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About half of the privately employed people in the United States and most government employees are covered by some type of pension plan. Pensions are a form of income that workers receive after they retire or become disabled, or their dependents receive after they die. Most union contracts with employers include retirement pension benefits.
Most private pension plans provide benefits to retirees in proportion to a formula based on the employee's age, years of service and annual salary. By federal law, all pension plans offer "vested pension rights" to workers who have completed a certain number of years of service. These employees are guaranteed to receive pension payments after retirement even if they leave the firm before they retire.
In 1974 Congress passed the Employee Retirement Income Security Act, which set standards for private pension plans; a federal agency, the Pension Benefit Guaranty Corporation, helps to administer it. Private pension plans must purchase insurance from the corporation, and if a company cannot pay pension benefits, the corporation will pay them.
The U.S. government administers several types of pension plans, the most important being Social Security -- the largest retirement income program in the country. The Social Security program was created in 1935 when President Franklin D. Roosevelt signed what is now known as the Social Security Act. This program provides full-rate old-age pensions to working people who retire at age 65, or reduced-rate pensions to those retiring between the ages of 62 and 65. Although the program is administered by a federal agency, the Social Security Administration, it uses no federal funds. Employees contribute to the pension plan through a payroll tax, which is taken as a percentage of their salaries; employers contribute an equal amount. Self-employed workers also pay a portion of their earnings to the program.
The federal government has traditionally provided military pensions as well as pensions for most federal workers, although legislation passed in the 1980s brought most new federal employees under Social Security as well. Ever since the Revolutionary War (1775-1783) disabled war veterans have received some type of pension. All military pensions are funded by federal revenue. By contrast, the largest of the federal civilian pension systems, the U.S. Civil Service Retirement System, is funded jointly by federal employees and the government.
In addition, many people -- generally those who are self-employed, those whose employers do not provide a pension, and those who believe their pension plan to be inadequate -- put part of their income into a special individual pension program. The two chief types of these programs are Individual Retirement Accounts (IRAs) and Keogh plans. Both types of accounts are administered by financial institutions such as banks, savings and loan associations, credit unions and insurance companies. The federal government supports both plans by providing income tax advantages for individuals who use them.
Money put into an IRA earns interest that is automatically added to the account; interest earned on an IRA is not taxed until it is withdrawn. In addition, people who do not have private pensions or who earn less than a certain amount may deposit money into an IRA each year without having to pay income tax on the money until it is withdrawn. Unlike IRAs, Keogh accounts may be set up only by self-employed people or by people who are full or partial owners of an unincorporated business. These individuals may deposit up to 25 percent of their income into a Keogh plan annually. Interest earned on the account is not taxed until withdrawn.