How does the US pension system work? - ForumDaily
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How does the pension system in the US

How do retirees live in a country where the retirement threshold is 67 years, that is, in the United States of America.

Photo: Shutterstock

Pensions in the United States are higher, pensioners have significant benefits, but few wait until the due date: often Americans agree to retire earlier, albeit with a fine of 20% of pension payments, explains RIA News.


The pension system in the United States is multi-component. The pension consists of the one that is paid by the state, as well as the funded part. Accumulative, in turn, consists of what the employing company pays (the so-called 401K), if it is a civil servant - from government funds, as well as from the pensioner's own savings, which can be accumulated in his account or invested in securities and managed by funds ...

Both of these items are not tax deductible. Additional benefits get the military, who have a separate fund. So there are cases when the pensioner receives three pensions.

The retirement age in the United States is 67. In this case, you can exit earlier, but then the payments will be less. You can retire early at the age of 62. For this you need to write a statement and indicate the reason for your decision. At the same time, the social pension will be only 70-80% of the accrued monthly payments, depending on the age and place of service.

For late retirement, which is 70 years, monthly payments increase by 24%. But if the pensioner leaves even later, he must start withdrawing the funds accumulated in the pension account. This applies to both the state part of the pension and the funded one. Otherwise, tax will be charged on these funds.

Medicare preferential health insurance is laid to a pensioner with 66 years. For low-income retirees, additional Medicaid benefits apply.

Such a late retirement age in the United States is due to the constant increase in life expectancy, which was observed until 2016. By the end of 2017, life expectancy had slightly decreased: to 78,6 years from 78,7 years earlier, as follows from data published on the website of the US National Center for Health Statistics (NCHS). Women in the United States live longer on average - 81,1 years, men - 76,1 years.

As life expectancy has increased gradually, there is a progressive scale for retirement. It allowed people born in certain years to retire earlier. For example, those born before 1937 could have done so at 65. All those born after 1960 go on a well-deserved rest from the age of 67.

State system

The Social Security nationwide pension benefits law, which is still in force today, was signed by President Franklin Roosevelt in 1935. According to this document, all persons whose age exceeds the officially established threshold are paid a cash benefit, the amount of which depends on the average level of wages.

Moreover, in America there is a program for the poor (SSI), which helps out in cases when the amount charged by the state is lower than the subsistence level. According to the terms of the program, each pensioner-participant is paid an additional difference, which does not reach the subsistence level.

Its value varies from state to state. For example, in the state of New York at the end of 2016, the cost of living was $ 990. If the social pension fell short of this threshold, the state would pay extra to at least that level.

At the same time, Anton Konev, a staff member of the Senate of the New York State Assembly, told RIA Novosti that assistance to such citizens is not limited to these payments.

“The state pension is on average 1000-1200 dollars a month. In addition to these payments, pensioners receive separate money for food. They are provided with assistance in paying for housing and communal services (electricity and heating). Plus, they get food delivered to their home. Or they go to special clubs for the elderly, where they are also fed, and the food is quite good. They are also paid for the arrival of a nurse who visits them once a day,” the agency’s interlocutor explained.

“As for nursing homes in the USA, those pensioners who only have a state pension (without the funded part) receive free accommodation in these homes. It is paid partly by the state, partly by the federal budget,” Konev added.

He emphasizes that “now in America the authorities are trying to leave older people in their own houses and apartments.”

“As I already said, nurses visit them, the state pays the salaries of people who buy food. Or they take pensioners to the store. “Many apartment buildings have a staffed program that pays for buses that take pensioners to the store twice a week,” Konev said.

He emphasizes that every politician is very focused on working with this electorate also because these are the most socially active citizens. “Unlike young people, they almost always vote. Elderly voter turnout is close to 80%. They don’t vote when they really can’t,” Konev noted.

American beneficiaries

Any person who works for the state, for example a teacher, receives a pension under a separate pension scheme - in addition to the basic pension, there are separate contributions to special funds.

“I work for the state. My contributions go into a separate New York State pension fund. All employees of the city of New York have exactly the same one,” explained a representative of the Senate staff.

According to him, the calculation is carried out differently in each case. “For example, my pension will be 65% of the average salary for the last three years of work for the state. Some have 75%. For people who later started working for the staff, it’s 50%,” explains the agency’s interlocutor.

Plus, civil servants are retiring earlier. For the state of New York it's 65 years.

In 1920, the United States passed the Civil Service Retirement Act. He, as former civil servants note, was more “favorable” to them than current norms.

“According to that law, we were entitled to an increased coefficient for calculating length of service, when you could be only part-time employed, but received payments from the state to the pension fund as for full-time employment,” former US Postal Worker Cindy Worrell told RIA Novosti.

However, in 1983, the legislation was tightened: the calculation is carried out clearly on the basis of the time spent at the workplace. As Worell admitted, for health reasons, she was unable to work until the age of 65 for several months, which is why her pension amounted to 80% of her due payments.

The retirement age is calculated differently for military and police officers. For example, colleague Worrell, who was retiring under the old law, received 65 years of experience by the time he retired at age 40. Thanks to his service in the US Army, he received large additional payments. So, according to Worrell, “he became a real rich man.”

The military and police in the United States are a completely different category, they can begin to receive a full-fledged pension after 20 years of service. Moreover, according to American law, a military man who served 20 years in peacetime or who has fought in the US Army for at least one day is considered a veteran. In addition to pensions, veterans have benefits, for example, for travel.

“There are special programs for veterans. In all social programs they always ask whether a person has served. Veterans are provided first in all social programs,” says Konev.

“By the way, today I was just deciding on a veteran’s issue. The people who lived with him did not pay rent. We are kicking them all out. But we will ask separately for the veteran so that he is not thrown out onto the street,” he set an example.

Additional payments

Another source of retirement benefits in the United States is accumulation funds and personal accounts of Americans. The law regulating this process was passed in 1974. Funds that accumulate such funds can be both private and public. It should be noted that the amount transferred to such a fund is not taxed. The funds accumulated in this fund are available at any time for the future pensioner. But if a person asks for them before the onset of retirement age, he will be forced to pay tax.

On the subject: Worth Knowing In Advance: Nasty Surprises in US Pension Security

The company-employer can act in the same way. The first pension fund, in which deductions were made only by employers, appeared in 1875. The system of such payments is called in the USA 401K. And the business is interested in transferring money to employees in a savings fund - due to this, the company can reduce the tax rate. Deductions to such funds from the employer can be either 10% of salary or 50% or higher. It all depends on the decisions of the individual company.

By agreement with the employer or by decision of the citizen, the funded part can be sent to the selected investment fund. The actual amount of savings on an employee’s retirement account depends on the success of a particular investment company.

“This is a risky, but potentially more profitable instrument. This model allows you to additionally finance the economy from pension savings, ensuring business development. Infusions into the economy through such an instrument amount to trillions of dollars a year,” notes Scott McDonald, leading economist at the Washington analytical agency Smith`s Research & Gradings.

According to him, after the change in legislation, the tool of savings funds and personal accounts of Americans began to be used in the United States in the mid-1980s.

“Of course, the option of investing in securities is risky. In 2008, many pension savings took a hit. But now the economy is growing, and the forecast is positive,” the expert finally said.

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