Question

A. Describe the differences between a private defined benefit pension plan and a private defined contribution pension plan.

B. Describe the circumstances that have contributed to the projected Social Security insolvency?

(I want you to type the anwer)

Answer 1

A. In a defined benefit plan, a specific amount of money, based on an actuarial calculation, is set aside each year in a trust fund for the employees by the employer. The pension payout is typically calculated using a formula that often includes average final compensation and years of service.

With a defined contribution plan, each employee has an individual account to which both the employee and the employer may make contributions. There may be some options on investment choices. Final benefits depend on the outcome of the investments. These plans are growing in popularity, since they offer more flexibility to both employer and employee.

B.

a. Revenues will have to be increased: Higher tax rates, higher covered earnings, general tax revenues will have to be used, or, some combination of the above will have to be implemented.

b. Benefits will have to be lowered: Retirement age will have to be increased, indexing for inflation will have to be less generous, certain benefits will have to be reduced or eliminated, or, some combination of the above, or other cuts, will have to be implemented.

c. Taxation of Social Security benefits may have to be changed to increase revenue.

d. If additional benefits are to be provided, a "fair" funding mechanism must be determined.

e. Privatization of the investment aspects of the social security system is being discussed as an option – part or all of the contributions (tax) can be invested in the private markets.