Social pension
According to the International Labour Organization, social security is a human right that aims at reducing and preventing poverty and vulnerability throughout the life cycle of individuals. Social security includes different kinds of benefits (maternity, unemployment, disability, sickness, old age, etc.)[1] A social pension is a stream of payments from the state to an individual that starts when someone retires and continues to be paid until death.[2] This type of pension represents the non-contributory part of the pension system, the other being the contributory pension, as per the most common form of composition of these systems in most developed countries.
History[edit]
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 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[edit]
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[edit]
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[9] 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.[10] The PAYG system is sometimes subject to demographic and political problems (e. g. aging of population).[11]
The impact on poverty of reducing pension benefits[edit]
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.[12]