Retirement Benefits

The first contingent of baby boomers turns 65 in the year 2011, and many reportedly won’t wait till 65 to retire. These present two challenges for employers. First, many employees, facing the inevitable aging process, are seeking (or demanding) enhanced retirement benefits. Second we’ll see that employers facing a looming employee’s shortage are taking steps to entice older workers to keep working in some capacity. The major retirement benefits re the federal Social program and employer pension / retirement plans, like the 401(k).

Social security

Federal program that provides three types of benefits: retirement income at the age of 62 and thereafter survivor’s or death benefits payable to the employee’s dependents regardless of age at time of death, and disability benefits payable to disabled employees and their dependents . These benefits are payable only if the employees is insured under the social act.

Most people assume that Social Security provides income only when they are over 62, but it actually provides there type of benefits. The familiar retirement benefits provide an income if you retire at age 62 or thereafter and are insured under the Social Security act, Second are survivor’s or death benefits. These provide monthly payments to your dependents regardless of your age at death, again assuming you are insured under the Social Security Act. Finally, there are disability payments. These provides monthly payments to employees who become totally disabled (and to their dependents) if they work and meet certain requirements. The Social Security system also administers the Medicare program, which provides a wide range of health services to people 65 or over. Full retirement age traditionally was 65 – the usual age for retirement. However, full retirement age to collect. Social Security rose gradually till 1960. It is now 67 for those born in 1960 or later.

A tax on he employee’s wages, shared equally by employees and employers, funds Social Security (technically, it is called Federal Old Age and Survivor’s Insurance). As of 2007, the maximum amount of earnings subject to Social Security tax was $97,500. Employer and employee each paid 7.65%.

Pension plans

Plan that provides a fixed sum, when employees reach a predetermined retirement age or when they can no longer work due to disability.

Pension plans are financial programs that provide income to individuals in their retirement. About half of full time workers participate in some types of pension plan at work. However, the actual rate of participation depends on several things. For example older workers tend to have a higher participation rate, and employees of larger firms have participation rates as much as three times as high as those in small firms.

We can classify pension plans in three basic ways: contributory versus noncontributory plans; qualified versus nonqualified plans; and defined contribution versus defined benefits plans. The employee contributes to the contributory pension plans while the employer makes all contributions to the noncontributory pension plan. Employers derive tax benefits from contributing to qualified pension plans, such as tax deductions for pension plan contributing to qualified pension plans, such as tax deductions for pension plan contributions (they are qualified for improved tax treatment); nonqualified pension plans get less favorable tax treatment for employees and employers.

Defined Benefit plans:

A plan that contains a formula for determining retirement benefits.

With defined plans employees know ahead of time the pension benefits they will receive (the benefit is defined or specified by amount of formula). The defined pension itself is usually set by a formula that ties the person’s retirement pension to an amount equal to a percentage of the person’s pre-retirement pay (for instance to a fraction of an average of his or her last five years of employment multiplied by the number of years he or she worked for the company.

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