Why Social Security and not a Retirement Plans
More than 9 in every 10 senior citizens in America receive some form of social security payment. It is the only source of income for one thirds of the elderly residents of the United States hence protecting them from diminished income due to retirement, death or disability. It provides benefits to millions of Americans and greatly mitigates the effects of poverty to the elderly after employment (LeBlanc, 2005). The program was set up many years ago and adopted a pay-as-you-go policy whereby the contributors of today pay for the benefits of current retirees.
Not only does the program pay for the benefits of retired individuals, but it also caters for dependants and survivors of workers under the program. Furthermore, it protects people who are disabled or earn very low income. There is therefore no need to plan for retirement because Social Security can cater for our retirement after employment as well as the needs of our dependants or survivors. Social Security in the United States The Social Security Administration was created by the federal government.
All citizens are required to have a valid social security card with a number that the government uses to keep track of yearly wages so that tax can be withheld from the salary. The social security payment taken by the government is placed in a special fund where it earns interest which pays benefits to the retired, disabled or a surviving spouse or child. There are two social security trust funds which are Old Age and Survivors Insurance (OASI), and Disability insurance (DI). These funds are well managed and can only be used to pay for the social security administration and benefits.
This is through a Board of Trustees which keeps an eye on the financial operation of the OASI and DI funds by providing annual reports to congress on the financial and actuarial state of the funds. Retirement Plans Retirement plans are employment-based and can either be defined benefit plans or defined contribution plans. Defined benefit plans provide guaranteed monthly payments to retirees based on years of service and salary. The plan defines the benefit that will be paid upon retirement.
In a defined contribution plan, the employer is not responsible of how the money is invested. The plan does not also guarantee a certain benefit. Instead, the employees control their own pension savings through investing in areas such as the stock market and the returns on the investment credited or deducted from their account. Some of the disadvantages of retirement plans include inadequate income due to poor economic conditions, stock markets losses or poor investment returns. In addition there is the risk of future benefit loss due lack of portability in case of change of jobs.
Other concerns include leakages where individuals withdraw money before retirement. Why Social Security and not a Retirement Plans? (a) Retirement benefits Social security provides income to millions of elderly people in America after retirement. The amount received as a retirement benefit will depend on the amount of money earned during the working years. Social security protects the retired citizens from the risk of inflation, financial market fluctuations and the possibility of outliving the retirement assets.
Another benefit of Social Security is that people who return to work after they start receiving the benefits will be able to get a higher benefit based on their earnings at that particular job. This is because the benefit is recalculated and the extra earnings added to the earning record of the individual. This in turn raises the monthly income received from social security. Unlike social security that ensures a retired individual receives monthly income until death, there are many risks that are involved in private pension plans.
One of this is the inflation risk which affects almost all private pensions. High inflation rates reduce the purchasing power of pension hence low earnings. Another risk is durability risk whereby some individuals exhaust their retirement savings and end up living in poverty (Aaron, Shoven, & Friedman, 1999, pp. 66). In comparison, social security ensures a stable income throughout the retirement age. (b) Survivor benefits In case of death of a spouse, social security protects the partner against loss of their income if the marriage had lasted for at least ten years.
The survivor gets one hundred percent of the deceased benefits thus protecting not only the unemployed spouses but also those with young children. A father or mother with a disabled or minor child will therefore get benefits that are not reduced. In the privatized system, workers have the option to choose against survivorship. If the couple rejects the survivor benefit option, the unemployed spouse may end up getting nothing in case of the loss of a partner (Arnold, Graetz, Munnell & Nationa Academy of Social Insurance (U. S. ). Confe, 1998, pp. 157).
The social security on the other hand assures widows of getting an income at least equal to the worker benefit of the retired husband. (c) Disability benefits A person is eligible for a disability benefit from the government of the United States if he or she is unable to work for at least a year due to an injury or illness. The social security has two types of programs under this benefits which are the Social Security Disability (SSD) as well as Supplemental Security Income (SSI).
There are some people who earn extremely low income or resources and hence are provided with an extra amount under the SSI program. These people earn so little money that they are left with nothing to save after expenditures on the basic needs. This plan therefore helps to raise the living standards of people who would otherwise be neglected in poverty. The Social Security Disability aims at providing an income for the disabled people who are unable to work due to their disability.
However, a person must be examined by a medical doctor to prove that he or she is eligible for this program. This benefit therefore caters for the needs of the disabled to ensure that they live a comfortable life. In contrast with the social security system, a private plan would require the disabled to buy disability and life insurance covers. The shortcoming of such arrangement is the risk of insurers competing for low risk customers rather than concentrating on the price and quality service. Conclusion
Social Security is important as it provides a regular monthly income not only to retired individuals, but also the disabled as well as the survivors or dependants of beneficiaries under the program. It ensures that an individual lives comfortably after retirement without any financial constraints while greatly reducing the risk of impoverishment after employment. In addition, it helps to raise the living standards of people who are earn low income and are therefore unable to put funds aside for saving.
In addition, Social Security funds are well managed through presentation of annual reports that account for the distribution of the funds. Personal savings are not sufficient to sustain individuals throughout their retirement age. More often than not, the savings are depleted after a few years hence leaving the retirees with no earnings. While a retirement plan only limits to giving benefits to individual workers and may not last throughout the retirement age, social security ensures provision of a regular income not only for the retired worker but also to the dependants as well as the disabled.
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