Editing Pension (section)

==Financing==
The financing of pensions varies. Pension plans can be set up by an employer, matching a monetary contribution each month, by the state or personally through a pension scheme with a financial institution, such as a bank or brokerage firm. Pension plans often come with a tax break depending on the country and plan type.{{Citation needed|date=March 2024}}

===Funded===
{{See also|Defined benefit pension plan#Funded pension plans}}
In a ''funded'' plan, contributions are invested in a fund towards meeting the benefits. All plans must be funded in some way, even if they are pay-as-you-go, 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.

===Unfunded or Pay-as-you-go===
{{See also|Defined benefit pension plan#Unfunded pension plans}}
In an ''unfunded'' defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are required. 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}}</ref> The social security systems of many European countries are unfunded,<ref>[http://www.economist.com/node/18502013 "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. 

==== Dependency ratio ====
A growing challenge for pay-as-you-go pensions is the [[dependency ratio]].<ref name="i599">{{cite journal | last=Hyndman | first=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"/>
	
=== 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> 

==== Economic challenges ====
Economic uncertainty can also be a cause for worry in the near future. As of April 2023, the global economy has been volatile in recent years, and this can have a significant impact on pension plans. For example, 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. This recent period of economic uncertainty has seen a rise in self-employed workers.<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> As such, the rise of [[Gig worker|gig economy]] and the increasing number of workers who are self-employed has made it more challenging to provide retirement benefits to a growing segment of the workforce due to the fact that many of these workers do not have access to employer-sponsored pension plans, making it more difficult for them to save for retirement.

===Pension crisis===
[[File:Митинг 2 сентября 2018 пенсии Суворовская площадь (Москва) 05.jpg|thumb|[[2018 Russian pension protests]]]]
{{Excerpt|Pension crisis|paragraphs=1|only=paragraphs}}

=== Balancing pension funding ===
{{See also|Welfare reform}}
Different [[Economic policy|economic policies]] are the adjusted to balance the funding of pensions:<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>

* Decrease of real pensions, 
* Increase of employee social contribution, 
* Increase of employer social contribution, 
* Increase of the retirement age.

These channels have been used by many governments to implement new retirement pension reforms. Simulating these economic policies can be useful to understand the mechanisms linked to these channels. Some software of macroeconomic simulation allow to compute and display them.<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> 

In the past, they had been sometimes simultaneously used (two or three channels used in the same time for a pension reform) or with a targeted way (on a certain group of persons such as in a certain business sector). In Canada, for instance, the annual payments were increased by some 70% in 1998 to achieve this.
The electoral costs of pension reforms can depend on [[financial literacy]].<ref name="z416">{{cite journal | last=Fornero | first=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>

==== Decrease of real pensions ====
One pension reform channel is to decrease the amount of real pensions paid to retirees by for example 1 [[Gross domestic product|GDP]] point. It proves to be [[demand shock]] insofar as the household's [[Disposable and discretionary income|available income]] decreases in the short term. This drop of [[purchasing power]] implies a diminishment of [[Consumption (economics)|consumption]] and of demand in general. The activity is then negatively affected. However, the [[Current account (balance of payments)|current account]] is improved as imports decrease following the reduce of domestic demand. In the medium term, since this cut of consumption and demand, [[unemployment]] increases. The [[price index]] decreases as the consumption price drops. As a consequence, exports increase. The real [[Direct labor cost|labour cost]] falls increasing thus companies' margins which limits the degradation of investments. The drop of consumption remains higher than the increase of current account which thereby results in the decrease of GDP. The public finance balance increases following the diminishment of pension benefits spent to retirees. However, unemployment benefits increase and given the drop of consumption and of household's incomes, which implies a fall in the incomes received from income tax and VAT by public administration.<ref name=":0" />

==== Increase of employee social contribution ====
This channel involves the increase of employee social contribution by for instance 2 points. This social contribution is spent by household as a share of income received by them. It turns out to be a demand shock because household's [[Disposable Income|disposable income]] decreases. Indeed, the income perceived by employees is reduced following the increase of employee social contribution. As the previous channel, the drop of purchasing power result in a diminishment of consumption and demand in general. It implies a drop in activity. However, the [[Current account (balance of payments)|current account]] is improved as imports are reduced following the cut of interior demand. In the medium term, the implications are similar to the decrease of real pensions. Employment and the price index decrease. Exports increase and the drop of investments is limited. The [[Gross domestic product|GDP]] decreases too. Finally, in the short term, the public finance balance increases but is quickly limited (but remains an increase) with the decrease of revenues from [[Value-added tax|VAT]] and [[income tax]]es and the increase of unemployment.<ref name=":0" />

==== Increase of employer social contribution ====
This pension reform channel increases employer social contributions by for instance 2 points. This social contribution is spent by the employer as a share of mass wages paid to each employee. The rise of the [[Direct labor cost|labour cost]] degrades the labour demand and increases the costs of production. The [[Competition (economics)|competitivity]] is degraded and results in the drop of the purchasing power. Job losses are then attended: the unemployment strongly increases. This shock is also [[inflationary]] given that household's consumption prices rise. As corporations' [[profitability]] drops, exports and companies' investment fall too. The current account drops and this shock is not [[Expansionism|expansionist]]: the GDP decreases. Finally, the public finance balance is improved but less than planned. Indeed, employer social contribution is increased but it happens to be less than expected as unemployment rises. In addition, income tax is lower than before the shock, employee social contribution increases and unemployment benefits expenses increase.<ref name=":0" />

==== Increase of the retirement age ====
This pension reform channel involves an increase of the [[retirement age]]. To do so, it implies an increase in the working age of for instance 2%, which decreases the number of retirees. In order to find this precise number for the simulation, we can assume people live on average 80 years, study during 20 years and are retirees during 20 years. As a consequence, an increase of 2% for life expectancy at work amounts to a decrease of 4% for life expectancy in retirement. Real pensions make globally a certain percentage of the GDP according to the country chosen. By knowing it, you can finally find the certain number of GDP point to simulate the decrease of number of retirees. For instance, in France real pensions make globally around 15% of GDP. Finally, -4% of 15% makes a decrease of 0.6 of GDP point.

In the short term, this labour force shock (supply policy) leads to an increase of unemployment which negatively affects household's purchasing power. The consumption decreases along with demand in general which leads to a decrease of activity. However, the [[Current account (balance of payments)|current account]] is improved as imports are reduced with the drop of domestic demand. In the medium term, through the rise of unemployment, gross salary and the real labour cost progressively decreases. It results in the progressive increase of employment and thus the gradual decrease of unemployment. The household's consumption prices decrease: this shock is [[deflation]]ary. The competitivity is improved which lead to a job creation and the boost of economic activity. The GDP increases and this shock is therefore expansionist. Administration's financing capacity improved in the short term happens to be limited in the medium term. Indeed, the drop of prices decreases the tax bases, especially household income.<ref name=":0" /> 

High [[Dependency ratio#Old-age dependency ratio|old-age dependency ratio]]s lead to forecasts of retirement ages of up to 70 years.<ref name="i599"/>