For most people who have worked hard for 30 years, their primary source of income after retirement is their pension. Generally, the pension received after retirement is not as high as the salary earned during one's working years, which naturally leads to a reduction in income during retirement. For U.S. government civil servants or those paid by the government, their pension plus Social Security benefits typically amount to 60% to 75% of their pre-retirement annual salary. Employees of private companies, however, are subject to a different retirement system; since each company's situation varies and the amount contributed by employees to retirement funds differs, the pension they can receive after retirement must be observed and analyzed on a case-by-case basis.
The U.S. pension system for the general public is relatively complex, but it primarily consists of three systems. First, every working individual who has accumulated enough work credits can receive Social Security benefits from the federal Social Security Administration after retirement. This is a national pension system established by the government, aimed at ensuring that every working person has basic living security after retirement. Second, there is the pension system for government civil servants and those paid by the government, which is designed to ensure that civil servants have generous benefits and retirement living standards. The civil servant pension system is usually referred to as a "defined benefit" system, where the pension amount is calculated based on factors such as the civil servant's pre-retirement annual salary and length of service. Third, the private company employee retirement system is primarily funded by both employers and employees purchasing retirement funds; the money accumulated during these working years becomes the pension after the employee retires. This system's retirement benefits for employees depend largely on the company's situation, with significant variations across industries. This retirement system is also known as a "defined contribution" system.
The U.S. pension system can also be categorized by the source of funds into Social Security, Individual Retirement Accounts (IRAs), company retirement plans (401k), and pensions. According to statistics from the U.S. Social Security Administration, the retirement funds for Americans primarily come from the following sources: Social Security benefits, accounting for approximately 39%; company or government retirement plans, accounting for about 19%; individual stock and securities earnings, accounting for about 26%; earnings from other assets, accounting for about 13%; and other income, accounting for about 3%. From the sources and proportions of American retirement funds mentioned above, it can be seen that Americans do not rely solely on pensions but rather on a combination of multiple sources. Therefore, financial management regarding retirement funds is of great importance; if you do not manage your finances, not only will your finances not "manage" you, but you may even face financial loss.
The U.S. Social Security System
In the United States, anyone working in any company or government department who has accumulated 40 credits can receive Social Security benefits from the government on a monthly basis upon retirement. Because everyone's income differs, the Social Security benefits received will also vary. Generally speaking, the Social Security benefits received by retirees annually account for less than 40% of their pre-retirement income.
Let us look at the Social Security benefits for someone with an annual salary of $40,000 in the United States. For Americans born after the 1950s, the legal age to receive full Social Security benefits is 66 and a half. If one begins receiving Social Security benefits at this age, they can receive $1,238 per month, totaling $14,856 per year.
If a person with an annual salary of $75,000 begins receiving Social Security benefits at age 66 and a half, how much will they receive per month? The U.S. Social Security benefit calculation follows a model based on monthly wage income plus two calculation points: the first point is $680, and the second point is $4,100. A person with an annual salary of $75,000 has a monthly wage of $6,250. If they retired in 2007, their monthly Social Security benefit, calculated via the formula, would be: 90%(680) + 32%(4100-680) + 15%(6250-4100) = $1,960, totaling $23,520 per year.
Social Security benefits can also be claimed early, as early as age 62, but one will not receive the full amount. A person with an annual salary of $40,000 who claims early would receive only $810 per month, or $9,720 per year. Social Security benefits can also be delayed. With the current poor economic situation in the U.S., many people delay retirement and continue working, but if there is earned income, Social Security benefits will be reduced by a certain percentage. Therefore, those who wish to work can continue until age 70 before claiming Social Security benefits. If claimed at age 70, a person with an annual salary of $40,000 would receive $1,739 per month, totaling $20,868 per year. If a person dies suddenly after accumulating enough work credits, their family members may be eligible to receive a certain percentage of Social Security benefits depending on the conditions. For example, minor children can receive $714 per month in Social Security benefits, a spouse caring for the children can receive $714 per month, and a spouse who has reached retirement age can receive $952 per month.
The U.S. Civil Servant Retirement System
The retirement system for U.S. federal, state, and local government employees is quite different from that of private companies and can also be called a defined benefit pension system. The federal civil servant retirement system was established in 1920, with 330,000 people covered at that time; by 1996, the number of civilian personnel covered by the federal government retirement system had increased to 2.6 million. Civilian personnel employed by the federal government before 1984 enjoyed retirement benefits according to the Civil Service Retirement System. Civilian personnel employed by the federal government on or after January 1, 1984, enjoy retirement benefits according to the Federal Employees Retirement System.
The Federal Employees Retirement System provides government employees with more favorable retirement benefits than the Civil Service Retirement System. In addition to a fixed-amount pension, government employees can also enjoy Social Security benefits and establish their own tax-deferred retirement savings plans. According to the Federal Employees Retirement System, federal government employees can contribute 10% of their salary to a retirement savings plan, while the government contributes 5% of the employee's salary into their retirement savings plan; this is basically similar to the pension system for private company employees. Under the Federal Employees Retirement System, the retirement benefits for U.S. civil servants are far better than those for ordinary private sector employees. Government employees covered by the Federal Employees Retirement System must pay a 7.65% Social Security tax on their wages, with the government paying an equal amount, and they must also pay 0.8% of their wages into the retirement fund.
