The Romans Started the First Pension Scheme in 13 B.C.

A pension fund (also known as a retirement fund or superannuation fund) is any plan, fund, or scheme which provides retirement income. The Romans started the first pension scheme in 13 B.C. when Roman Emperor Augustus began paying pensions to Roman Legionnaires who had served 20 years. These armed forces pensions were financed at first by regular taxes, then by a 5% inheritance tax.

The Germans (Duke Ernest the Pious of Gotha) started the first pension fund in 1645 called the Widows’ Fund which provided benefits for the widows of the clergy. They then followed this up with the widows’ fund for teachers in 1662. It then took another 200 years before broad civilian pensions became common. Once again Germany was the pioneer with German Chancellor Otto von Bismarck introducing modern civilian or social pensions in 1889.

The Federal Old-age and Survivors Insurance Trust Fund is the world’s largest public pension fund which oversees $2.645 trillion USD in assets. Worldwide pension funds hold over US$20 trillion in assets, with the largest 300 accounting for $6 trillion in assets.

When governments first introduced their pension schemes they did not envisage the future costs as they set the pensionable age much higher than the life expectancy at the time. For example, when Germany introduced their old-age and disability pensions (which could be accessed upon turning 60), the average life expectancy of Germans was only 45. Today Germans have a life expectancy of 81, and pension payments account for 28% of Germany’s government spending.

To limit the unsustainable cost of government pensions as populations age, most governments have tried to push the cost onto both employers and the citizens themselves. Most minimum wage legislation requires employers to make superannuation contributions on behalf of their employees. Governments also designed their tax system to encourage citizens to contribute to, and fund, their own retirement. Through generous tax concessions, the aim is for the majority of citizens to be self-sufficient in retirement. The government pensions are then only a safety net for the poor, disabled, disadvantaged, or unlucky.

In Australia for example, employers are required to contribute 9.5% of an employee’s gross wages into super. This was introduced in 1992 by the Keating Labour Government as a compulsory ‘Superannuation Guarantee’ system which was part of a major reform package addressing Australia’s retirement income policies. This contribution was originally set at 3% of the employee’s income and has been gradually increased by the Australian government.

In addition, Australian employees and those self-employed, can contribute up to $25,000 into super per year and claim a tax deduction. For a taxpayer in the 49% tax bracket making these super contributions saves them $8,500 in tax. In addition, Australian super funds are concessionally taxed on earnings, so the compounding of earnings in super produces higher returns (and fund balances).   Depending upon their circumstances, super funds pay 0%, 10% or 15% tax on their earnings.

To avoid the 9.5% super guarantee obligations, many Australian businesses replaced their employees with independent contractors. Where the independent contractors are operating through an entity (a partnership, company or trust), the employer saves the 9.5% super contributions.