![]() Self-employed individuals pay both the employee and employer shares, or 12.4 percent. Benefit Fundingīoth employees and employers pay Social Security payroll taxes-each pay 6.2 percent of an employee's covered earnings up to the taxable maximum ($127,200 in 2017), 4 with 5.3 percent allocated to the Old-Age and Survivors Insurance ( OASI) Trust Fund and 0.9 percent allocated to the Disability Insurance ( DI) Trust Fund (collectively referred to as the OASDI Trust Fund). This section discusses key features of Social Security retirement benefits, including funding, payments, and taxation. Social Security Retirement Benefits: Key Features As more people reach retirement with a nest egg of savings, it is important that they understand the complexities involved in purchasing an annuity and how this type of income compares with other retirement income sources. Lastly, this issue paper explains some of the risks of both the Social Security program and the private annuity industry. In addition, this paper gives examples of the premiums needed to replicate Social Security retirement benefits and discusses the variables that affect the amount of annuity income. It then discusses key features of private annuities, including funding and payments, types and features, and taxation. This issue paper explains some key features of Social Security retirement benefits, focusing on program funding benefit payments to retired workers, their spouses, and survivors and benefit taxation. In addition, many may not understand the role of interest rates and life expectancy in determining annuity payments or how much money they should annuitize. Although privately purchased annuities seem similar to Social Security benefits because both offer a steady income stream, individuals may not understand the inherent differences between them. In general, an annuity is an insurance product that pays a monthly amount for the remainder of the person's life in exchange for a one-time upfront payment called a premium. A worker can choose to take the money as a lump sum, draw it down through disbursements as needed, or use some or all of it to purchase an annuity. While Social Security and DB plans provide monthly lifetime payments, at retirement a worker must determine how to spend the retirement savings accumulated in DC plans, IRAs, or other personal savings accounts. ![]() ![]() In DC plans, employees contribute a portion of their wages, often matched in full or in part by their employers, and earn investment returns over time to accumulate retirement savings.īecause of the shift from DB to DC plans, workers bear greater responsibility for managing their income and assets to ensure they last throughout retirement. Today, workers with employer-sponsored pensions are more likely to be covered under defined contribution ( DC) plans, typically 401(k) plans. DB plans typically provide retirees with lifetime pension income and offer survivor benefits for spouses. 3 Historically, a worker's pension income came from a defined benefit ( DB) plan, which generally is employer-funded and provides set monthly payments based on the worker's salary, years of service, and age at retirement. 2 The third leg, employer pensions, has changed significantly over the past 30 years (Employee Benefit Research Institute, n.d.). 1 For the second leg, personal savings, individuals can invest for retirement independently, usually through an individual retirement account ( IRA). Workers are eligible for lifetime benefits if they have worked long enough in covered employment to qualify. The first leg, Social Security, is a social insurance program that pays retirement benefits to workers and their family members. Retirement income in the United States has been described as a three-legged stool composed of Social Security benefits, personal savings, and employer pensions (DeWitt 1996).
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