public, appointment. [[Augustus]] Caesar (63 BC–AD 14)<ref>{{Cite web |url=https://www.nationalgeographic.com/culture/people/reference/augustus-caesar/|archive-url=https://web.archive.org/web/20190521043647/https://www.nationalgeographic.com/culture/people/reference/augustus-caesar/|url-status=dead|archive-date=21 May 2019|title=Who was Augustus Caesar?|date=20 May 2019 |website=Culture}}</ref> 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, which at the time represented around 13 times a legionnaires' annual salary) 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 (''aeririum militare'') established by Augustus in 5 or 6 AD.<ref name="auto3">{{cite book |vauthors=Clark RL, Craig LA, Wilson JW |title=A History of Public Sector Pensions in the United States |place=Philadelphia, Pennsylvania |publisher=University of Pennsylvania Press |url=https://pensionresearchcouncil.wharton.upenn.edu/wp-content/uploads/2015/09/0-8122-3714-5-3.pdf}}</ref> This was in an attempt to quell a rebellion within the Roman Empire which was facing militaristic turmoil at the time.

Widows' funds were among the first pension type arrangement to appear. For example, [[Ernest I, Duke of Saxe-Gotha|Duke Ernest the Pious]] of [[Gotha]] in Germany founded a widows' fund for clergy in 1645 and another for teachers in 1662.<ref>{{cite book |last=Haberman |first=Steven |title=History of Actuarial Science |volume=1 |year=1995 |publisher=William Pickering |location=London |isbn=978-1-85196-160-3 |pages=xlviii|oclc=468359649}}</ref> "Various schemes of provision for ministers' widows were then established throughout Europe at about the start of the eighteenth century, some based on a single premium others based on yearly premiums to be distributed as benefits in the same year."<ref>{{cite book|last=Hald|first=A.|title=A History of Probability and Statistics and Their Applications Before 1750 |year=1990 |publisher=John Wiley and Sons|isbn=978-0-471-50230-2|oclc=19629739}}</ref>

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.<ref>{{cite book|last1=Hinrichs|first1=Karl|date=2021|chapter=28 Old-Age Pensions|title=The Oxford Handbook of the Welfare State|pages=491–505|editor-last=Béland|editor-first=Daniel |publisher=Oxford University Press |language=en |doi=10.1093/oxfordhb/9780198828389.013.28|isbn=978-0-19-882838-9|last2=Lynch|first2=Julia F.|editor2-last=Leibfried |editor2-first=Stephan|editor3-last=Morgan|editor3-first=Kimberly J.|editor4-last=Obinger|editor4-first=Herbert}}</ref>

=== Germany ===
{{Main|State Socialism (Germany)}}
{{See also|Pensions in Germany}}
As part of [[Otto von Bismarck]]'s social legislation, the [[State Socialism (Germany)#Old Age and Disability Insurance Bill of 1889|Old Age and Disability Insurance Bill]] was enacted and implemented in 1889.<ref>{{cite web|last1=Gianasso|first1=Alexandre |title=A Brief History of Pensions|url=http://www.damgoodpensions.com/blog/a-brief-history-of-pensions/|website=Davidson Asset Management|access-date=29 June 2015}}</ref> The Old Age Pension program, financed by a tax on workers, was originally designed to provide a pension annuity for workers who reached the age of 70 years, though this was lowered to 65 years in 1916. Unlike accident insurance and health insurance, this program covered industrial, agrarian, artisans and servants from the start and was supervised directly by the state.<ref>Holborn, Hajo: A History of Modern Germany – 1840–1945: Princeton University Press; 1969; pp. 291–93.</ref>

Germany's mandatory state pension provisions are based on the pay-as-you-go (or redistributive) model. Funds paid in by contributors (employees and employers) are not saved and neither invested but are used to pay current pension obligations.