Federal civil servant pension benefits mainly depend on the level of salary and the length of service. Under the Federal Employees Retirement System, the pension calculation standards for government employees who retire at age 55 with 30 years of service, age 60 with 20 years of service, or age 62 with 5 years of service are basically the same. For a government employee retiring at age 55 with 30 years of service, the annual pension is calculated as 1.1% of the average of their highest 3 years of income multiplied by the number of years of service. If a civil servant with an annual salary of $75,000 retires after 30 years, the annual pension calculation formula is: 75,000 x 1.1% x 30 = $24,750, which is equivalent to 33% of their pre-retirement salary. If this civil servant reaches the age to receive full Social Security benefits, they would receive $23,520 in Social Security benefits. The combined pension and Social Security benefits would be $48,270, equivalent to 64% of their pre-retirement annual salary. For civil servants who retire before age 62 and have worked for less than 20 years, the pension is calculated as 1% of the average of their highest 3 years of income multiplied by the number of years of service.
In the event of disability, civil servants who have served in government departments for more than 18 months are eligible for disability benefits. The disability payment for the first year is 60% of the average of their highest 3 years of income, and 40% annually thereafter. For example, a civil servant with an annual income of $75,000 would receive $45,000 in the first year of disability and $30,000 annually thereafter. If a government civil servant passes away, their spouse can receive a survivor's pension. If an employee who has worked for the government for between 18 months and 10 years passes away, their spouse receives a one-time lump-sum survivor's benefit. If an employee who has worked for the government for more than 10 years passes away, their spouse will receive a survivor's pension equal to half of the deceased's pension annually.
Personnel serving in the U.S. military enjoy very generous retirement benefits, which are higher than those of federal civilian personnel. Military personnel can retire after 20 years of service, and the calculation ratio for their pension is also higher than that of civilian personnel. For personnel who enlisted before 1980, the pension is calculated as the highest annual salary multiplied by 2.5% multiplied by the number of years of service. If a military officer has a maximum annual salary of $80,000 and has served for 30 years, their annual pension would be $60,000, equivalent to 60% of their annual salary during service. For military personnel who served after 1980, if they serve for more than 30 years, their annual pension after retirement will be 75% of their highest annual salary during their military service.
The pension system for U.S. state and local government employees varies slightly by state, but it is basically Social Security plus a pension. The calculation of these civil servants' pensions is basically similar to the Federal Employees Retirement System, mainly based on the length of service multiplied by a certain percentage (1.5%-2%) of the highest annual salary within 3 to 5 years. For example, if a state government employee's average highest annual salary is $80,000 and they retire after 30 years of service, at a 2% rate, the calculation result is 80,000 x 2% x 30 = $48,000. This government employee would receive an annual pension of $48,000 after retirement, equivalent to 60% of their highest pre-retirement salary.
How do public school teachers receive pensions?
Although the numerous public school teachers in the United States (including universities, primary, and secondary schools) are not classified as government civil servants, because their salaries are paid by the government, the teachers' pension system is somewhat similar to the government civil servant pension system, but not exactly the same. The U.S. public school teacher pension system belongs to the defined benefit pension model. Teachers enjoy Social Security retirement benefits and a fixed pension, but teachers and employers must contribute a certain amount of funds to the pension fund every month. Each U.S. state has different regulations on the amount of personal contributions teachers must make to their pensions. For example, in Maryland public schools, teachers enjoy Social Security retirement benefits, and each year, both the teacher and the school district contribute 6.2% of the teacher's total salary into the Social Security system. Regarding the pension, teachers must contribute 2% of their total salary to the pension fund annually, while the school district contributes 9.35% of the teacher's total salary into the pension fund, with the combined contributions from both parties totaling 11.35% of the teacher's total salary. Public school teachers in Ohio do not enjoy Social Security benefits; therefore, for their pension, teachers must contribute 10% of their total salary to the pension fund annually, and the school district contributes 13.5%, totaling 23.5% of the teacher's annual salary.
When teachers retire, the pension amount is mainly based on the length of service and the age of retirement. Pennsylvania stipulates that if a teacher reaches the age of 62 or has worked for more than 35 years, they can enjoy full retirement benefits. In some U.S. states, teachers can also retire at age 55 and enjoy full retirement benefits as long as they have worked for between 30 and 35 years. The pension calculation model for teachers is similar to that of federal government civil servants, which is the percentage point multiplied by the length of service and the average salary of the last three years of work. In Maryland, the teacher percentage point is 2.5%. If a teacher retires after 30 years of service and their average annual salary for the last three years of work is $60,000, according to the formula, the annual pension this teacher can receive after retirement is: 2.5% x 30 x 60,000 = $45,000, equivalent to 75% of their pre-retirement annual salary. Maryland teachers do not enjoy Social Security benefits, so the fixed pension amount for teachers is relatively high. If compared with the federal government civil servant pension, as introduced above, for the same 30 years of service, the federal government civil servant's pension accounts for 33% of their pre-retirement annual salary; if Social Security is added, the ratio rises to 64%, but it is still lower than the ratio for Missouri teachers.
