The employee, when working, is tense of the period after he cannot work, i.e., after retirement. What will happen how he can afford his expenses and other things. To ease this specifically, in United States government has introduced various plans that give benefits to an employee after retirement. These plans mainly include Social Security and the 401k plan.
Social Security vs 401k
The main difference between Social Security and 401k is the way they are generated. Social security is the tax earned during the working year of an employee, which is given to him on a monthly basis after the retirement, whereas 401k is the retirement benefit of an employee-generated from them only and sponsored by the employer, which is also given on a monthly basis after the retirement.
Social Security is a program of the United States providing retirement benefits and benefits for the disabled and survivors. That means if a person who is not capable of working due to some disability by fulfilling certain requirements can have all the benefits under this program.
401k is a type of plan in the United States where an employee can contribute a few percent of his pre-tax income as a saving for the post-retirement period; this amount is further invested in cash, stocks, mutual funds, and bonds, etc.
Comparison Table Between Social Security and 401k
| Parameters of Comparison | Social Security | 401k |
| Meaning | It is considered as a defined benefit an employee is guaranteed after retirement. | It is considered as a defined contribution made by employees and output of which mainly depend on the market. |
| Basis of Income | Taxed earned during the working year. | It is directly taken from the paycheck. |
| Eligibility of Employee | 10 years of work is mandatory. | 12 months of services and must be of minimum 21 years old employees can start investing. |
| When Employee can begin collecting | Minimum at 62 less than 100%, at 65 age full retirement 100% benefits, and 70 age more than 100% benefits. | Minimum age 59 (have some exceptions for emergencies) and maximum 70 age. |
| It is a type of | It is a type of Insurance. | It is a type of savings. |
What is Social Security?
It is a type of insurance that provides benefits to different people such as post-retirement benefits, benefits to the disabled, and benefits to the survivors. They can have the benefits by paying from their payroll for a minimum period of ten years. It can be categorized into different types:
- Retirement Benefits: this is the benefit an employee receives after retirement. If he is taking early retirement, he will get relatively less than the 100% benefits, whereas, on his full retirement, he will receive 100% benefits of social security. The benefits can be more than 100% in case if an employee is extending his retirement period. These benefits can also be claimed by the spouse after fulfilling certain requirements.
- Disability Benefits: people who are disabled or going to die in the coming years are also eligible for these benefits. Although they have to meet certain requirements/criteria, also their family members can also claim them.
- Survivors Benefits: under this, the family of the deceased are also eligible for these benefits; few terms have to be fulfilled for that.
What is 401k?
401k is a type of plan under which an employee contributes to a retirement account sponsored by the company/employer. It is called a saving or contribution type of plan. Under this, both employer and employee contribute a fixed amount (fixed by the Internal Revenue Service) which can be claimed by the employee after retirement. It is considered a good option for an employee to have post-retirement benefits.
There are mainly two types of 401k plans:
- traditional 401(k)s and
- Roth 401(k)s or Designated Roth account.
Both of these are the same. The only difference is that they are taxed in a different method.
In case of when an employee resigns, having a 401k following is the option they consider:
- They withdraw the money, although it is not very beneficial in case of urgency, they have this option.
- Move the money into Internal Revenue Service.
- They can leave it with the company or employer and start with a new 401k account in a new company.
- They can take or move their old 401k to a new 401k wherever they are working, although this option is not allowed by every company.
Main Differences Between Social Security and 401
- Social Security means the guaranteed benefits given to an employee post-retirement, and 401k means the benefits given to an employee post-retirement which mainly depends on the market.
- Under Social Security, it is mandatory that the employee must be working in the company for a minimum period of ten years, whereas under the 401k plan minimum period of working is one year.
- The minimum age for withdrawing the money under social security is 62 and under 401k plan is 59 (unless it is a case of disability or emergency)
- Social Security is the tax earned during the working years, and 401k is taken directly from the paycheck.
- Social Security is considered as a type of Insurance, and 401k is considered as a type of savings.
Conclusion
Therefore, although both the plans have the same motive to give post-retirement benefits to the employee till both can be differentiated based on how they are generated or when a person can withdraw the money or start investing in it, and many more. For example, wherein Social Security an employee must have 10 years of working experience in the company to have the benefits, the minimum work period required for the 401k is one year. After that, they can start saving money for their retirement benefits. Along with this, the Unites States includes other plans such as Solo 401(k), 403(b), 457(b), IRA, Roth IRA, etc.
References
- https://www.sciencedirect.com/science/article/pii/S1573442002800118
- http://www.pensionplanadmin.com/Newsletter%20Articles/About%20401(k)%20Plans.PDF
- https://ideas.repec.org/p/boc/bocins/401k.html