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IRA Financial Blog

U.S. Retirement System: How We Got Here

Key Points
  • The US retirement system can work for everyone
  • IRAs, 401k, Pension Plans – it can get confusing
  • Know the history of retirement in the US

Traces of Pension History in the USA

Where did the retirement system as it is now, start in the United States? The Presbyterian Church devised a fund to give to retired ministers for pious use in 1717. In 1884, a pension plan was devised for the workers on the railroad, by Baltimore and Ohio Railroad, to receive 20%-35% of their total wages after the age of 65. 

The first pension plan in the US was created by the American Express Company in 1889. In 1985, an amendment was brought in the Plan Document of American Pension Plan and thanks to Charles Kwasha Lipton, the first cash balance plan was created for Bank of America.

Types of Retirement Plans in the US

There are two types of Retirement Plans that are widely discussed under the US Retirement plans. These two types are: Defined Benefit Plan and the Defined Contribution plan.

Defined Benefit Plan

Defined Benefit Plan Is also known as ”Pension”. It is aimed to provide an employee monthly salary-like package. The amount offered is fixed. It comes from fund trust, a special formula is set forth by plan sponsors for it. It may be funded or non-funded, which means that it is run by the Government, and mostly pension packages are handled by the Government.

Defined Contribution Plan

A defined contribution plan does not guarantee a specific amount of money at retirement. It is an employee-sponsored plan with individual accounts for each participant. 

The contribution is from the employee side and at the end, the employee gets an amount, not fixed, it may be in some percentage plus or minus to the total contribution. It is an emerging and widespread plan.

Hybrid & Cash Balance Plans

It includes combined features of Defined Benefit and Defined Contribution Plans.  In this type of retirement plan, an employee’s notional account balance grows at defined rates of interest and employer contribution.

Shortcomings of US Retirement System

There are some shortcomings of the US Retirement system; discussed below.

  1. Coverage Gap

About one-third and one-half of workers have no access to workplace retirement plans. When many pension plans have been created no heed is paid to cover all the workers under such plans to secure their living after retirement.

It is recorded that in 1970 more than fifty percent of private-sector workers had access to retirement plans which has now declined to half.  Around 55 millions Americans lack access to retirement plans.

 In this way, the coverage gap creates a boundary between well-paid and worst-paid.

  1. Widespread Financial Instability

No doubt, financial instability is created when income fluctuates week to week and month-to-month. When an employee has no stable weekly or monthly income how he/she can hope to avail retirement plans. 

For instance, a contribution benefit plan demands contribution from the employee’s side, but when income is not stable, how can an employee participate?

Steps for Progress

  • Rethinking the role of employers.
  • Ensuring lifetime income.
  • Meeting a broader range of financial needs.
  • Making portable pension plans.

Components of Retirement System in the US

The retirement system of the US consists of mainly two systems. Social Security and Occupational Pension plan.

  1. Social Security System

The Social Security system provides the population of 65 of age or over with 39% of their total income. It is the crucial component of retirement income for a large majority of old Americans.

 It is the single largest source of retirement income for Americans in Social Security.

  1. Occupational Retirement System in the US

It is aimed to provide a significant number of the population’s total income. It covers full-time employees. Mainly it covers private-sector employees to support them at the time of their retirement.

How American Retirement System Helps to Pursue Your Goals

The US retirement system has many shortcomings yet this system is modifying its services for individual interests. Another retirement plan is SEP, to support an individual’s business after retirement. Its advantages are;

  • Easier to set up.
  • Allows for a contribution of up to a quarter of each employee’s pay.
  • Provides a significant amount of income at retirement.
  • You’re to decide whether and how much to contribute to your SEP-IRAs.

This is the way an individual can set up his/her smart business after retirement.

Final Words

When the world is facing poverty and hard levels to live and to support their employees, the US Government devised the best Retirement plan to lift their employees. 

The success of the US Government Retirement System is that it provides a lot of options even if you can start your small business after retirement. This is what makes the US retirement system unique. 


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