A social pension (or non-contributory pension) is a stream of payments from state to an individual that starts when someone retires and continues in payment until death. It is a part of a pension system of most developed countries, specifically the so-called zero or first pillar of the pension system, which is a part of state social security system. The social pension is different from other types of pension 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
The need for a social pension comes from the times of 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.
The first step in forming cash transfers to elderly can be seen in the end of 19th century. One of the first countries that introduced a social pension was Germany in 1889 by its chancellor Otto von Bismarck who wanted to connect ordinary workers with the newly created German state and granted every worker who reached age of 65 a small flat pension. At first it was funded by taxes on tobacco monopoly.
In 1890s followed Denmark (1891) and New Zealand (1898) and in the early 20th century Australia (1908), Sweden (1913) and many others. Throughout the 20th century, most of 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. This resulted in convergence to a dual system where both of those strategies were included.
Today, more than 100 countries grant social pension to its citizens in various forms and on average OECD countries spend 7 – 8 per cent of their GDP on the pensions for elderly and elderly care.
Reasons
The reasons for implementing a social pension and involvement of the government are problems that are left with voluntary steps of individuals providing themselves enough funds for their retirement or with market failures, leaving inequalities in the society. As an example, we can see a shortsightedness of individuals, which causes lack of savings or additional income when they retire. This can be connected also with an information gap, when the individual is not able to assess the solvency of savings and insurance companies or productivity of investment programs. Another reason can be insurance market failures, such as moral hazard or adverse selection, which can make insurance against risks, such as longevity or disability, unavailable.
Financing
Financing the social pension is a part of national fiscal and public finance policies and therefore it is linked to the general government budget. Generally, the social pension schemes as a part of the first pillar of pension systems use pay-as-you-go scheme (PAYG), which collects contributions in form of social security taxes 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. The PAYG system is sometimes subject to demographic and political problems (e. g. aging of population).