social security and ERISA

the social security act

• social security: is a government program that provides continuing but limited income to workers and their dependents

• the social security act provides benefits to employees and their families when their earnings stop or are reduced because of retirement, disability, or death

• paying for social security

  • Social Security Tax: 6.2% of employee’s pay and 6.2% of employee’s salary paid by the employer for the first $142,800 earned

  • Medicare Tax: 1.45% on the first $200,000 earned and 2.35% above that number

• Since the program first began paying monthly Social Security benefits in 1940, the average life expectancy for men reaching age 65 has increased nearly 7 years to age 84.3, for women reaching age 65, their average life expectancy has increased nearly 7 years to age 86.6

the employment retirement income security act (ERISA)

• pension plan: a program established by an employer or a union that is designed to provide income to employees after they retire

• Previously, funds in some employee pension plans were poorly invested or used for other business expenses. These practices resulted in losses of retirement benefits to workers and severe economic hardship for them.

• One requirement of the act is that employers must place employee contributions to pension plans in a trust fund that is independent of the employer’s control

  • types of pensions

    • defined benefit plan

      • Guaranteed by company to pay employees a certain amount each year in retirement.

      • Riskier for the company because the investments might underperform, but the company is still responsible to pay the full amount

    • defined contribution plan

      • Company provides a fixed contribution for retirement

      • Riskier for the employee because if they don’t save enough or their investments underperform, they will not have enough for retirement

      • Example: 401(k)