In the U.S. teacher retirement system, an "80 retirement rule" is also popular, meaning that as long as the teacher's age plus their years of service reaches 80, they can enjoy full pension benefits. This is more favorable for teachers with long teaching tenures because they can retire earlier. For example, if a teacher starts working at age 25, after 30 years of work, their age and years of service already exceed 80, and this teacher can retire at age 55 and enjoy full retirement benefits.
There is basically no mandatory retirement age for U.S. teachers; some retire at 50, and others do not retire until 70. Taking Missouri as an example, the median retirement age for teachers is 57, and the proportion of teachers retiring at 55 is the highest, accounting for 9.5% of the total number of retired teachers. Teachers who retire at 50 account for 5% of the total, and teachers who retire at 70 account for 1%. Similarly, the median length of service for retired teachers in the state is 29 years, and the proportion of teachers who retire after 30 years of service is the highest, at 14%. The proportion of teachers who retire after 15 years of service is 5%, and the proportion of teachers who retire after 40 years of service is 1.7%.
The U.S. Private Company Retirement System
Many private companies in the United States also used to adopt employee defined benefit pension systems, especially industries organized by labor unions, which tended to favor this type of pension system, where all of the employees' pensions were borne by the employer. In 1978, 41% of personnel in U.S. private companies participated in this type of retirement benefit system; by 2008, the proportion of private company personnel participating in this retirement system had dropped to 21%. Now, the vast majority of private companies in the United States adopt a defined contribution pension system, meaning that employers and employees jointly contribute to purchase a retirement plan, the most common of which is the 401k plan. This retirement plan reduces the company's retirement personnel costs, and the company also shifts the risk of retirement fund investment from itself to the individual employee. In U.S. private companies, employees in industries with labor unions have much better and more secure pensions than those in non-union industries. 79% of employees who participate in unions have retirement benefits, while only 44% of employees who do not participate in unions have retirement benefits. 70% of employees who participate in unions enjoy defined benefit pension treatment, while only 16% of employees who do not participate in unions enjoy defined benefit pension treatment. There are also some companies that adopt a comprehensive retirement system of a pension plus a 401k plan, which makes the retirement benefits of private companies more competitive.
The 401k plan has now become the most important employee retirement plan for U.S. private companies. Its main operating method is that the company employer contributes 3-5% of the employee's annual salary to the employee's personal retirement account each year, and the employee can also contribute a certain amount of funds to the retirement account each year, ranging from a few hundred to tens of thousands of dollars (but there is a cap). If an employee leaves the company, this money belongs to the individual employee. If an employee works at a company until retirement, the money accumulated during their working period is their pension, and they can withdraw this money from the retirement account at age 59 and a half. Due to tax reasons, people generally do not withdraw all of this pension at once, but rather withdraw it year by year to avoid paying taxes. All money contributed by employers and employees to the 401k retirement account does not need to be reported for tax purposes; only when the retiree withdraws it is it considered income and subject to income tax declaration. In 2007, 60 million workers in the United States joined the 401k plan. Most people who joined this plan had the money in their retirement accounts managed by professional financial planners and mostly invested in the stock and fund markets. In private companies, after an employee retires, the company no longer bears the expenditure of their pension, which can effectively reduce the company's human resource costs.
In a defined contribution pension system, the pension a person can receive depends largely on their income. Let's look at a specific example. An accountant retires after 30 years of work, and their average annual salary for 30 years is $90,000. They join a 401k retirement plan, and the employer contributes 3% of their annual salary to their retirement plan each year, which is $2,700 per year, totaling $81,000 over 30 years. The accountant themselves contributes 5% of their annual salary to the retirement plan each year, which is $4,500 per year, totaling $135,000 over 30 years. The retirement plan funds contributed by the employer and the individual over 30 years amount to $216,000. This is just the principal. The retirement funds continuously accumulated over 30 years are invested in the stock or mutual fund market, and at an annual return rate of 9%, the funds in the 401k retirement plan by the time of retirement will be a significant amount.
A chef is a low-income profession in the United States, with a median annual salary of $30,000. If a chef also joins a 401k retirement plan, the employer contributes 3% of their annual salary to their retirement plan each year, which is $900 per year, totaling $27,000 over 30 years. The chef themselves contributes 5% of their annual salary to the retirement plan each year, which is $1,500 per year, totaling $45,000 over 30 years. The retirement plan funds contributed by the employer and the individual over 30 years amount to $72,000. Even with 30 years of work, due to different incomes, the principal accumulated by the 401k retirement plan alone will have a considerable difference, and if investment income is added, the difference between the two will be even greater.
