» Student HandoutEssential Terms
» What Is Social Security?
The following pages on the Social Security Administration's Web site address:
» Types of Retirement Plans
Defined Benefit Plan: This employer-sponsored plan tells employees the exact benefit (usually a monthly amount) that they can expect to receive upon retiring. Investment risk and portfolio management are entirely under the control of the company. The amount that retiring employees receive is determined by factors such as how long they have worked and how much money they earned. Both the amount contributed and the retirement benefit are fixed.
Note: Social Security in its current form is a defined benefit plan. Workers pay a fixed percentage of payroll taxes and are told what their monthly social security benefit will be on retirement.
Defined Contribution Plan: Employers or individuals set aside a certain amount or percentage of money each year for the benefit of the employee or individual. There is no way to know how much the plan will ultimately give the person upon retiring. The amount contributed is fixed, but the benefit is not.
Note: Most proposals for changing Social Security are based on defined contribution plans.
You can read more about the pros and cons of defined benefit and defined contribution plans from:
» Personal Versus Private
What's the Difference Between a Personal Defined Contribution Plan and a Private Defined Contribution Plan?
Not much, it turns out, but boosters and critics of the plan think the choice of word is important. The following excerpt from the March 22, 2005 New York Times article, "It's 'Private' Vs. 'Personal' In Debate Over Bush Plan" highlights the importance of language in framing political strategy:
In the Social Security debate, one of the most ferocious struggles is over language, whether President Bush is proposing to create "personal" or "private" accounts in the program, whether he is really proposing the "privatization" of Social Security. Mr. Bush complained last week that " 'privatization' is a trick word," intended to "scare people." Senator Harry Reid of Nevada, the Democratic leader, interrupted a news conference to correct a reporter who asked about "personal" accounts.