Retirement plans in the USA (2024)

Retirement plans in the USA are a complex issue, as there are both government and private plans for old age. We have summarized what contributions US citizens and Green Card holders can expect from the national Social Security system and what additional provisions are necessary for retirement.

Social Security in the USA

The official name of the state retirement plan in the USA is Old-Age, Survivors, and Disability Insurance (OASDI). However, it is generally known as Social Security.

The authority responsible for Social Security in the USA is the Social Security Administration (SSA), headquartered in Woodlawn, Baltimore County, Maryland. The SSA is also responsible for issuing a Social Security Number (SSN).

The American pension system is divided into:

• Old-Age Insurance (OAI): old-age pension
• Old-Age Survivors Insurance (OASI): widow's and orphan's pension
• Old-Age Survivors Disability Insurance (OASDI): disability pension
• Supplemental Security Income (SSI): a welfare program that provides assistance to disabled, blind, and impoverished seniors
• Temporary Assistance for Needy Families (TANF): a program of services for low-income families with minor children

The beginnings of Social Security in the USA

Following the Great Depression at the end of the 1920s, unemployment, old-age poverty, and financial hardship for widows and orphans became major problems for the population of the USA. At the state level, there were already some public welfare schemes in place, but they were inconsistent and insufficient.

To stop the negative spiral caused by the crisis, US President Franklin D. Roosevelt introduced extensive economic and social reforms during his first term. As part of the measures that would become known as the "New Deal," the Social Security Act went into effect on August 14th, 1935.

How does Social Security work?

The American Social Security system is financed by the pay-as-you-go principle. This means that all employed persons pay into the system to cover the benefits of the recipients. At the same time, employees build up their own pension entitlements for later.

The pension entitlement depends on the payments made and the number of years of contributions. However, a minimum contribution period of five years is required. All salaried employees, as well as self-employed persons and freelancers, are obliged to pay contributions and must pay into the state pension fund.

In addition to the retirement benefits, Social Security also guarantees access to medical treatment through Medicare, the public health insurance program for elderly or disabled citizens.

Pension contributions in the USA

Pension contributions are regulated in a uniform manner throughout the USA. Employers and employees each pay 6.2% of the employee's gross salary into the state pension fund. Self-employed persons and freelancers must pay the full 12.4% themselves.

However, contributions must only be paid up to an income of currently $137,700 (as of 2021). No further contributions are charged on annual income exceeding this limit.

Retirement age in the USA

Americans born before 1960 receive retirement benefits from the age of 65. For all those born after 1960, the retirement age is 67 years.

Retirement plans in the USA also offer the option to receive Social Security benefits as early as at the age of 62. Those who take advantage of this "flexible age limit" must expect a reduction in pension benefits of around 5-6% for each year of early retirement.

However, the opposite is also possible: Americans who choose to wait until age 70 to retire will receive an additional 5-6% for each extra year of contributions.

Social Security for survivors

Spouses of deceased persons receive 60% of their partner's pension. It is not required that the surviving spouse has paid into the pension fund, nor that he or she is a US citizen. However, the survivor must prove "lawful presence" in the US, i.e., either hold a Green Card, be a refugee, or have applied for political asylum.

If the survivor has paid pension contributions himself and is also entitled to Social Security benefits, it is possible to choose between the two entitlements. However, both benefits cannot be claimed at the same time.

Social Security for Green Card holders

Not only Americans but also Permanent Residents (i.e., Green Card holders) receive Social Security benefits in the United States. However, they only qualify for US Social Security if they have earned at least 40 Work Credits in America. This corresponds to approximately 10 years of employment in the USA, as a maximum of 4 Work Credits can be earned per contribution year.

You will need fewer American Work Credits if you come from one of the 26 states that have a Social Security agreement with the USA. These include, for example, most European countries, Canada, and Australia. Immigrants from these countries can have their years of contribution from their home country recognized in America.

Private retirement plans in the USA

The Social Security system in the USA cannot completely sustain the standard of living in old age but is more of a basic provision. Therefore, it is usually necessary for American employees to supplement their old-age pensions themselves. Various tax-subsidized programs for company pension plans and private pension plans are available for this purpose.

The 401(k) Plan and 403(b) Plan

401k plans belong to the most popular types of supplementary retirement plans in the United States. The name refers to the measure's enshrinement in Section 401(k) of the Internal Revenue Code, the US tax law.

401(k) plans allow US employees to contribute a certain portion of their annual compensation tax-free to private investment funds (e.g., index funds, bonds, ETFs, stock funds, and balanced funds). American employers usually make contributions to the funds too.

In 2016, about 55 million Americans paid contributions to a 401(k) retirement plan.

403(b) plans are similar schemes for employees of organizations that are not subject to taxation, e.g., schools or hospitals.

Individual Retirement Account (IRA)

Individual Retirement Accounts, or IRAs, offer another option for private retirement planning in the USA. They can be opened with a bank or investment broker and provide tax advantages when saving for retirement. The most common types of Individual Retirement Accounts are:

• Traditional IRA
• Roth IRA
• SEP IRA
• SIMPLE IRA
• Rollover IRA
• Conduit IRA

Would you like to get more information on how to successfully start a new life in America? Then take a look at our articles on Credit History in the USA and the Driver's License in the USA. They’ll be a helpful guide to you.

Sources:

bundestag.de, finanzrocker.net, wikipedia.org, nolo.com, finance.zacks.com