I'm a blockchain security specialist and writer living in NY.
Today, we can expect to live longer than ever before. The bad news — there may be a big deficit to manage the expenses of the aging population, according to a report by the World Economic Forum.
Based on present-day working population’s contributions being used to fund the pension of the aged and with falling birth rates, the existing system is facing tough challenges. Often termed as another form of ponzi schemes, which work on principle of “Take from Peter to Pay Paul,” the current pension system needs a foundational revamp. Even in developed countries where governments claim efficient pension systems, getting the amount you are entitled to is often complicated.
Many present-day workers either lack easy access to pension plans, or they abstain from buying the ones that are available. The problem is compounded as the increasing number of self-employed, gig economy, and informal sector workers hardly think about retirement planning. Overheads of managing pension accounts and operations as well as inflationary pressures further diminish the returns for the limited number of those who invest in pension schemes. Frauds and scams illegally siphoning pension funds are an additional headache to be dealt with as well. The same WEF report estimates that the worldwide pension savings gap will grow at the rate of 5 percent per year from the US $70 trillion in 2015 to US $400 trillion by 2050 — around five times the global GDP resulting in a highly skewed, high-cost, mismanaged pension system which will also lead to a deficit.
While it may be difficult to change the saving habits of individuals, the infrastructure around the pension ecosystem can be overhauled to not only address the existing shortcomings, but also promote positive participation of individuals.
To address the needs of the beneficiaries, increase participation, and to simplify the complex legacy pension infrastructure, some blockchain based pension systems are attempting to make the pension infrastructure refocus on its original aim of being an “easy and necessary medium for guaranteeing a safe-and-secure financial future.”
Low-cost, lean, efficient and near fraud-free operations, an auditable trail of an individual’s transactions, total transparency, and easy transfers of user profiles are a few benefits offered by such blockchain-based pension solutions.
Though each such system will have its own mechanism, the basic infrastructure will share many similarities. For instance, all stakeholders and entities such as consumers, institutions, developer communities, sector advisors and service providers will join the blockchain as participants with each being given the ability to execute necessary tasks. All transactions as well as assets will be tokenized so as to maintain transparency and a solid immutable audit trail. An individual making a payment for an investment, a pension fund making investment in a security, or a fund being withdrawn will all be authenticated and recorded on the blockchain, and aided by its native crypto token.
Depending on the configuration, all assets such as user profiles, funds, and investments- can be moved from one chain to the other if needed. Such systems would allow full autonomy to the user to select how his money is invested in different assets and in what proportion.
In many countries, government contributes a part of retirement savings, the employer contributes another, and the individual contributes the rest. Blockchain opens the door for the users to make additional investments which may extend to crypto tokens and digital assets, allowing for a new form of diversification. For instance, the blockchain pension offering from NestEgg which is backed by APG, the largest pension fund of the Netherlands, is planning to allow participants to own a piece of future infrastructure.
The system will incentivize the network participants for contributing in ways which will benefit the end users as well at the pension ecosystem. Many such solutions will use smart contacts, the pre-defined self-executing agreements that form the basis of blockchain based business transactions.
Another project working on a solution for the pension industry is Akropolis. The venture is building a blockchain-based platform that allows users to effectively build and manage retirement portfolios.
Akropolis provides a decentralized pension marketplace which gives users access to a variety of pension products. This gives workers the flexibility to choose the most fitting pension product given their needs unlike with traditional pension schemes where these are usually chosen for them. The use of blockchain also makes transactions secure and transparent. Users will be able to track fund performance and audit their portfolios at any given time should they wish.
The project is envisioned to become a multi-jurisdictional, international platform for the efficient delivery of pensions and retirement benefits. Led by crypto luminary and ex Lehman Brothers analyst Anastasia Andrianova, the team plans to release the first version of the platform, external APIs, and dedicated hardware wallets by 2019. It will initially use the Ethereum blockchain but is planned to become blockchain-agnostic in the longer term.
Owing to the ongoing challenges and inefficiencies, the inner workings of pension funds have been questioned time and again across the globe. Blockchain and distributed ledger technology may provide the required solution for improving the pension process, administration, workflow and infrastructure. Additionally, it might help increase the user participation in the pension industry which is also a leading cause of the big deficit. However, user adoption and necessary adherence to the local regulations will be the keys to success for all such projects.