A Brief History Of Pensions
Everybody will be affected by pensions at one point in their life; either by funding them or by becoming a pensioner, there is no escape from pensions. One could further note that pensions are becoming an increasingly central topic of political debates around the Western world.
Though they are taken for granted today, this has not always been the case. On the contrary, pensions are a fairly recent development of economic and political thought. Let’s have a look at how and why they came about. To do so, we need to go back 370 years. This would take us to the Duchy of Gotha, in the heartland of Germany.
1645. Duke Ernest the Pious of Gotha, a Protestant prince whom Oliver Cromwell deeply admired, decreed the creation of a fund to support widows of clergymen across his realm. In 1662, a similar fund would be set up to support widows of the duchy again; this time, widows of teachers would be the beneficiaries. These two funds are among the firsts modern examples of what we may call pension funds.
Later in the 17th and 18th centuries, pensions under the form of annuities would become more and more common across Europe. These were largely granted as compensation for the loss of spouses (especially for men of rank killed in action), loss of limbs (again, mostly for the wounded in action) or in return for acts of merit, either military or civil. It was indeed common for innovators, inventors, tradesmen or politicians to be granted annuities in the 18th century for having advanced the interests or wealth of the nation. These were handed out directly by royal treasuries.
Yet, it was not before 1889 that a legislation applicable to all workers eligible was enacted and implemented. The man behind the initiative called “The Old Age and Disability Bill” was Otto von Bismarck. The German Empire was thus the first European country to establish a fully-fledged pensions systems for workers aged 70 or more. The limit was lowered to 65 in 1916. Workers in Great Britain would have to wait until 1908 before having the chance of being granted a state-pension, provided that one’s annual means did not exceed £31.50. As in Germany, the minimum age to be allowed a pension was 70. The “Old Age Pension Act 1908”, intended to award pensioners 5 shillings (£0.25) a week. Still, even though pensions in 1908 were small by contemporary standards ( note that the amount quoted in the previous sentence is not adjusted to 2015 pounds sterling) the most staggering contrast between today and then is the ratio of pensioner per workers. In 1908, that ratio was 1:22. By 2018, it will drop to 1:3.5 .
The great turning point in the history of state pensions was World War II, however. In the UK, the "National Insurance Act 1946” completed universal coverage of social security. The "National Assistance Act 1948" formally abolished the “Poor Law of 1834”, and gave a minimum income to those not paying national insurance. Pension plans became popular in the United States during World War II, when wage freezes prohibited outright increases in workers' pay. The defined benefit plan had been the most popular and common type of retirement plan in the United States through the 1980s; since that time, defined contribution plans have become the more common type of retirement plan in the United States and many other western countries.
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