History Pensions

Only about a dozen high-income countries have voluntary employer-provided private pension systems that pay benefits to a sizable percentage of their retirees. These countries include Canada, Germany, Ireland, Japan, the United Kingdom, and the United States. In these countries, however, usually only 50 percent or less of retirees are covered. Only in countries where most workers belong to a union, such as the Netherlands, is the coverage rate substantially higher.

In other high-income countries, such as Australia and Switzerland, private employer-provided pensions have been mandated, thus achieving coverage for most of the workforce. In France, industry-wide pensions are mandated, and, following the lead of Chile in 1981, a number of countries in the 1990s and early 2000s mandated individual-account pension plans. These countries include Argentina, Chile, Colombia, Peru, and Uruguay in Latin America, and Hungary and Poland in Eastern Europe. The World Bank became a proponent of this approach during the 1990s, and played a role in its spread.

In the poorer, developing countries of Africa and Asia, most workers are generally not covered by either a pension or a social security program. Without this coverage, agricultural workers in rural areas tend to work longer into old age, with family members taking over the more physically demanding tasks. When people are no longer able to work, their families are expected to provide for them.

In middle-income countries, such as Brazil and Indonesia, pensions are provided to workers in the high-income sector. In these countries, multinational companies have played a role in the international spread of employer-provided pensions. In Brazil, pensions are provided by state-owned enterprises and multinational companies.

In most countries, the early history of pension provision is similar. Pensions were first provided to retired military personnel. Later, large bureaucratic organizations, such as the railroads and banks, provided pensions to long-service employees. Government employees also generally were among the first groups to be covered.

At first, pensions were provided on an ad hoc basis as charity rather than as an earned right. Over time, pension benefits have become more formalized as defined benefit plans, with written documents specifying their features. They have also become an earned part of compensation—employees have a legal claim to them. Starting from different origins, defined contribution pensions developed out of employer-sponsored savings plans.

Social security programs around the world provide different types of income support. The term social security refers to government programs that provide retirement income benefits. Social security has been a factor in the development of pensions in most countries. In western Europe and Japan, private pensions predated social security. Japan and the United Kingdom chose to protect private pensions from being replaced by social security programs by allowing employers to contract out of social security, thus reducing social security contributions and benefits, if minimum standards are met by an employer-provided pension plan. In contrast, countries with generous social security benefits, such as Italy and Austria, have little need for additional pension benefits and, consequently, few pension plans have developed.

The development of the income tax system has also played an important role in the development of private pensions around the world. While pensions predated personal income taxes in many countries, their growth (of income taxes) has been aided by special tax preferences that all countries with well-developed pension systems offer. The importance of the role of income taxes was demonstrated during the 1990s, when the income tax preferences for private pensions were revoked in New Zealand, and private pension coverage subsequently declined. In Brazil and many other developing countries, relatively few workers pay income taxes because their income is below the threshold for liability. Thus, in those countries the incentives provided by the tax system do not affect most workers. The expansion of the personal income tax system to cover most workers in the United Kingdom during World War II was instrumental in making pension coverage widespread in that country.

The history of pensions has also been shaped by the history of the macroeconomy. The Great Depression of the 1930s was much less severe in the United Kingdom than in the United States, and the reduction in pension coverage during that period was consequently less in the United Kingdom. During the early part of the twentieth century, France and Germany experienced hyperinflation, which had a devastating effect on funded pensions. The experience of hyperinflation appears to have had a long-term effect on the pension systems of these countries, with both countries now relying primarily on unfunded pensions where benefits are paid for out of current income.

During the 1990s, voluntary defined contribution plans grew in importance in many countries, probably aided by the strength of financial markets during that decade. They are also growing in importance in the Anglo-Saxon countries of Australia, Canada, Ireland, and the United Kingdom, and they are increasing in importance in the European countries of Austria, Belgium, Germany, Greece, Netherlands, Spain, and Switzerland. The majority of new plans in Australia, Ireland, Switzerland, and the United Kingdom are now defined contribution plans.