Retirement in the United States. The pension system in the United States operates on a pay-as-you-go basis. Every American worker is eligible for a basic retirement pension paid by US Social Security. In addition, American workers can also subscribe to occupational pension funds to which they contribute throughout their careers.
The American retirement system
The “pay-as-you-go” pension system was put in place by Franklin D. Roosevelt with the Social Security Act of 1935. Called “Old Age Survivor Insurance” (OASI), this plan provides for automatic levy of a tax on the wages of employees and the income of employers.
At the same time, it is common for workers – most often managers who can afford it – to contribute to occupational pension funds. These allow them to supplement their retirement pensions and provide them with higher income than those received with the basic scheme. Therefore, 2 options are available to them:
-or they choose to let the employer directly take care of placing part of their salary in a private fund called the “defined benefit plan”;
-or they themselves invest part of their income in private funds called a “defined contribution plan” (such as 401 (k) or 403 (b)).
Note: the 401 (k) plan allows the employee to save by tax exemption on invested money and capital income which will be placed in an investment portfolio until their withdrawal. The 403 (b) plan is a similar system offered to employees of tax-exempt organizations such as hospitals or schools.
Following the recent financial crises and the increase in taxes on these plans, the use of defined benefit plans is less and less offered by employers.
A contribution is levied under the OASI at a rate of 12.40% (6.20% for the employer and 6.20% for the employee), under an annual ceiling of $ 132,900 in 2019.
Age conditions and insurance period
In the United States, a worker can retire at age 62. However, the age for obtaining a full retirement pension is higher. It depends on his year of birth. In the event of early departure, the pension will be subject to a discount of up to 32.5%.
Example: a person born in 1955 will receive his full pension at the age of 66 years and 2 months. If she decides to retire at the age of 62, she will only receive 74% of her pension.
Regarding funded pension funds, no age condition to benefit from them applies. However, penalties may be applied if the pensioner decides to receive them before he turns 70.
The calculation of the retirement pension
The amount of the basic retirement pension is calculated on the basis of the 420 best monthly earnings (ie 35 years), according to a progressive formula by income bracket. The replacement rate applied to the first tranche is 90%, it is 15% to the last tranche.
To claim the payment of the basic pension at the full rate, the pensioner must have obtained 40 “credits” (corresponding to the French quarters). To validate a “credit”, the pensioner must have earned at least $ 1,360 during the quarter in 2019. As in France (where this amount is € 1,504.50 in 2019), it is not possible to validate more of 4 “credits” per year.
It is possible for a pensioner who has reached the legal age to receive his retirement at full rate, to delay his retirement, and thus obtain a premium.
Combination of employment and retirement
It is not uncommon for American pensioners to continue working after the age of 62. The regulations on this subject take into account the income collected by this activity to determine the amount of the retirement pension.
Note: the income received does not take into account financial investments, various pensions, annuities, etc.
3 situations are considered:
When the pensioner has reached full retirement age:
The pensioner receives his retirement pension at the full rate, without limitation of income linked to a professional activity.
When the pensioner has not reached full retirement age:
The amount of the retirement pension will be reduced by $ 1 for every $ 2 of activity income over $ 17,640 received in the year (2019).
Example: Jacob receives a basic pension of $ 9,600 ($ 800 x 12 months) each year. At the same time, he has a job that earns him $ 28,000 per year, or $ 10,360 above the ceiling. His pension is reduced by 10,360 / 2 = $ 5,180. In total, he therefore earns 28,000 + (9,600 – 5,180) = $ 32,420.
When the pensioner reaches full retirement age within the year:
The amount of the pension will be reduced by $ 1 for every $ 3 of earned income above $ 46,920 received in the period before the full rate (2019).
Example: Susan will receive her full pension in August 2019. From January to July 2019, she will receive, for her retirement, $ 5,600 ($ 800 x 7 months). Over this same period, his professional activity will bring him $ 48,000, or € 1,080 above the ceiling. Until July, his pension will be deducted at 1,080 / 3 = $ 360. In total, she will earn from January to July 2019 48,000+ (5,600 – 360) = $ 53,240.
Survivor’s allowance (reversion)
When the pensioner dies, the surviving spouse can benefit from his retirement pension subject to having reached the legal age to benefit from the full rate pension. Otherwise, he will only receive a percentage of the deceased’s pension, depending on his age.
Example: the surviving spouse who is 60 years and 11 months old when the pensioner dies will only receive 75.2% of the deceased’s retirement pension.
Divorced spouse’s pension
The United States pension system provides that the ex-spouse can receive the retirement pension of the deceased pensioner as long as the following conditions are met:
-the marriage lasted at least 10 years;
-the ex-spouse has not remarried;
-the ex-spouse is at least 62 years old;
-the retirement pension that the ex-spouse receives or should receive is less than that of the pensioner;
-the pensioner is eligible for the basic pension scheme.
As soon as the ex-spouse has reached the legal age to benefit from the payment of his pension at the full rate, he may request the payment of half of the pensioner’s basic retirement pension.
What to remember about retirement in the United States
While the United States has had a basic pension system since 1935, most workers also contribute to occupational pension funds.
Contributions are 12.40% (6.20% for the employee and 6.20% for the employer).
The legal age is 62, but the age for the full rate depends on the year of birth. If applicable, the pension will be subject to a discount of up to 32.5%.
Americans validate 1 “credit” in the same way as the French validate 1 quarter: by contributing from a certain income ($ 1,360 in 2019), within the limit of 4 per year.
The combination of employment and retirement is unlimited if the retiree meets the conditions for the full rate. Otherwise, his pension will be reduced by 1/2 of the earned income exceeding $ 17,640 (if he reaches the full rate for the same year, the pension is reduced by 1/3 of the earned income exceeding $ 46,920 ).