===Ireland===
{{Main|Pensions in the Republic of Ireland}}
There is a history of pensions in [[Ireland]] that can be traced back to [[Brehon Law]] imposing a legal responsibility on the kin group to take care of its members who were aged, blind, deaf, sick or insane.<ref>{{cite SSRN|last1=Lynn|first1=Theodore G. |last2=Clarke |first2=Blanaid J.|title=The Irish Corporate Governance System|date=19 August 2010 |ssrn=1661617}} {{doi|10.2139/ssrn.1661617}}.</ref> For a discussion on pension funds and early Irish law, see F Kelly, ''A Guide to Early Irish Law'' (Dublin, [[Dublin Institute for Advanced Studies]], 1988). In 2010, there were over 76,291 pension schemes operating in Ireland.<ref>{{cite web|title=The Pensions Board Annual Report |year=2010 |url=http://www.pensionsboard.ie/en/Publications/Annual_Report/ |website=pensionsboard.ie|access-date=15 December 2011 |url-status=dead|archive-date=5 January 2012|archive-url=https://web.archive.org/web/20120105051147/http://www.pensionsboard.ie/en/Publications/Annual_Report/}}</ref>

In January 2018, a "total contributions approach" qualification system was announced, effective from March 2018, for those pensioners who reached state pension age after 1 September 2012. The new system requires a person to have 40 years' worth or contributions to receive the full rate and a minimum total period of paid contributions of 520 weeks with ten years' full coverage. The State Pension is payable from age 66 with the age being increased to 67 in 2021 and 68 in 2028.<ref>{{Cite journal |title=Pension modelling results: Ireland |website=Pension at a glance |publisher=OECD |date=19 Nov 2019 |url=http://dx.doi.org/10.1787/888934043359 |access-date=2022-04-18 |doi=10.1787/888934043359|url-access=subscription }}</ref>

=== Spain ===
The history of pensions in Spain began in 1908 with the creation of the National Insurance Institute (INP) and the design of old-age pensions in a free affiliation scheme subsidised by the State. Although in 1919 the pension system was made compulsory and in 1931 an attempt was made to unify the different branches of insurance, the INP failed to ensure that pensions acted as immediate remedial measures for the old-age problem that was evident at the time. Public intervention in social insurance in Spain during these years was greatly determined by  the failure of private initiatives such as the Savings and Pension Fund of Barcelona.

The Mandatory Workers' Retirement (ROO) was the first compulsory social insurance in Spain and was aimed at wage earners between the ages of 16 and 65 who earned no more than 4,000 pesetas a year. This was followed by the creation of the [[Social security in Spain|Social Security]] system in 1963, early retirement and the possibility of partial retirement in 1978 and the special regime for self-employed workers in 1985.<ref>{{Cite journal |last=Terán |first=Alexander Elu |date=2006-01-13 |title=Las primeras pensiones públicas de vejez en España. Un estudio del Retiro Obrero, 1909-1936 |journal=Revista de Historia Industrial |pages=33–68 |issn=2385-3247 |url=https://raco.cat/index.php/HistoriaIndustrial/article/view/63750}}</ref>

Various reforms and adjustments have been made over time, such as the 1995 reform that established the sustainability factor and the 2011 reform that raised the retirement age from 65 to 67.<ref>{{Cite web |last=Secretaría de Estado de la Seguridad Social |date=2019 |title=Historia de la Seguridad Social |language=es |url=https://www.seg-social.es/wps/portal/wss/internet/Conocenos/HistoriaSeguridadSocial |website=Seguridad Social: Conócenos}}</ref> Currently, the pension system in Spain is still under debate to ensure its long-term sustainability with proposals such as the implementation of private pension plans and the revision of the conditions of access to public pensions.

===United Kingdom===
{{Main|Pensions in the United Kingdom}}
{{See also|English Poor Laws|Timeline of pensions in the United Kingdom}}
[[File:Leeds public sector pensions strike in November 2011 14.jpg|thumb|Public sector workers in [[Leeds]] striking over pension changes by the government in November 2011]]
The decline of Feudal systems and formation of national states throughout Europe led to the reemergence of standing armies with their allegiances to states. Consequently, the sixteenth century in England marked the establishment of standardised systems of military pensions. During its 1592–93 session, Parliament established disability payments or "reliefe for Souldiours ... [who] adventured their lives and lost their limbs or disabled their bodies" in the service of the Crown. This pension was again generous by contemporary standards, even though annual pensions were not to exceed ten pounds for "private soldiers", or twenty pounds for a "lieutenant".<ref name="auto3"/>
 
The beginning of the modern state pension came with the [[Old Age Pensions Act 1908]], that provided 5 shillings (£0.25) a week for those over 70 whose annual means do not exceed £31.50. It coincided with the [[Royal Commission on the Poor Laws and Relief of Distress 1905-09]] and was the first step in the [[Liberal welfare reforms]] to the completion of a system of social security, with unemployment and health insurance through the [[National Insurance Act 1911]].

