The US pension system, although not perfect, is considered one of the most perfect in the world, and the size of pensions is higher than the average in European countries.
Both public and private pension systems operate in the United States. Thanks to this, Americans can provide themselves with not one, but three pensions: public, private corporate at the place of work and private individual by opening a personal retirement account.
Solidarity (pay-as-you-go) pension systems
In the solidarity system, pensioners do not receive their own money, but the money of the currently employed payers of taxes and fees. Thus, the pay-as-you-go system represents the continuity of generations.
The essence of this system is that receipts to pension funds in the form of fees for pension insurance, almost without lingering on pension accounts, go to the disposal of pensioners in the form of monthly pension payments. Thus, guaranteed payments of pensions in established volumes are provided.
Accumulative pension systems
If the main state pension program is of a distributive nature and performs primarily a social function, then all other pension systems existing in the United States are built on a funded basis. Therefore, the respective pension funds are the largest source of long-term investment in the economy. Accumulation systems include both public and private pension programs. State funded programs are designed to provide for civil servants and local government officials. Federal programs mainly cover government officials and military personnel. There are two types of funded pension programs: defined benefit plan and defined contribution plan. The first type guarantees participants a fixed amount of pension, which for each employee is determined taking into account the size of the salary and the length of service in the company. Typically, defined benefit programs generate funds from contributions from entrepreneurs, and employees themselves do not pay contributions to these funds.
However, in the last 20-30 years, programs with a certain contribution have developed in the private sector of the economy. These retirement plans are usually equally funded by entrepreneurs and employees. Moreover, each participant has an account in the pension fund and can choose between various investment programs offered by management companies. Thus, he himself is responsible for the results and, to a certain extent, determines the amount of subsequent pension payments himself.
Contributions to the state pension fund are made in an equal share at a rate of 7.65% by employees and employers, but only up to $ 65.4 thousand per year. Self-employed people pay for themselves both as an employee and as an employer – 15.3% together. About a fifth of this goes towards retirement health insurance when work health insurance ends.
The right to a pension for US citizens arises from 65.5 years, regardless of gender, and in case of disability – a little earlier, but each unfinished year “eats” about 7% of the pension. And if the insurance experience is less than 10 years, the pension is not assigned at all, although it remains possible to apply to the state for a poverty benefit. In the coming years, the retirement age for Americans will rise to 67. The calculation of the pension takes into account the length of service, the amount of insurance premiums and inflation rates. The average US government pension is between $ 1,100 and $ 1,200 per month.
The US Tax Code allows workers to contribute a portion of their salary before tax to their personal retirement savings accounts as part of a locally funded defined contribution retirement benefit plan. In addition, employers can voluntarily deposit funds into the same accounts, and such payments are also tax-free. Employees receive ownership of their contributions from the moment they are paid. For contributions paid by an employer, it usually takes 5-6 years from the time they join the plan before employees get inalienable ownership of them.
Investments are allowed in specialized trust funds or, for more financially prepared persons, in stocks or bonds of specific issuers. Thus, another very important effect for the development of the economy is achieved – investment. As of March 31, 2010, the total assets of pension funds exceeded $ 9.838 trillion. For comparison: the US gross domestic product for 2013 was $ 16.8 trillion. It is a huge investment resource that fuels American business.
The value of pension savings is gradually increasing due to the receipt of investment income. Although during the crisis, a temporary decrease in the value of deposits is also possible due to the fall in the value of financial instruments (stocks, bonds).
After the onset of retirement age, a person has the right to receive pensions, and after a few more – to withdraw all the funds, spending them on medical treatment, tourism or donating to descendants. However, in this case, payments are stopped and the pension account is closed.