Background
A final salary scheme is a specific form of defined benefit pension plan designed to provide employees with a secure, predictable income upon retirement. This type of scheme is valued for its capacity to offer financial stability through a calculation based on salary at or near retirement.
Historical Context
Final salary schemes have their origins in the early 20th century and became particularly prominent in the latter half of the century as nations sought to establish robust pension frameworks. Their widespread adoption was seen in both the public and private sectors, inspired by the need to reward long-term service and offer employees retirement security.
Definitions and Concepts
In a final salary scheme, the annual pension received is typically a fixed percentage of the employee’s salary at or near the time of retirement. This percentage is often multiplied by the number of years contributed to the pension plan. For example, an employee might receive a pension of 1/60th of their final salary for each year of service.
Major Analytical Frameworks
Classical Economics
Classical economists did not focus extensively on pension schemes, as these frameworks were not prevalent during the early development of this economic thought. However, the concept of saving and investment for the future aligns with the principles of personal responsibility advocated by classical economists.
Neoclassical Economics
Neoclassical analyses often emphasize the efficiency and sustainability of financial systems, including pensions. Within this context, final salary schemes are analyzed in terms of their actuarial soundness and the economic incentives they create for both employees and employers.
Keynesian Economics
Keynesian economics would examine final salary schemes in terms of their impact on aggregate demand. Providing financial stability in retirement can support consumption levels amongst the older population, thus positively affecting overall economic stability and growth.
Marxian Economics
From a Marxian perspective, an analysis might explore how final salary schemes contribute to the welfare state and the role they play in labor-capital relationships. This includes examining how these schemes affect class struggles and the distribution of wealth upon retirement.
Institutional Economics
Institutional economists would delve into the regulatory and organizational frameworks that govern final salary schemes. This includes examining how laws, governance structures, and employment norms influence the design and operation of these pension plans.
Behavioral Economics
Behavioral economists might investigate how final salary schemes impact individual retirement planning behaviors. They could explore psychological biases such as present bias or overconfidence and the tendency for employees to undervalue future pension benefits in current decision-making.
Post-Keynesian Economics
Post-Keynesians might focus on the macroeconomic effects of final salary schemes, stressing the role of government in ensuring these constitute a viable component of broader social safety nets.
Austrian Economics
An Austrian economist might critique final salary schemes, highlighting potential issues related to state intervention and market distortions. They may argue for more flexible and market-driven retirement solutions.
Development Economics
In developing economies, the emphasis might be on the feasibility of implementing and sustaining final salary schemes for growing labor markets. This analysis would consider economic diversity and varying degrees of formal employment sectors.
Monetarism
Monetarist perspectives would analyze how final salary schemes influence the broader financial stability of an economy, possibly considering implications on inflation or the monetary supply if funded through government resources.
Comparative Analysis
Comparing final salary schemes with career average schemes and defined contribution schemes reveals key distinctions. Career average schemes calculate pensions based on an average of earnings throughout the career, while defined contribution schemes depend on the amount contributed and the investment returns on those contributions.
Case Studies
Several case studies could illustrate real-world applications and consequences of final salary schemes. These might include the pension plans for public service employees in specific countries and the evolution of such schemes in response to economic or demographic changes.
Suggested Books for Further Studies
- Pension Economics by David Blake
- Retirement Plans: 401(k)s, IRAs and Other Deferred Compensation Approaches by Everett T. Allen, Jr., Joseph J. Melone, Jerry S. Rosenbloom, and Jack L. VanDerhei
- The Future of Public Employee Retirement Systems edited by Olivia S. Mitchell and Gary Anderson
Related Terms with Definitions
- Defined Benefit Pension Scheme: A plan that promises a specified monthly benefit upon retirement, typically based on salary and years of employment.
- Career Average Scheme: A pension plan where the retirement income is based on the average salary over the entire working career of the individual.
- Defined Contribution: A retirement plan where the contribution amount is specified, but the payout depends on investment performance.
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