In 1921, The Finance Act introduced tax relief on pension contributions in line with savings and life insurance. As a consequence, the overall size of the fund was increased since the income tax was now added to the pension as well.<ref name="auto5">{{Cite web |title=The Pension Timeline - complete history of pensions |date=22 February 2023 |url=https://pensionaccess.co.uk/pensions/the-pension-timeline/}}</ref>

Then in 1978, The [[State Earnings-Related Pension Scheme]] (SERPS) replaced The Graduated Pension Scheme from 1959, providing a pension related to earnings, in addition to the basic state pension. Employees and employers had the possibility to contribute to it between 6 April 1978 and 5 April 2002, when it was replaced by the [[State Second Pension]].

After the Second World War, the [[National Insurance Act 1946]] completed universal coverage of social security, introducing a State Pension for everybody on a contributory basis, with men being eligible at 65 and women at 60.<ref name="auto5"/><ref>{{Cite web|url=https://fixmypension.com/2018/02/27/a-brief-history-of-pensions/|title=A Brief History of Pensions – Fix My Pension|date=27 February 2018 }}</ref> The [[National Assistance Act 1948]] ([[11 & 12 Geo. 6]]. c. 29) formally abolished the poor law, and gave a minimum income to those not paying National Insurance.

The early-1990s established the existing framework for state pensions in the [[Social Security Contributions and Benefits Act 1992]] and Superannuation and other Funds (Validation) Act 1992. Following the highly respected [[Goode Report]], occupational pensions were covered by comprehensive statutes in the [[Pension Schemes Act 1993]] and the [[Pensions Act 1995]].

In 2002, the [[Pensions Commission]] was established as a cross-party body to review pensions in the United Kingdom. The first Act to follow was the [[Pensions Act 2004]] that updated regulation by replacing OPRA with the [[Pensions Regulator]] and relaxing the stringency of minimum funding requirements for pensions while ensuring protection for insolvent businesses. In a major update of the state pension, the [[Pensions Act 2007]], which aligned and raised retirement ages. Following that, the [[Pensions Act 2008]] has set up automatic enrolment for [[occupational pensions]], and a public competitor designed to be a low-cost and efficient fund manager, called the [[National Employment Savings Trust]] (or "Nest").

===United States===
{{Main|Pensions in the United States}}
[[File:20230331 Average retirement savings account balances and median net worth, by age, US.svg|thumb|In the U.S., average balances of retirement accounts, for households having such accounts, exceed median net worth across all age groups. For those 65 and over, 11.6% of retirement accounts have balances of at least $1 million, more than twice that of the $407,581 average (shown). Those 65 and over have a ''median'' net worth of about $250,000 (shown), about a quarter of the group's ''average'' (not shown).<ref name=WSJ_20230331>{{cite news |last1=Dagher |first1=Veronica |last2=Tergesen |first2=Anne |last3=Ettenheim |first3=Rosie |title=Here's What Retirement Looks Like in America in Six Charts |url=https://www.wsj.com/articles/retirement-charts-social-security-savings-health-efa1962b |work=The Wall Street Journal |date=March 31, 2023 |archive-url=https://web.archive.org/web/20230331093530/https://www.wsj.com/articles/retirement-charts-social-security-savings-health-efa1962b |archive-date=March 31, 2023 |quote=(For Average household retirement savings account balance:) Estimates of 401(k), IRA, Keogh and other defined contribution account balances based on 2019 data. Source: Employee Benefit Research Institute. . . . (For median net worth:) Source: Federal Reserve. |url-status=live }}</ref>]]
The first "American" pensions came in 1636, when [[Plymouth Colony]], and subsequently, other colonies such as Virginia, Maryland (1670s) and NY (1690s), offered the first colonial pension. The general assembly of the [[Virginia Company]] followed by approving a resolution known as Virginia Act IX of 1644 stating that "...all hurt or maymed men be relieved and provided for by the several counties, where such men reside or inhabit."<ref>Hening’s Laws of Virginia, Vol. I, page 287</ref> Furthermore, during [[King Philip's War]], otherwise known as the First Indian War, this Act was expanded to widows and orphans in Virginia's Act of 1675.<ref>Hening’s Laws of Virginia, Vol. II, page 324 and page 331</ref><ref>{{citation|url=https://www.statutesandstories.com/blog_html/first-american-colonial-pensions/|title=First American Colonial Pensions|date=18 November 2017|access-date=29 April 2020|publisher=Statutes and Stories}}</ref>

