Types of pensions and their financing - Social policy

Types of pensions and their financing

The main types of pensions:

- pensions based on fixed sizes;

- pensions based on fixed contributions;

- solid universal pensions, without paying contributions.

The formulas for calculating the size of pensions usually provide for either pensions fixed in solid sizes without reference to the amount of wages or pensions that depend on the amount of wages. Pensions set in fixed amounts do not change depending on the amount of wages, but may vary depending on the duration of the contribution period. In the member countries of the Organization for Economic Cooperation and Development (OECD), which provide pensions in solid amounts, apart from them (the second part) are state or mandatory private pension schemes, the size of pensions from which depends on the amount of wages.

In pension systems based on fixed (fixed) contributions, the rights of the participant in the system are determined solely on the basis of the amount of funds in his account and the period of his future life upon retirement. In the simplest form, a defined contribution system functions as follows: an individual (personalized) pension account of an employee is credited with contributions paid, and then income received from investing funds credited to an employee's account is transferred thereto. Thus, the amount of the pension depends on the amount of accumulated pension resources and the interest accrued on them, which, when retiring, serve to purchase an annuity (life annuity) of a certain amount. This explains that the amount of the pension is not calculated in advance.

For workers with low wages, such a pension system does not exclude the risk that the amount of accumulated funds in a personal pension account will be insufficient to purchase an acceptable pension.

To remedy this situation, the so-called minimum pension, is used, which in systems with defined contributions usually takes the form of a guaranteed minimum income. In this case, the minimum pension is paid at the expense of the funds available to the employee's account and the state subsidy necessary to secure the minimum pension, which is determined taking into account the subsistence level.

Thus, pension systems have significant variations, although they are based on a combination of the principles of compulsory social insurance, with elements of personal insurance and state social security, including social pensions.

Pension systems organized on a solidarity-based basis with fixed payments are the most common in Europe and OECD countries. This is usually a state pension system, in which the level of pensions is set in advance (hence the term "fixed-size"), depending on the earnings and duration of the insurance period, which means that there is no rigid actuarial the relationship between the amount of contributions made and the amount of pensions.

Once the formula by which the size of the pension is calculated is legislated, its absolute value becomes predictable and guaranteed (Figure 13.1).

Classification of pension systems

Fig. 13.1. Classification of pension systems

The compulsory insurance contributions of employees and employers (often states), which are calculated on the amount of the wages of the insured, usually limited to an upper limit (slightly exceeding the average wage in the country) are the financial basis of pensions, with defined benefits.

The advantages of such a system are its simplicity for understanding by the population, which serves as a significant motivational factor for participation in the system, and also quite effectively ensures the replacement of wages for pensioners, using (within reasonable limits) the mechanisms of redistribution of funds among sections of the population with different levels income on the principles of personal responsibility, collective solidary mutual assistance and social justice.

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