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Pensions in the United States

Pensions in the United States

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Piggy Bank with retirement savings message
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In the United States, employers play a key role in helping workers save for retirement. About half of all privately employed people and most government employees are covered by some type of pension plan. Employers are not required to sponsor pension plans, but the government encourages them to do so by offering generous tax breaks if they establish and contribute to employee pensions.

The federal government's tax collection agency, the Internal Revenue Service, sets most rules governing pension plans, and a Labor Department agency regulates plans to prevent abuses. Another federal agency, the Pension Benefit Guaranty Corporation, insures retiree benefits under traditional private pensions; a series of laws enacted in the 1980s and 1990s boosted premium payments for this insurance and stiffened requirements holding employers responsible for keeping their plans financially healthy.

The nature of employer-sponsored pensions changed substantially during the final three decades of the 20th century. Many employers -- especially small employers -- stopped offering traditional "defined benefit" plans, which provide guaranteed monthly payments to retirees based on years of service and salary. Instead, employers increasingly offer "defined contribution" plans. In a defined contribution plan, the employer is not responsible for how pension money is invested and does not guarantee a certain benefit. Instead, employees control their own pension savings (many employers also contribute, although they are not required to do so), and workers can hold onto the savings even if they change jobs every few years. The amount of money available to employees upon retirement, then, depends on how much has been contributed and how successfully the employees invest their own the funds.

The number of private defined benefit plans declined from 170,000 in 1965 to 53,000 in 1997, while the number of defined contribution plans rose from 461,000 to 647,000 -- a shift that many people believe reflects a workplace in which employers and employees are less likely to form long-term bonds.

The federal government administers several types of pension plans for its employees, including members of the military and civil service as well as disabled war veterans. But the most important pension system run by the government is the Social Security program, which provides full benefits to working people who retire and apply for benefits at age 65 or older, or reduced benefits to those retiring and applying for benefits between the ages of 62 and 65. Although the program is run by a federal agency, the Social Security Administration, its funds come from employers and employees through payroll taxes. While Social Security is regarded as a valuable "safety net" for retirees, most find that it provides only a portion of their income needs when they stop working. Moreover, with the post-war baby-boom generation due to retire early in the 21st century, politicians grew concerned in the 1990s that the government would not be able to pay all of its Social Security obligations without either reducing benefits or raising payroll taxes. Many Americans considered ensuring the financial health of Social Security to be one of the most important domestic policy issues at the turn of the century.

Many people -- generally those who are self-employed, those whose employers do not provide a pension, and those who believe their pension plans inadequate -- also can save part of their income in special tax-favored accounts known as Individual Retirement Accounts (IRAs) and Keogh plans.

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This article is adapted from the book "Outline of the U.S. Economy" by Conte and Carr and has been adapted with permission from the U.S. Department of State.

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