There are different kinds of retirement incomes that retirees can choose from, depending on what their lives were during employment. But two of the most common retirement incomes are Social Security and pensions, which can both be structured and funded in different ways.
Social Security is under the federal government and is funded through the collected payroll taxes from companies and employees. The pension, on the other hand, is where the contributions come from the employer on behalf of their employees. I will be talking about them separately and their key differences below, so continue reading to find out more about these two.
Social Security benefits are received by many seniors, but this is not considered as their pension. It only looks like one, especially if you paid into it while you were working. The amount of Social Security check will depend on the age of the beneficiary when he first started receiving the benefits. This will also depend on how much you earned while you were still contributing to it. This time of retirement income may not fully meet or replace your income or financial needs.
The pay-as-you-go system is the one funding the Social Security, which means that you’re paying for it while you’re working. Every time you get your pay stub, you will see that the taxes for Social Security will be listed as FICA. There are also some funds used for the retirees’ benefits.
Even before the 401(k) plans and IRAs, pensions were popular. Most probably, your grandparents and parents have enjoyed huge pension benefits if they worked for some big companies for years. Nowadays, pensions are known as defined-benefit plans, since the amount that you will receive during retirement is defined or decided in advance.
A private pension is created by your employer called a retirement account, where the employees can benefit in the future. Employers who are governed by certain regulations and law usually contribute for the employees. Once the employee retires, he will receive monthly payments. Employees who are under the state government also receive pensions as well.
The payouts from the private pension depends on different factors, including how long the employee worked for the employer. As an employee, you have the option to choose a monthly annuity check or a lump-sum payment. Back then, employers were all required to maintain excess assets within their chosen plan. This law was made so that when retirees need funds, the money will be available for them immediately.
Years ago, employers started encouraging the Congress to amend the rules of pension. This is to let them use money over pension plans that are funded for the benefits of their employees, including early retirement payment and health plans.
There is a book entitled How Companies Plunder and Profit from the Nest Eggs of American Workers, written by Ellen Schultz. It relates as to how all of these changes led companies to move their asset pensions to company offers that are unrelated. The result of this is huge downsizing of pensions and pension funds that are underfunded.
Nowadays, the pensions of the private-sector are becoming obsolete. But there are around 42 million Americans who remain covered by these pensions up until today.
Difference Between Social Security And Pension
Both Social Security and pensions can provide income to retirees. But both of them can’t fully fund the expenses of retirees, and both retirement incomes can face challenges. Social Security may continue to provide help to the elderly and disabled for years, but as to how much is this will remain to be unknown. Pension plans, on the other hand, are unfortunately dying and are replaced by the defined contribution plans, including the 401(k) plans and IRAs.
These are all the information that you should know about the difference between Social Security and Pension. Both are retirement incomes, but Social Security is the one that is still standing tall up to this day. The pension, as mentioned above, is slowly becoming obsolete due to the different contribution plans that are becoming available for employers and companies.
Based on Materials from Investopedia
Photo Sources: Pixabay, The Blue Diamond Gallery, Trekkerpedia