A sixth of the United States population receives social benefits
And the result is this: a sixth of the 307-million population receives social benefits, including old-age pensions. All categories of beneficiaries are funded from the federal budget and state treasuries with $700 billion per year, and – attention! – this single expenditure item covers all other government spending, including military.
So when Barack Obama’s opponents in polemical fervor call the president a “socialist,” they are not discovering America, but repeating long-forgotten old news. Franklin Roosevelt also caught flak for this, whose “New Deal” was directly compared to “Stalinist socialism in the USSR,” although there was nothing particularly Soviet about his social innovations. Moreover, in a speech at the signing ceremony of the law, the 32nd president, on the contrary, spoke of the modesty of his goals. “We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life. But we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
In fact, only these two types of insurance – for old age and disability, and also for unemployment – were provided for by the 1935 law. Outside its scope were, for example, the numerous agricultural workers of the time and millions of government employees.
The first pension payment was made on January 31, 1940 – to Ida May Fuller, a resident of Vermont. She had contributed only $24.75 to the social security system. At the same time, the first American pensioner lived to be a hundred years old and received a total of $22,888.92 from the state.
Over the years, the system grew rapidly. The categories of social insurance recipients included sailors and bank employees (in 1939), farmers (in 1950), railroad workers (in 1951), military personnel (in 1956), clergy (in 1967), and only in 1983 all federal employees, including the president.
In the mid-1960s, medical insurance programs were added to the usual insurance programs for old age, survivor, disability, and unemployment. This made social security the largest item of government spending in the United States – more than 40% of the federal budget.
Three-time Pensioners
In America, a pension is not called insurance for nothing. You have to pay for it. Almost every worker pays 6.2% of their annual income (or that part of it below $106,800), which goes to fund the state-guaranteed pension. The employer contributes the same amount. Self-employed individuals pay the social tax at the full rate – 12.4%.
As a result, the state pension for a single elderly person averages a thousand dollars. For a couple where one spouse has no work history, it is over 1,500 dollars. With an average salary of 2,000 dollars per month – quite decent. Individuals who for various reasons did not participate in the mandatory pension program receive a social benefit of about 500 dollars per month.
If the American system of mandatory pension formation were applied in Russia, it would essentially mean an increase in income tax by 50%. Americans, however, pay regularly for a peaceful old age. Over 75 years, according to historian Larry DeWitt, about $13 trillion has been collected into social insurance funds, and only $10.6 trillion has been paid out to date.
But this is far from all the pension income of most Americans.
Working US citizens can secure up to three pensions! True, they will have to show personal initiative.
There are two main types of private pension savings and many varieties. The first is employer-sponsored collective pension plans, the most popular of which is 401(k) – named after the section number in the Tax Code.
All large corporations, most medium-sized companies, and even many small businesses include a pension plan in the employee contract – pension contributions are tax-free, and it is beneficial for both employees and employers to allocate part of the payroll to pensions. This is entirely voluntary. The individual decides how much of their salary to direct towards pension formation. In turn, companies offer different matching conditions – from 10% to 100% of the employee's contribution. When changing jobs, a new pension contract is made, while the old one continues to exist, but no new contributions are made to it. Therefore, an American can be a participant in as many as a dozen pension programs. For the “corporate” part of the future pension to match the size of the state pension, as well as Medicare medical insurance payments, it is necessary to accumulate about 200-300 thousand dollars over a working career.
The second option for private pension in America is a personal pension account. It can be opened with a non-state pension fund, a financial company managing mutual funds, a bank, or an insurance company. In principle, a personal pension is no different from a collective one, except that it is formed solely at the expense of the future pensioner.
The law limits the size of annual contributions to various pension programs – depending on the type of insurance, you can contribute from $2,000 to just over $10,000 per year. This is done to prevent the pension scheme from being used for tax evasion. Therefore, a pension of millions of dollars per month is not even in the cards for a billionaire. He will have to save for old age using ordinary financial instruments that do not provide tax benefits. However, an American can secure a pension of 100% of salary (if we are not talking about top managers with their bonuses).
The age at which one can receive the full state pension remains unchanged and is the same for men and women – 65 years. But if someone is satisfied with 75 percent of the entitled pension, it can be received from age 62. The desire to work after 65 increases the state pension by 7-8% annually, and so on until age 70.
