What is the difference between Social Security and a private pension?

The Social Security system and private pensions are alike in that they provide retirees with guaranteed income upon retirement. They differ in how they are administered. Social security is overseen by the federal government, whereas private pensions are the sole responsibility of the companies that provide them.

For generations, American workers have relied on a combination of pension funds and Social Security for financial security in their retirement years. In the past decade, both systems have come under scrutiny.

Pensions consist of a combination of employer or employee contributions. Some pensions involve a combination of funds from both the employee and his company. The monies are typically invested in stocks, bonds or mutual funds. The objective is for the portfolio to accumulate investment wealth so that, after a number of years, the fund can serve as income for the worker throughout their retirement.

Types of pensions include a defined benefit plan, 401k plans, profit sharing and money purchase plans. The defined benefit plan guarantees the worker a specific monthly income upon retirement. 401k’s, which have become hugely popular, combine employer and employee contributions in a portfolio that is invested in mutual funds. Profit sharing gives the worker a stake in the ownership of their company and money purchase plans involve strictly company contributions.

Many pensions have shifted from money purchase plans to profit sharing and 401k plans. Many companies have altered their philosophy on pensions and are encouraging a combination of risk from their business and the worker through mutual contributions.

Social Security is taken from every American worker regardless of age, employment or income. The government uses the money to establish, in a sense, trust funds that cover expenses for retirement and various disability or survivor insurance. The government’s promise is that every worker will eventually benefit from the program when they retire or are disabled and prevented from working. Most working Americans begin to receive Social Security payments when they reach age 63.

In addition to money taken out of a worker’s paycheck, the worker’s employer has to make a matching contribution to the Social Security program. Therefore, what the worker sees on their paycheck as their contribution is only half the money.

Much debate in recent years has focused on whether or not Social Security can survive the retirement of the Baby Boomer generation. Americans live longer than ever before and many experts feel the retiring Boomers will drain the system of funds within 20 years. Many in the industry maintain that Social Security will not be available to workers under the age of 40.

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