What do you do for people who are too old to work? Societies have come up with basically 5 ways to provide for the elderly:

1. Work until you die. In modern, high-tech societies, this may be practical. An old person doesn't have the strength and stamina that he used to, but may retain his mental facilities and skills well into old age. An old person can still be a salesman, an artist, a manager, etc. Failing that, you can give him a job that isn't very taxing, like Walmart greeter.
2. Investments. When a person is young and working, he puts money aside for when he gets old. Then when he retires he lives off these savings and investments. This is how it was done for much of US history. The big catch to this system is that the person had to have the resources, discipline, and foresight to save money when he was working. If he couldn't or didn't, then he has nothing to draw from in retirement, and he has to fall back to some other method.
3. Children provide. In many societies around the world today, a person's children take care of him when he gets old. They may move in with the children. Often they still do some useful work, like taking care of grandchildren or helping with household chores.
4. Social security. In many industrialized countries today, the government provides for the elderly using tax money. When you're working you pay taxes that support retired people, then when you retire it's your turn to collect. I use the specific term "social security" rather than a more general term like "government pension program" because many countries that have systems like this call it "social security". Note that many people think that the taxes you pay in when you are working are put in to an account in your name which is then used to pay benefits when you retire. This is not how it really works. People who are working and paying taxes support retirees.
5. Pension. Your employer supports you when you retire. There are two kinds of pensions: funded and unfunded. A funded pension is when the company puts money aside for retirees while they are working, so that when someone retires there is money there to pay their pension. An unfunded pension is when the company uses current income to support retirees.

Note that social security is sort of a wholesale version of your children supporting you. In #3, a person's own children support him. In #4, all the young people in society contribute to a collective pot which supports all retirees. The big advantage of #4 is that if someone has no children, or if his children are unable or unwilling to support him, there's still money available for him, from other people's children. The big disadvantage of #4 is that this takes away one incentive to have children. You can let other people do the hard work and bear the expense of raising children, and then you live off of them.

A funded pension is much like living off investments. The difference is that someone else is managing the money. The big advantage of a funded pension is that because someone else is managing it, you don't have to worry about it. There's no issue of you failing to save and invest during your working years, because someone else is doing it for you. You don't have to worry about making bad investments because the employer or pension fund manager has a lot of resources and is able to afford skilled financial planners. They may, of course, mess up and lose money, but at least that's less likely than if you do it yourself. But that does lead to the big disadvantage: You're not in control. Maybe you could manage the money better and maybe not.

An unfunded pension is a lot like social security. It's just on a smaller scale: one company is doing it for its employees rather than the government doing it for everyone in the country. A big drawback to unfunded pensions is that if the company goes broke, you could lose your pension. A big advantage is that, like for a funded pension, someone else is managing your retirement fund for you. Someone who, hopefully, has more skill and experience in investing.

Another way that people classify pensions is as "defined contribution" versus "defined benefit". Defined contribution means that the amount that you put in while working is fixed and the amount that you get out when you retire is variable, depending on how well your investments do. Defined benefit means that the amount you get out when you retire is fixed. In practice, defined contribution plans are usually accounts in the name of the worker and under his control. They are investments, like #2. Defined benefit plans are usually controlled by the company, like #5.

© 2025 by Jay Johansen

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