It appears that the next asset type to dominate the market, in the near future, is the newly emerging crypto asset. Its use in financial transactions is on a constantly growing, thus, it is becoming a quite new income source for many people and institutions. However, many governments do not seem to tolerate its inevitable dominance over the financial market and are reluctant to accept it.
Sooner or later, crypto transactions, like other financial operations, will subject to taxing policies. In order for this to happen, governments worldwide have to develop proper means for exercising control over this newborn financial feature.
In fact, any monitoring and logging policies of the cryptocurrency, ironically enough, could contradict its core idea, namely anonymity and transparency. However, it is necessary and has to be done. In order to regulate and calculate tax on cryptocurrency, its transactions have to be monitored and recorded.
No doubt that the main downside of accepting crypto taxation is the concern regarding a full-scale control over literally all financial activities of individuals.
However, this control can make it possible for the contributors to choose how the collected taxes will be further allocated and the fact that a part of the taxes could end up on their own retirement funds. Depending upon the legal retirement age and econom ic situation, this could mean that the hard-working, middle-class people will have a relatively secured retirement. “When I am 64” or later according to the Beatles’ 1967 hit.
Is the blockchain technology the sought after solution for saving a decent amount of money for an early retirement? Well… Basically, nobody is unwilling to quit a five-days-a-week job instead to pack their bags for a luxury cruise trip to some remote luxury island while listening to the Beatles’ “When I am 64”?
Current economies are successful in managing and gathering variant types of tax and allocating it to the payers, for instance, paying back descent amounts of pension to the liable citizens. For example, Norway, which was ranked top in 2017 Global Retirement Index, offers a much higher standard of living for the retirement phase than other countries.
The average monthly salary of the Norwegians in 2018 is estimated to be EUR 4,750 (or approximately USD 5,564). That indicates an annual salary of EUR 57,000 (USD 66,768). According to the official statistics and records, Norwegians put nearly 7.8 percent of their income into the pension fund. Additionally, the employers contribute yet another 14.1 percent to that, bringing the setback allocated to the pension fund to the total of 21.9 percent of the paycheck amount. Consequently, the refundable money accumulated in a Norwegian’s pension account upon going into retirement after a typical 47-year service, between 20 and 67 years of age, amounts up to EUR 586,701 (USD 687,243).
The Situation Looks Pretty Bleak in Other Countries
According to the experts of the World Economic Forum, nearly 48 percent of the world’s population that are over 60 years of age do not currently have access to any proper pension support. It is estimated that the retirement savings gap will reach USD 400 trillion in less than four decades by 2050. It implies that the life for the elderly is literally exacerbating.
The other quite tough challenge, even for the most developed countries, is that the number of pension receivers is on the rise year by year. Life expectancy is increasing slightly but constantly.
According to an official WHO statement, it has surged upwards 5.5 years in a short period since the start of the new millennia through to 2016. Another UN report states that since 1951 (up to the current date) retired citizens have been growing older approximately 1.5 percent per year. This elucidates that the number of people, whom the government is obliged to take care of and to pay money to, is rising.
In the short term, pension funds require reliable means and an IT framework in order to sufficiently process and securely store the tremendously huge database of pensioners. A database that has an ever growing number of annual entries.
Furthermore, there have been numerous cases of pension funds failure even on a global scale. Unfortunately, the news about failed pension even schemes are almost commonplace today. In May of 2016, the Hoover Institution at the Stanford Graduate School of Business published a rather controversial research. This research exposed the loss that was incurred by the US Public Employees Retirement System. The US government on both federal and local levels has been unable to fill the gap in the pension market as it is estimated by experts to be over USD 3.4 trillion.
The report also shows that, in some states, such as Illinois, Arizona, Ohio, Nevada, and in some cities, like Chicago, Dallas, Huston, and El Paso, where the people’s interests are protected not only by law enforcement but also by the Media, pension funds have not been paying the benefits in part.
The researchers suggest that pension funds concealed this information through some “accounting tricks” in order to prevent the media to get in or any federal scrutiny. The real gap can be up to three times higher than official figures say.
Who Wants to Be a Crypto Pensioner?
Those who are optimistic about cryptocurrencies can now take the offer to integrate crypto assets into their future pensions plans. For example, through investment in dedicated, sector-specific, non-public funds, respectively, they could get a refund in form of investment benefits as they are about to retire.
