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Understanding pensions USA (II): the Pyramid of Resources

Having put our intention to delve into the US pension system in proper perspective , today I propose to describe in a general way the elements that make it up. To do this, we will begin by illuminating an important misconception that we usually make when we analyze this issue: the one- sided view .

In effect, when discussing the financial resources that a person will have at the time of retirement, “the pension system” is mentioned as a kind of black box , a mechanism independent from the rest of the economic elements that will constitute their assets. future. It seems that from the moment the well-deserved retirement from work or professional begins, that black box should ensure by itself (through public resources withdrawn coercively) the financial support of the individual, without other nuances, since “we all have the right to a pension worthy ”.

In the Spanish case, our Constitution (article 50) establishes that “the public powers will guarantee, through adequate and periodically updated pensions, the economic sufficiency of citizens during the elderly”. Now, as we already pointed out in the first article of the series, this “guarantee” and “adequacy” can be achieved in various ways. Subtracting from the general attention the different financial, public and private sources, which can configure a dignified retirement, supposes to obviate areas of political-economic action and of financial disclosure vital for the individual . And that is something that we cannot afford in a situation as difficult as the current one.

The United States has a more global and pragmatic approach to this issue, consistent with the culture of the country. The responsibility of ensuring a sufficient retirement does not only lie with the “public powers”. Companies and individuals have, as we will see, a key role in shaping a more rational and sustainable system over time. In this sense, the vision offered by the following Resource Pyramid is very illustrative , obtained from an interesting but somewhat triumphalist research document, ” The Success of the US Retirement System .” This figure provides us with a good approximation of what American pensions are:

Pyramid

Five elements make up the Pyramid of Resources that, to a greater or lesser extent, the American citizen has when he decides to retire: Social Security, home ownership, pension plans sponsored by companies and government (federal, state or local) , the Individual Retirement Accounts (IRA) and the rest of financial assets .

Five elements make up the Pyramid of Resources that, to a greater or lesser extent, the American citizen has when he decides to retire: Social Security, home ownership, pension plans sponsored by companies and government (federal, state or local) , the Individual Retirement Accounts (IRA) and the rest of financial assets .

At the base of the Pyramid is Social Security , made up of a series of federal programs, the most important of which is OASDI ( Old-Age. Survivors and Disability Insurance ). Social Security covers citizens of any income level; however, the largest proportion of its funds is dedicated to lower-income workers, in order to ensure their retirement above a certain level of poverty. With certain exceptions, the Administration of Social Security and the US Agency Tax ( Internal Revenue Service. IRS) monitor the income of workers and self-employed during their working / professional life and collect the necessary funds via taxes: FICA ( Federal Insurance Contributions Act tax ) and / or SECA ( Self Employed Contributions Acr tax ). Taxes are also collected for other programs like Medicare . These taxes feed the Trust Funds  that finance the different programs. In 2013, calculated Social Security expenditures were $ 1.3 trillion, 8.4% of GDP and 37% of federal spending. It is estimated that Social Security income keeps approximately 20% of Americans 65 and older above the officially established Federal Poverty Level.

To give you an idea, the contributions to the  North American Social Security in 2014 are 6.2% for the worker and another 6.2% for the company (12.4% total) in the case of OASDI. All of this applied to a maximum salary of $ 117,000 per year. In addition, 1.45% is deducted, also for worker and company (2.90% total), in the case of Medicare. The minimum retirement age to receive the full pension is 66 years and the maximum amount to be received by Social Security is 2,642 dollars per month. Compare and judge for yourself.

To give you an idea, the contributions to the  North American Social Security in 2014 are 6.2% for the worker and another 6.2% for the company (12.4% total) in the case of OASDI. All of this applied to a maximum salary of $ 117,000 per year. In addition, 1.45% is deducted, also for worker and company (2.90% total), in the case of Medicare. The minimum retirement age to receive the full pension is 66 years and the maximum amount to be received by Social Security is 2,642 dollars per month. Compare and judge for yourself.

The next level of the Pyramid is housing . Indeed, the home itself continues to be one of the resources available to most retirees. The percentage of homeowners grows with age and is high for all income levels of Americans nearing retirement. Many of them do not have mortgage charges or they are very low at the time of reaching retirement. Here it is worth highlighting a fact that may seem obvious: pensioners do not need to sell their house to obtain resources; it is enough that they live in it . Ownership, in this sense, is equivalent to having an annual income that would otherwise have to be used for rent.

Above housing, we find the pension plans offered to workers by the companies or governments (federal, state and local) that employ them . These, in turn, can be DB ( Defined Benefit ) or DC ( Defined Contribution ) type plans . A Defined Benefit plan provides a monthly income to the retiree, calculated based on their years of service and salary. In contrast, in a Defined Contribution plan, the employer does not guarantee a certain income; it is the worker who controls their contributions (and those made by their company or administration), which they keep even if they change jobs. We will deal with the evolution and casuistry of these plans in the next article.

Next, on our upward journey, are Individual Retirement Accounts (IRAs) , an option many Americans avail themselves of when their employers don’t offer any retirement plans, or when they want to have an additional plan for their senior citizens. savings at the time of retirement. IRAs have attractive tax advantages, which we will discuss in a later entry. We will see, we will compare… and we will cry.

It is important to note that, unlike what happens with pension plans in our country, DB, DC and IRAs plans represent a source of resources for approximately 80% of Americans nearing retirement . The higher the income level, the greater the weight of these plans in the total available assets upon retirement. Its relative importance in the system is very high, as we will have occasion to verify.

Finally, at the top of the Pyramid are the rest of the assets that families own at the time of retirement. They can be other financial products, residential or non-residential real estate, vehicles, long-term assets, etc. Everything counts.

It is evident that the composition of this Resource Pyramid varies with age, income level, and other socioeconomic factors. Not all workers or professionals will have the same profile when they retire, but I think they will agree with me that an approach like the one described is much more appropriate to assess the viability of a pension model . One in which the State has an important facilitating and moderating role of imbalances, but where the citizen is a much more active and responsible part in the definition and assurance of their financial future . A model, in short, in which their “passive” assets are much less so because they play an essential role in governing their own destiny.

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