There are six primary sources of retirement income:
- Social security About 90 percent of all US workers participate in the social security system whose role is to guarantee at least a minimum level of retirement income for every eligible retiree. This government program has greatly reduced poverty in the United States, although 12 percent of older people are still below the poverty level.
- Defined benefit plans The largest accumulation of private sector retirement funds is in defined benefit plans, which promise specific benefits and are typically sponsored by large employers. Approximately 15 percent of US workers are enrolled in such plans, although there has been a tendency for small employers to discontinue the plans because of excessive regulatory burden and costs. These plans, in combination with Social Security, generally replace about 60 percent of pre retirement earnings for those who have worked at least 30 years. Workers who change jobs frequently or work part-time often fail to qualify or accumulate adequate vested benefits from these plans. (Those who do become vested may receive benefits from more than one plan). Government workers are generally covered by defined benefit plans, many of which are underfunded and frequently have made overly generous promises.
- Defined Contribution Plans These plans promise no specific retirement benefit; instead, employers make specific contributions (often according to a formula related to income or profits) to an employee’s retirement account. Such plans are often favored by smaller firms because they are less regulated and have lower administrative costs and more certain contribution requirements. An important advantage of defined contribution plans is no public liability for inadequate funding. However, these plans often produce a lesser final benefit than a defined benefit plan. There are five times as many defined contribution plans in the United States as defined benefit plans, but many are small, and only about 26 percent of US workers are active participants in a defined contribution plan that is their primary retirement plan.
- Personal savings An important source of retirement income is personal savings, which has been traditionally relatively low in the United States. Personal savings has fallen from 9 percent of personal income in 1981 to 4.5 percent through the first six months of 2006. Nevertheless, personal savings is a significant source of retirement income.
- Post retirement employment For many, jobs (usually part-time) provide meaningful opportunities and often a necessary retirement supplement. About 22 percent of US retirees had income from earnings. Under social security rules, for those under 65 and below 70 benefits are reduced for earnings in excess of certain limits. Social security benefits are not reduced for workers who are 70 or older.
- Private inter-generational Transfers The transfer of savings from deceased parents to children is an important source of income that for many could serve as a partial offset to shortfalls in their own retirement funding.