Pension is a form of income that workers or their spouses receive after the workers retire, become disabled, or die. A pension is intended to replace, or partly replace, the salary or other regular income previously received by the worker. Most pension programs are operated by governments or by private employers.
The governments of most industrialized countries operate pension plans for their citizens. In the United States and many other countries, a government-run social security program helps retired workers and their families achieve a degree of economic security. In some cases, a person may also qualify for additional pension benefits associated with military or government service. Government pensions are usually financed by taxes paid by individuals and businesses. Government-run pensions are sometimes called state pensions.
Many businesses provide private pension programs for their employees. Benefits from these plans are paid in addition to any government pension that might be available. In most private pension programs, the benefits depend on the employee’s age, years of service, and average salary. Many employers offer thrift, or savings, plans, through which employees contribute a portion of their income for retirement. In most thrift plans, the employer matches a certain percentage of each employee’s contributions. Pension plans provided by employers are sometimes called occupational pensions.
Individual pension plans, or personal pension plans, are pensions established by individuals. They are most common among people who are self-employed or who do not receive a pension from their employer. Contributions vary depending on how much income the person puts into the plan.
Pensions in the United States
Pension programs in the United States benefit people who have had careers in private industry; in the armed forces; or in federal, state, or local government. Many U.S. citizens collect benefits from more than one type of pension plan.
Federal pension plans.
The U.S. government administers four major types of pension plans: (1) Social Security, (2) railroad pensions, (3) military pensions, and (4) federal civilian pensions.
Social Security is the largest retirement income program in the United States. The Social Security Administration, a government agency, runs the program. Employees pay part of their salaries to Social Security through the Federal Insurance Contributions Act (FICA) payroll tax. Employers contribute the same amounts paid by their employees. Most self-employed workers also pay part of their earnings to the program. Eligible people who retire at age 65 or older may get full Social Security benefits for the rest of their lives. Those retiring between 62 and 65 receive reduced benefits. The Social Security program was established in 1935.
Railroad pensions provide retirement income for railroad workers. They are the only type of private industry pension managed by a U.S. government agency. The agency that manages these pensions is the Railroad Retirement Board. Employee and worker contributions are supplemented by government revenues. Railroad workers qualify for a pension after 10 years of service. Retirees who are 65 or older, or are 62 or older and have worked at least 30 years, receive full benefits. The current railroad pension system was established in 1936.
Military pensions have provided retirement income for veterans with disabilities since the Revolutionary War in America (1775-1783) and for retired veterans since the early 1800’s. The Uniformed Services Retirement System includes all military pension programs. It is funded by federal revenues. Military personnel who have served a minimum of 20 years can retire at any age and receive benefits.
Federal civilian pensions provide income for retired government employees other than military personnel. Many federal workers are covered by the Civil Service Retirement System (CSRS), which is funded by employees and the government. Federal employees who were hired during or after January 1987 are covered by the Federal Employees’ Retirement System (FERS), which was established in 1986. The FERS also includes some employees formerly covered by the CSRS. The FERS provides benefits from Social Security, a thrift plan, and a federal retirement plan. The government contributes to the FERS thrift plan and matches a certain percentage of contributions made by employees to that plan. The FERS retirement plan generally pays lower benefits than does the CSRS.
Private pension plans.
There are four main kinds of private pension programs in the United States. These programs include (1) trust-fund plans, (2) group annuity plans, (3) profit-sharing plans, and (4) thrift plans.
Trust-fund plans pay benefits from a trust managed by a bank or other financial institution. Money paid to the pension funds is invested in stocks, bonds, and other sources of income. Most of the money is paid by the employer. Many employers who participate in trust-fund plans must pay premiums to a federal agency called the Pension Benefit Guaranty Corporation to insure worker benefits against inadequate funding.
Group annuity plans cover all participants with an insurance policy financed either by the employer alone or by both the employer and the employees. The policy guarantees that each worker will receive a monthly annuity (payment) after retiring. Life insurance firms manage most group annuity plans.
Profit-sharing plans are funded by employers, largely from a portion of their annual profits. People may be paid in monthly installments or with one lump sum.
Thrift plans allow employees to make contributions for retirement. Companies typically match around 50 percent of the employee’s contributions up to a certain maximum amount. One common type of company thrift plan is a 401 (k) plan. Under this plan, all or part of the contributions come from pretax income, and taxes are deferred until money is withdrawn. Withdrawals or loans from such an account are permitted up to a set limit and only under certain conditions. Many employers provide a thrift plan in addition to another type of pension plan.
Individual pension plans.
Many people put part of their income into individual pension programs. The two chief types of individual programs are individual retirement accounts and Keogh plans.
Individual retirement accounts are special savings accounts administered by such financial institutions as banks, savings and loan associations, and insurance companies. The money in an individual retirement account (IRA) earns interest that is automatically added to the account. In a traditional IRA, people who do not have private pension plans, or who earn less than a certain amount, may deposit a certain sum into the account each year without having to pay income tax on the deposited money until it is withdrawn. In other IRA’s, people may have to pay tax on the money they deposit. The interest earned on any funds in a traditional IRA is not taxed until withdrawn. Usually, if an individual withdraws previously untaxed money from the account before a certain age, a federal penalty tax must be paid.
In a type of IRA known as a Roth IRA, the money deposited in the account is subject to federal income tax at the time it is earned. But the government does not tax interest earned on the account.
Keogh plans may be set up only by people who are self-employed or who own all or part of an unincorporated business. Like IRA’s, Keogh accounts are handled by banks and other financial institutions, and the money is not taxed until it is withdrawn.
Pensions in other countries
Pension systems vary throughout the world. Many developed countries have a combination of government pensions, occupational pensions, and individual pensions. In Canada, for instance, the government provides pension benefits through the Old Age Security program and the Canada Pension Plan. Many Canadian retirees also benefit from employer-sponsored pensions and private registered retirement savings plans.
In the United Kingdom, the government provides a basic state pension for people above a certain age who have paid taxes into the National Insurance system. People who have contributed above a certain level to the National Insurance system may be eligible for a state second pension, with additional benefits. Most large employers also offer private pension plans. The Pensions Regulator, a government agency, regulates occupational pension plans.
Australia operates two main programs for retirement income. The first is a federal means-tested pension, which covers nearly all workers and is funded by general government funds. The second is a system of individual accounts supported by contributions from employers. Employers are required by law to contribute a certain percentage of each worker’s income into a pension fund.
In many less developed countries, there are no pension systems. Older people in such countries may have to rely on their children or other relatives to house them and provide them with food, clothing, and other necessities.
