State Pension

State Pension (also known as 'Social Security' in the United States) is a regular payment from the government that individuals can claim upon reaching the official retirement age. It is designed to provide a foundational income level to cover basic living costs in retirement. These systems are typically funded on a 'pay-as-you-go' basis, meaning contributions from today's workers and their employers (through specific taxes like the FICA tax in the US) are used to pay the pensions of current retirees. The amount you receive generally depends on your history of contributions, which is tied to your working life and earnings. While a crucial part of the social safety net, the State Pension is rarely sufficient on its own to fund a comfortable retirement. For a savvy investor, it's best viewed as the base layer of a much larger retirement plan that you build yourself through saving and investing.

The specific rules for State Pensions vary significantly from country to country, but they generally fall into two broad categories.

In the United States, the system is universally known as Social Security. To qualify, you must accumulate a certain number of 'credits' by working and paying Social Security taxes over your career. The amount of your monthly benefit is calculated based on your average indexed monthly earnings over your 35 highest-earning years. You can start claiming benefits as early as age 62, but your monthly payment will be permanently reduced. To receive your full benefit, you must wait until your designated 'full retirement age,' which varies depending on your birth year. The system is a cornerstone of American retirement, but its long-term financial stability is a subject of ongoing political debate.

Across Europe, there is no single system. Instead, each country has its own unique model, creating a patchwork quilt of rules and benefits.

• The UK: The 'New State Pension' is a flat-rate system based on your National Insurance contributions record. You generally need 35 qualifying years of contributions to receive the full amount.
• Germany: The 'Gesetzliche Rentenversicherung' is a core part of the German social security system, with benefits linked closely to an individual's lifetime earnings and contributions.
• France: The French system is notoriously complex, with different regimes for different types of workers, but is also fundamentally based on contributions over a working lifetime.

Despite the differences, most European systems share the same 'pay-as-you-go' structure and face similar demographic challenges.

A disciplined value investing approach is built on understanding true value and mitigating risk. When viewed through this lens, the State Pension should be treated with healthy skepticism and careful planning.

You cannot and should not think of your future State Pension as a guaranteed asset in the same way you would a stock, bond, or property. Why? Because you don't control it. The rules are set by politicians and can be changed by them. This introduces a significant 'political risk' that is outside of your control. Governments can:

• Raise the retirement age.
• Change the formula used to calculate benefits.
• Increase taxes on pension payouts.
• Alter the number of contribution years required.

These are not just theoretical risks; many countries have already made such changes in response to financial pressures.

Most Western countries are facing a demographic challenge: populations are aging, and birth rates are falling. This means that, over time, there will be fewer workers paying into the system for every retiree drawing benefits from it. This puts immense strain on the 'pay-as-you-go' model and increases the likelihood that governments will have to reduce benefits or raise taxes to keep the system solvent. Relying on a system under such pressure for the bulk of your retirement income is a risky strategy.

Given these realities, how should a prudent investor approach the State Pension?

• Treat it as a bonus, not the plan. Your personal savings and investment portfolio should be your primary plan. The State Pension is the safety net underneath, not the main event.
• Focus on what you can control. You have direct control over your own savings rate and investment decisions. Concentrate your efforts on building a robust portfolio, ideally filled with undervalued, high-quality businesses that can grow your wealth over the long term.
• Factor it in, but conservatively. When conducting your retirement planning, it's reasonable to include your estimated State Pension. However, it's wise to use a conservative estimate to create a margin of safety against future changes. Many online government calculators can provide a projection, which you can then discount for your own planning.
• Know the rules. Make sure you understand the contribution requirements in your country to qualify for the maximum possible basic benefit. Don't leave this “free” money on the table due to a small, avoidable shortfall in your contribution history.