Pension programs

There are two types of pension programs in general: defined contribution and defined benefit. Pension program of defined contribution is paid out depending on how much is paid in, and defined benefit depends on workers' salary levels and how long workers work for their employers. In addition, people pay for their pension programs compulsorily and voluntarily. The compulsory part of contributions is usually collected by state-owned institutions and the voluntarily part is paid to private insurance companies which normally offer higher returns.

Pension programs exist because people do not trust their own abilities to generate positive returns from their current excess incomes for their future spending; therefore, they give their money to the professionals and trust these professionals to manage their wealth. Then how well the pension funds are managed depend on the abilities of the fund managers and the general market environment. The security markets at one time spot are zero-sum games, as the amount of losses is equal to the amount of gains. However, the market is not stable, when more cash flows into the market, the losers of the last period could be the winners of the next time period. Therefore, when the market is expanding, there would be more winners in the market over time, and vice versa.

The security market should not be the major target of the pension funds. Although when the economy is in boom, they can generate very high return rates, when in a recession, the pension funds could be stuck in the security market and lose liquidity at the same time.