Pension: A right or a favour?

"Pension should not be viewed as a favour granted by the state or employer, but as a fundamental right earned through years of service and contribution, ensuring dignity and security in later years."

Is pension a right or a favour? This has been the subject of an ongoing debate, about the role of pension, its evolution, and whether it should be viewed as an entitlement (a right) or of goodwill (favour).

Pension represents an essential aspect of social security. Its aim is to ensure that ‘the beneficiaries have a stable source of income – even after retirement.

The word “pension” originates from the Latin word pensio meaning “payment” or “a sum of money.” It implies regular, structured or consistent payment to someone on a recurring basis after retirement and after they have stopped working. While the term is commonly associated with retirement, the underlying meaning is a financial “support system” for financial stability in the later stages of life.

History of pension

The history of pension dates back by thousands of years. One of the earliest reference to pension can be traced to the Romans. The Romans were one of the first to recognise the importance of terms like service before self or meritorious service meaning “bringing in money”,  admirable, applaudable, commendable, creditable and laudable or praiseworthy service by their soldiers who were granted  “dona militaria” — a type of pension and land or a monetary reward after retirement for their unblemished service in the armed forces for a certain number of years.

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The concept of pensions was far more in formal in Europe where the Monarchs offered land or money to their loyal servants after they retired or were too old to work. These arrangements were not universal and were based largely on the relationship between the master and their servants.

The Royal British Navy evolved a more formal pension system in the 17th century to show the sailors that their work was appreciated and they were wanted. As such sailors who had served for a minimum number of years became eligible for pension after they retired or were too ill to continue. This was one of the earliest formal systems of pension for workers.

Several European nations introduced a pension scheme for soldiers and civil servants. This was a more structured system for granting post-retirement benefits to government servants in the 18th century. The Industrial Revolution was a significant landmark when factory owners began to realize the need to take care of retired workers who could not work any longer. As such private pension plans started emerging in the late 19th century, especially in the United States and Europe, where employers started offering post-retirement benefits to their workers.

Another important landmark in the history of pension occurred in Germany in 1889 when Chancellor Otto von Bismarck introduced the first national pension system to provide financial support to older citizens. This became the role-model for many countries around the world and led to the evolution and development of the social security systems.

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In 1935, President Franklin D. Roosevelt of the United States of America introduced the Social Security Act. This was a major step towards the creation of a government-run pension system, where workers paid a small sum during their working lives and received the benefit after retirement. Many European countries followed suit and government-regulated pension systems became more common worldwide, providing financial benefits to eligible citizens upon retirement particularly in UK, France, and Canada.

After World War II, the pension systems expanded rapidly, and governments began to take interest in providing more comprehensive pension plans to their citizens, with wider benefits – covering disability and survival benefits. Private-sector employers also began offering more formal Defined Benefit (DB) plans, based on their salary and years of service. By the late 20th century, many employers began shifting from traditional Defined Benefit pension plans to Defined Contribution (DC) plans, where workers and employers both contribute a certain amount, and the retirement benefits depend on investment returns.

Today, pension systems are often a combination of social security or employer-sponsored retirement plan to keep pace with the financial difficulties due to the aging population, rising healthcare costs, and economic pressures.  

Nature of pension

Pension is a form of compensation provided to individuals after they retire, typically based on their service or contributions during their working live. In most countries, pensions are considered an important pillar of social welfare, ensuring that people do not live in poverty once they are no longer able to work due to age or disability.

There are two broad categories of pensions:

Public Pensions (State-run): funded by the government to provide financial security to citizens post-retirement.

Private Pensions (Employer or Individual-run): provided by employers or individuals, through private retirement plans like the National Pension System (NPS) in India or 401(k) in the U.S.   

In terms of political philosophy, the debate surrounding pensions generally revolves around whether they should be treated as guaranteed entitlements (a right) or if they should be discretionary (a favour). Let’s examine both of these perspectives in detail.

Pensions is a right

This view-point is rooted in the social contract theory which lays down that individuals within a society agree to collectively support each other for common good. In return, they expect certain guarantees and protections from the state, including economic security during their old age. In this context pension is seen as part of the social contract between the government and citizens who contribute to the economic growth and development during their working years, through taxes or public service. Hence the state should provide for their basic needs after retirement. The right to pension therefore becomes a social justice or moral obligation on the part of the state to ensure its citizens’ welfare.