Looks promising and tempting. Companies, like Bitcoin IRA from Los Angeles, CA are the pioneers of this new market, offering investment in these eight different cryptocurrencies: Bitcoin, Bitcoin Cash, Z Cash, Ethereum, Ethereum Classic, Stellar Lumens (XLM), Litecoin, and Ripple.
Turns out, traditionally, more conservative organizations and institutions — even — are showing an interest in the looming cryptomarket. This year, the national pension fund of the Korean Republic published news about having done an investment of KRW 2.6 billion (equal to USD 2.3 million) in four different cryptocurrencies.
New technologies make it possible to take further steps towards the implementation of a transparent and reliable blockchain-based system for a pension fund.
Companies that are dedicated to working on popularizing cryptocurrency have been adopting this idea and are working on creating software-based blockchain technology. The applications that are currently under development soon bring about a possibility of a regular saving plan.
They could actively track and manage the pay as you go pension contributions in real time.
The implementation and application of this software get both pension funds and future pensioners involved. They, in particular, offer contributors (people who pay taxes) the opportunity to actively monitor the decisions that the software makes about their payments.
Any developer that is entrusted with the task of creating a trustworthy platform to serve a huge number of contributors must focus on security and resistance to forgery and hacker breaches as the first priority. Other criteria to take into account are data preservation and general resilience. Real-time data processing demands the ability to withstand enormous loads and I/O traffic. Besides, the new blockchain platform will provide the pension funds and the contributors with greater transparency, hence, preventing the risk of misinforming the investors and possibly evasion.
Notably enough, in late 2017, the first two largest pension funds of the Netherlands: APG (currently ranked top first financial service provider on the collective pensions market) alongside with the PFZW (the Stichting Pensioenfonds Zorg en Welzijn, eng: Pension Fund for Care and Well Being is the second largest pension fund in the Netherlands) announced their test launch of blockchain applications. The two companies are certain that blockchain will help considerably cut the operational costs of a pension system.
Highly reliable blockchain platforms, featuring fast transactions, could be considered a suitable solution for large projects.
The number of pension funds worldwide, that are keen to utilize the blockchain technology, is set to rise even further in the near future. This is because it is is economically efficient and enables the contributors and funds to monitor their cash flow in real time.
Below is a depiction of a possible capital saving and management system:
As shown on the picture, the blockchain system features the capability to track the cash flow from the contributors account down to depositing on the fund assets and back.
Do Pension Tokens Beneficially Dominate the Future Markets?
Other solutions by blockchain include partial refunds of taxes on crypto transactions to wallets in the form of pension tokens. Tokens will not be redeemed (traded against cash) before their owners reach the retirement age, including this provision on smart contracts for tokens, which seems to be fairly realistic.
The tokens will virtually make the choice of retirement age with ease, and the contributors could go into retirement at any age. Thanks to the rigid and accurate database already on the blockchain, with a full record of the cash flow, the pension calculation is simple and real time.
Alternatively, the decision of ceasing to work could be made upon reaching a particular amount of assets on the contributor’s account and not after a certain age.
The flexibility and security offered by blockchain is worth investing in to further technological development and adopt new platforms.
“The application of blockchain to the pension system might not translate itself directly into earlier retirement as such aspects are driven by different socioeconomic considerations. However, the logging of social security and pension contributions over a Blockchain or DLT solution would provide an auditable trail of contributions which should make it easier for the administering bodies to assess the entitlement process. Efficiencies will always lead to a bigger pension pot,” Wayne Pisani, the partner of the Grand Thornton, the expert in Tax and regulatory, comments.
Meanwhile, analysts of the global consulting firm PWC feel generally positive about the integration of blockchain in the world financial systems. Their research emphasizes transaction transparency and security as the obvious “pros.”
“The possible efficiencies are, indeed, multi-fold: a digitized collection of data, live reporting, live reconciliation, automated payments, and reduced bureaucracy,” Wayne Pisani adds.
The advantages offered by blockchain technology in the pension system are as follows:
Transparent transactions. Cash flow is monitored and reported in real time
- High speed. It takes a fraction of a second to process transactions or to submit an inquiry into the database.
- Ease of use. Since the bureaucracy practically is removed, having to fill in long tax declarations for the pension fund turns into an old-school burden.
- Security. All the transactions are safe from forgery, evasion, and the similar.
- Sparing the costs. Since money can be transferred directly to the pension fund, the cost of such transactions is typically much lower than in the conventional financial model.