Retirees can earn income from a variety of sources, two of the most common being pensions and Social Security. However, these two programs have significant differences in terms of their funding and structure.
Pensions are a type of workplace retirement plan that is funded by contributions from employers on behalf of workers.
On the other hand, Social Security is administered by the federal government and is funded by payroll taxes paid by workers and businesses.
Next, we explain these two systems in more detail:
pensions
Before the popularization of IRAs and 401(k) plans, pensions were the primary means of saving for retirement. Your parents and grandparents, if they worked for the same company for many years, could have received a generous pension.
Pensions today are officially known as defined benefit plans, because the amount of the payment you will receive at retirement is decided or defined in advance.
A private pension is a retirement plan that is established by an employer for the future financial well-being of its workers.
Employers, who are governed by specific laws and regulations, make contributions on behalf of their employees and spend the money at their discretion.
Upon retirement, the employee receives monthly payments.
Although becoming rare in the private sector, state government employees often have pension systems.
Social Security
Although many retirees receive Social Security benefits during their retirement, the system is not considered a pension plan.
It may seem like a pension, since if you have contributed to the system during your working years, you are eligible to receive monthly benefits upon retirement. These benefits can begin to be granted from the age of 62.
The amount of benefit checks varies based on the age you start receiving them, as well as the number of years you’ve worked and the wages you’ve earned while contributing to the program.
Keep in mind that Social Security is not designed to fully replace your income or meet all of your financial needs in retirement.
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