======Funded System======
A Funded System is a type of [[pension plan]] or social security system where benefits are paid from a dedicated pool of [[assets]] that has been built up over time from contributions. Think of it as a giant, collective savings jar. Money goes in from employees and/or employers, gets invested in things like [[stocks]] and [[bonds]], and is expected to grow over many years through [[investment returns]] and the magic of [[compound interest]]. When a member retires, their pension is paid out from this accumulated pot of capital. This approach directly contrasts with a [[Pay-As-You-Go (PAYG) System]], where contributions from today's workers are used immediately to pay the pensions of today's retirees, with no large-scale fund being saved for the future. Most private-sector pension plans in the US and Europe, such as a [[401(k)]] or a defined-benefit corporate pension, are examples of funded systems.
===== How It Works: Your Future, Your Fund =====
The logic behind a funded system is wonderfully simple and aligns perfectly with the principles of saving and investing for the long term.
Imagine you start a new job and enroll in the company's retirement plan. Each month, a portion of your salary, often matched by your employer, is deposited into an investment account. This money doesn't just sit there. It's used to buy a diversified mix of assets. Over the course of your career—say, 30 or 40 years—this fund is designed to grow substantially. The final value isn't just the sum of the contributions; it's the contributions **plus** all the growth it generated from being invested in the [[capital markets]].
When you finally retire, the system starts paying you a regular income. These payments are drawn from the specific pool of capital that //your// contributions helped build. In essence, you are paying for your own retirement with money you saved and grew decades earlier.
===== Funded vs. Pay-As-You-Go (PAYG) Systems =====
Understanding the difference between these two models is crucial for grasping the risks and realities of your own retirement planning. Most countries use a mix of both, with state-run social security often being PAYG and private/workplace pensions being funded.
==== Key Distinctions ====
  * **Funding Source**
    * **Funded System:** Your benefits come from a pot of money built by your own (and your employer's) past contributions, plus investment growth. It is //pre-funded//.
    * **PAYG System:** Your benefits are paid by taxes and contributions from the //current// workforce. It's an inter-generational promise.
  * **Primary Vulnerability**
    * **Funded System:** **Market Risk.** The value of the fund can fall if investments perform poorly, potentially reducing future benefits. It's sensitive to the ups and downs of the financial markets.
    * **PAYG System:** **Demographic Risk.** The system relies on having enough workers to support the number of retirees. An aging population with a lower birth rate (fewer workers per retiree) puts immense strain on a PAYG system.
  * **Core Promise**
    * **Funded System:** "You will be paid back from the capital you helped create."
    * **PAYG System:** "The next generation will pay for you, just as you paid for the generation before."
===== Why This Matters to a Value Investor =====
As an investor, you're trained to look beyond the surface and assess long-term sustainability. Applying this lens to retirement systems reveals why understanding the funded model is so important.
  - **Know Your Risk Exposure:** Just as you analyze a company's balance sheet, you must analyze your retirement plan's structure. If your retirement security depends heavily on a state-run PAYG system in a country with challenging [[demographics]], you understand that the political and economic risks are high. This knowledge empowers you to save more aggressively in plans you control, like an [[Individual Retirement Account (IRA)]] or other funded accounts.
  - **Embrace Ownership:** Funded systems, especially defined-contribution plans like the 401(k), put you in the driver's seat. You own the assets in your account. This fosters a mindset of ownership and personal responsibility, which is the cornerstone of value investing. You are not a passive beneficiary of a government promise; you are the manager of your own future wealth.
  - **A More Stable Foundation:** From a macroeconomic perspective, countries with strong funded pension systems are generally on a healthier long-term fiscal path. These systems create vast pools of savings that are invested productively, fueling economic growth. They also reduce the future burden on taxpayers, as the [[liabilities]] for pensions are backed by real assets, not just promises. For a value investor, a country with a sound retirement infrastructure is often a more stable and attractive place to invest.