Public pensions got their start with various 'promises', informal and legislated, made to veterans of the [[American Revolutionary War|Revolutionary War]] and, more extensively, the [[American Civil War|Civil War]]. They were expanded greatly, and began to be offered by a number of state and local governments during the early [[Progressive Era]] in the late nineteenth century.<ref>Davies, W. E. (1948). The Mexican War veterans as an organized group. The Mississippi Valley Historical Review, 35(2), 221-238.</ref><ref>Costa, D. L. (1995). Pensions and retirement: Evidence from union army veterans. The Quarterly Journal of Economics, 110(2), 297-319.</ref>

Federal civilian pensions were offered under the [[Civil Service Retirement System]] (CSRS), formed in 1920. CSRS provided retirement, disability and survivor benefits for most civilian employees in the U.S. Federal government, until the creation of a new Federal agency, the [[Federal Employees Retirement System]] (FERS), in 1987.{{Citation needed|date=March 2024}}

Pension plans became popular in the United States during [[World War II]], when wage freezes prohibited outright increases in workers' pay. The defined benefit plan had been the most popular and common type of [[Retirement plans in the United States|retirement plan in the United States]] through the 1980s; since that time, defined contribution plans have become the more common type of retirement plan in the United States and many other western countries.{{Citation needed|date=March 2024}}

In April 2012, the [[Northern Mariana Islands]] Retirement Fund filed for [[Chapter 11]] [[bankruptcy]] protection. The retirement fund is a [[defined benefit]] type pension plan and was only partially funded by the government, with only $268.4 million in [[asset]]s and $911 million in [[liability (financial accounting)|liabilities]]. The plan experienced low investment returns and a benefit structure that had been increased without raises in funding.<ref name=p&i20120419>{{cite news|last=Mercado|first=Darla|title=In apparent first, a public pension plan files for bankruptcy|url=http://www.pionline.com/article/20120419/REG/120419842/in-apparent-first-a-public-pension-plan-files-for-bankruptcy|access-date=2012-04-28|newspaper=Pensions and Investments|date=2012-04-19|archive-date=24 June 2012|archive-url=https://web.archive.org/web/20120624233818/http://www.pionline.com/article/20120419/REG/120419842/in-apparent-first-a-public-pension-plan-files-for-bankruptcy|url-status=dead}}</ref>
According to ''Pensions and Investments'', this is "apparently the first" U.S. public pension plan to declare bankruptcy.<ref name=p&i20120419/>

==See also==<!-- PLEASE RESPECT ALPHABETICAL ORDER -->
* [[Elderly care]]
* [[Financial advisor]] and [[Fee-only financial advisor]]
* [[Fiscal sustainability]]
* [[Generational accounting]]
* [[Parent–offspring conflict]]
* [[Pension led funding]]
* [[Pension model]]
* [[Public debt]]
* [[Retirement planning]]
* [[Social contract]]

Specific:
* [[Bankruptcy Code (disambiguation)|Bankruptcy code]]
* [[Ham and Eggs Movement]], California pension proposal of the 1930s-40s
* [[Individual Pension Plan]] (IPP)
* [[Pension Rights Center]]
* [[Provident Fund (disambiguation)|Provident Fund]]
* [[Roth 401(k)]]
* [[Universities Superannuation Scheme]]

==References==
{{Reflist}}

==Further reading==
* {{cite book|author1=[[Franco Modigliani]]|author2=Arun Muralidhar|title=Rethinking Pension Reform|url=https://books.google.com/books?id=LtGWQ_CUvpAC|date=2 August 2004|publisher=Cambridge University Press|isbn=978-0-521-83411-7}}
*Grünewald A. 2021. "[[doi:10.1177/0010414021989763|From Benefits and Beneficiaries: The Historical Origins of Old-Age Pensions From a Political Regime Perspective]]." ''Comparative Political Studies''.
* {{cite book |last =高山 |first =憲之 |author-link =:ja:高山憲之 |date =1983-07-21 |title =年金・崩壊の危機: 21世紀の先進国社会 |publisher =東洋経済新報社 |location =Nipponbashi, chuou-ku, Tokyo, Japan }}

==External links==
{{Wiktionary}}
* [https://www.usa.gov/retirement US Retirement]
* [https://www.gov.uk/browse/working/state-pension UK State pension]
* {{Cite AmCyc|wstitle=Pension|short=x}}

{{Employment}}
{{Generation}}
{{Authority control}}

[[Category:Pensions| ]]
[[Category:Personal finance]]