For participants in private programs, retirement comes earlier and depends on the terms of the contract. There is no single legally established retirement age in America as such. In essence, a person can plan their own retirement date, calculating by when they will have saved enough for a comfortable old age. At the same time, it is worth remembering that when pension payments are received, the time for payment also comes. The pension contributions of a working American, the employer, and the investment income on the pension account are tax-exempt. However, income tax will have to be paid on the savings at the time of withdrawal. On average, it is 28%.
A Number for Life
The need for careful accounting of individuals claiming social insurance benefits has turned the Social Security Administration (SSA), part of the Department of Health and Human Services, into a bureaucratic monster that fully controls the lives of Americans. In particular, the need for internal passports, as well as all other identity documents, has disappeared – they were replaced by the social security number, known only to the owner and the SSA.
It first appeared in 1936, when documents for social insurance began to be processed. Then it was issued to all citizens upon reaching age 14. Now it is assigned to every American at birth and accompanies them throughout life from beginning to end. The number is also assigned to non-citizens of the US who receive permission to work in the country.
The nine-digit code is unique and is not reused even after the owner's death. The first three digits indicate the geographic region in a broad sense, the next two – from 01 to 99 – specify which SSA office issued the card, and the remaining four are sequential within the group. A total of 420 million numbers have been issued.
Government control is the essence of the American pension system. Despite its apparent liberalism, several government agencies carefully ensure that everything in the pension sphere complies with the law. In essence, the government in America guarantees the safety of citizens' pension savings. To the extent that there is a deposit insurance system for corporate pensions.
True, this applies only to defined benefit plans, that is, when an employee and employer enter into a contract under which the person will receive a certain amount per month upon retirement. It is easy to calculate the amount of assets of a given pension fund needed to cover its obligations to contributors. In case of a shortfall, the authorities oblige corporations to replenish their pension reserves.
However, a different scheme of private pension savings is more common – defined contribution plans. The size of the future supplement to the state pension cannot be calculated; it depends solely on the state of the stock market where pension money is invested. But here too, the government's eye is watching. The Employee Benefits Security Administration and the Pension Benefit Guaranty Corporation annually open hundreds, if not thousands, of administrative and criminal cases involving fraud by management companies with citizens' pension accounts.
So, do American pensioners have no problems? They do, and quite similar to ours. The fact is that average life expectancy in 1950 was 68 years, in the mid-2000s – 77 years, and by 2050 it may reach 80 years. In accounting terms, these wonderful figures mean that an increasing number of people are receiving social benefits for increasingly longer periods.
At the same time, the number of working people is moving in the opposite direction. If in 1945 there were 42 workers per beneficiary of social benefits, today there are only three. By 2030, this number will decrease to two.
The combination of all these factors suggests that over the next 75 years of the existence of government social programs, their obligations could reach 50 trillion dollars. Social Security, according to calculations by economist Brian Riedl from the Washington-based Heritage Foundation, will require up to 6% of GDP, and Medicare even more – up to 11%. 'This alone represents the biggest and most serious economic challenge of our era,' Riedl emphasizes.
Several years ago, during a period of active market growth, Republicans attempted to privatize Social Security in Congress. The key provision of the reform was the idea of turning the state pension into a private one – allowing people to control their own social accounts, spending the accumulated money on investments in a wide range of securities, as happens in the case of voluntary pension insurance. But the proposal did not find support. The subsequent financial crisis and market collapse became an argument for opponents of reforms.
So, in terms of the pension system, the New World follows the Old. True, without too serious costs. Raising the retirement age is not even contemplated in the US. But they may well return to the idea of full privatization of the pension system.
It is about even greater government encouragement of voluntary savings for old age. This same path, apparently, will have to be chosen by Russia as well. To begin with, the state pension must be made truly insurance-based. So far, it is not such in our country. The so-called insurance part is only formally considered personal. In reality, these contributions from enterprises are used to pay benefits to current pensioners. And as already mentioned, this money is insufficient. Pensions in our country are, in essence, paid directly from the budget.
However, the process of privatizing old-age benefits in Russia has already begun: a funded system is in place and a government co-financing program for voluntary pension contributions is being implemented. The next logical step is to credit mandatory insurance payments to the personal accounts of future pensioners, as in America, rather than pooling them into a common fund. After that, everything will be almost like in America.
The only thing left is to prove to citizens the effectiveness of the private pension system. For example, introduce insurance for pension savings to minimize investment risks. In the US, this process took decades, and even now only half of Americans have corporate and personal pension accounts. So future Russian pensioners still have it all ahead of them.
Nikolai ZIMIN.
