Social pension

A social pension (or non-contributory pension) is a stream of payments from state to an individual that starts when someone retires and continues to be payed 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 since its eligibility criteria do not require former contributions of an individual, but citizenship or residency and age or other criteria set by government.

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[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]

Categories[edit]

  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.[11]
  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[edit]

Since 2000, the coverage of legal and effective social pension has been constantly increasing, especially in recent years.[12] 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 12-16%

Philippines[edit]

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.[13] 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[edit]

The Swedish social pension is administered by the Swedish Pensions Agency, and ensures a minimum level of pension for all residents[14]. It covers everyone who has worked or lived in Sweden[15]. The social pension consists of several different parts, such as the income pension, income pension complement, premium pension and guarantee pension[16]. 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[17] 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.[18]

Denmark[edit]

The Danish social pension is a regular income paid to people who have reached retirement age by the Danish government.[19] Those who are residents of Denmark are entitled to the social pension.[20] The minimum age to receive the pension is determined by a person's date of birth:[21]

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.[22] As of 2024, the basic amount of the social pension is DKK 6,928 per month[21], however this basic amount may be reduced if it is determined than an individual makes more than DKK 348,700 per year.[23] There is also a pension supplement of DKK 8,016 per month for single individuals, and DKK 4,102 per month for married couples.[21]

Czech Republic[edit]

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]

See also[edit]

References[edit]

  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. ^ Willmore, Larry (2012). "Types of Social Pension" (PDF).
  12. ^ "Social protection for older persons: Policy trends and statistics 2017–19" (PDF). International Labor Office. 2019.
  13. ^ "P23 B appropriated in 2019 for Indigent Senior Citizens' Social Pension". 23 August 2018.
  14. ^ "The Swedish pension system | Pensionsmyndigheten". www.pensionsmyndigheten.se. Retrieved 2024-04-19.
  15. ^ "The Swedish pension system and pension projections until 2070" (PDF). European Commission. 10 December 2020. p. 1. Retrieved 19 April 2024.
  16. ^ "The Swedish pension system | Pensionsmyndigheten". www.pensionsmyndigheten.se. Retrieved 2024-04-19.
  17. ^ "The Swedish pension system | Pensionsmyndigheten". www.pensionsmyndigheten.se. Retrieved 2024-04-19.
  18. ^ "The Swedish pension system | Pensionsmyndigheten". www.pensionsmyndigheten.se. Retrieved 2024-04-19.
  19. ^ "State Pension". life in denmark.dk. Retrieved 2024-04-20.
  20. ^ "Pensions at a Glance 2023" (PDF). OECD. 2022. p. 2. Retrieved 20 April 2024.
  21. ^ a b c "State Pension". life in denmark.dk. Retrieved 20 April 2024.
  22. ^ "Pensions at a Glance 2023" (PDF). OECD. 2022. p. 2. Retrieved 20 April 2024.
  23. ^ "Pensions at a Glance 2023" (PDF). OECD. 2022. p. 3. Retrieved 20 April 2024.
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