Pension Pillar

DEFINITION of 'Pension Pillar'

One of three pension formats as outlined by the World Bank in 1998 and which has since been adopted by many economically reforming countries in Central and Eastern Europe. The goal of the three-pillar system is to separate the major objectives of pension (retirement) plans into the following pillars:

Pillar 1 – A standardized, state-run pension system, which offers basic coverage and is primarily focused on reducing poverty.
Pillar 2 – A funded system that recipients and employers pay into; this includes pension funds and defined-contribution accounts/plans.
Pillar 3 – Voluntary private funded accounts, including individual savings plans, insurance, etc.

BREAKING DOWN 'Pension Pillar'

The three-pillar system outlined here very closely resembles what we see in the United States:

Pillar 1 – Social Security provides basic but universal coverage.
Pillar 2 – Comprised of 401(k)s and other employer plans
Pillar 3 – Personal savings and investment plans

This multi-tiered system is seen as more effective than having one state-run pension system to serve all citizens.