Module 12 · Pensions and retirement
How pensions work: pillars and ageing societies
The three pillars of retirement income, how pay-as-you-go pensions depend on the number of workers, what a replacement rate tells you, and how retirement ages are changing.
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In this lesson
- Describe the three pillars of retirement income
- Explain pay-as-you-go pensions and why the old-age dependency ratio matters
- Calculate a replacement rate and the gap it leaves
- Compare retirement ages and reforms in Slovenia, Germany, France, the UK and the US
Mojca, 55, opens her pension statement in Ljubljana. It shows a monthly figure that is less than her salary. Her son, 28, asks, “Will there be a pension left for me?” How do pensions work, and why do they keep changing?
Three pillars
A is regular income that replaces pay when you stop working. Most countries combine three sources, called the :
- Public pension (pillar 1). Usually mandatory and run by the state: Slovenia’s ZPIZ, Germany’s statutory pension, the UK State Pension, US Social Security.
- Workplace or supplementary pension (pillar 2). Paid through an employer or a voluntary plan, and usually invested.
- Private saving (pillar 3). What you save and invest yourself.
Pay-as-you-go and funded pensions
Most public pensions are : contributions from today’s workers pay today’s pensioners. There is no personal pot. You earn entitlements, such as years of insurance, that the state promises to honour. A works the other way: contributions are invested, and the pension is paid from the pool they build.
Each has its own risk. Pay-as-you-go depends on the number of workers per pensioner. Funded schemes depend on investment returns and fees.
What a pension replaces
The is your pension as a percentage of your earnings before retirement. A net pension of €1,080 after net pay of €1,800 is a replacement rate of 60%. Many planners aim for 70% to 80% of former net pay, so there is a monthly gap of €180 to €360 to fill from savings. That aim is a rule of thumb, not a law.
The retirement age is rising
The is the age from which you may claim a full pension. It is moving up in many countries as people live longer.
- Slovenia: under the 2025 reform, the age for those with at least 15 years of insurance stays at 65 until 2027, then rises 3 months a year from 2028 to reach 67 in 2035. Those with 40 years of service can retire at 60 now, rising to 62 in 2035.
- Germany: 67 for people born in 1964 or later.
- France: a planned rise to 64 was suspended: the legal age is frozen at 62 years 9 months from 1 September 2026 until 1 January 2028.
- UK: the State Pension age rises from 66 to 67 between 2026 and 2028.
- United States: the full retirement age is 67 for people born in 1960 or later; claiming at 62 cuts the benefit by about 30%.
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