Today many modern welfare states in Europe view pensions as social entitlements. For them pension is not a favour but an earned entitlement grounded in the principle that individuals should not be forced into poverty once they can no longer work due to age. Pensions, in this regard, are seen as a just reward for years of work, often subsidized by taxes or social security contributions.

Universal Social Security and Human Rights

The notion that pension is a right is also supported by the Universal Declaration of Human Rights (UDHR), adopted by the United Nations in 1948 which recognizes pension as a right or social security. Article 22 of the UDHR states: “Everyone, as a member of society, has the right to social security.” This includes the right to retirement benefits, among other forms of social security.

Pension is an inherent right that allows individuals to enjoy a standard of living and protection against hardships of aging or incapacity. Therefore the state takes an active role in protecting the citizens’ dignity and wellbeing.

Workplace and legal rights

In many countries, pension is not a social entitlement but an employee benefit earned by virtue of lifelong work. Employees contribute their share throughout their lives as deduction from their regular salary, and expect to receive the funds they have contributed to upon retirement.

In countries with strong labour laws, pension is guaranteed by statute or collective bargaining agreements between employers and trade unions. These legal structures reinforce the idea that pension benefits are entitlements, earned through work and protected by law.

In the United States pensions and social security benefits are not a matter of goodwill but are legally mandated for citizens who have paid into the system during their working years. Similarly, many European nations, including the United Kingdom, treat pension as a fundamental right, providing a state pension to all citizens who meet the eligibility criteria.

Pension as a favour

However there is another viewpoint that treats pensions as a favour. This viewpoint stems from the belief that pensions are discretionary benefits that the state or employers provide, as an act of generosity or goodwill.  

The idea that pensions are a favour is often linked to the ability of governments to provide. Some critics argue that pension scheme funded by the state place a heavy burden on public finances.

Many governments around the world are finding it difficult to fund pensions for all citizens. This has led to a debate – whether pension should be guaranteed, or considered discretionary benefit – depending upon the government’s ability to pay.

In countries like India, where pension systems have been aligned with market-driven models, like the National Pension System (NPS), the idea of pensions being a “favour” has gained prominence. The shift towards a contributory pension model where individuals contribute a portion of their earnings to a pension fund, have led to the belief that pension is not necessarily a universal right provided by the state.

Employer-provided discretionary pension

For private sector employees, pensions is often part of employment contracts and a universal entitlement. Instead, it is treated as a contractual obligation between the employer and employees. In many cases, private employers use the discretion to offer or withhold pension plans or modify the terms. Even in cases where pension is offered, the amount varies according to the employer’s financial situation, the worker’s position, and the company’s policies. In such cases, employees may see pensions as a favour granted by the employer rather than as a universal entitlement.

Many workers in the informal sector, such as agricultural workers, street vendors, or small business owners, do not have access to pension plans. This reinforces the perception that pension is not an entitlement, but an additional benefit granted by employers or the government.

Evolving nature of pension: a hybrid perspective

The current trend in many countries is that pension is moving towards a hybrid model combining the right and favour. On one hand, there is growing recognition that pension is a fundamental right that should be guaranteed to all citizens, regardless of their employment history or income level. On the other hand, many governments and organizations are adopting market-driven models that make pension benefits more dependent on individual contributions and economic conditions.

Contributory pension schemes like the National Pension System (NPS) in India and the 401(k) in the United States reflect this shift. These schemes emphasize individual responsibility while still maintaining the social expectation that the state will provide some form of pension support. This hybrid approach balances the fiscal realities of pension funding with the social responsibility of providing for retired individuals.

Conclusion: a right or a favour?

The question of whether pension is a right or a favour is not easy. It ultimately depends on the context in which the pension system operates, the fiscal capacity of the state, and the social and political philosophy of the government. For some, pensions are an inalienable right that ensures citizens’ welfare and dignity in old age. For others, pensions may seem like a favour granted based on the economic and political goodwill of the state or employer.

As countries continue to grapple with issues like aging populations, increasing life expectancy, and fiscal constraints, the ultimate goal is to create a system that ensures that people are not left to face financial hardship in their old age.