Question

In: Accounting

There is a suggestion that businesses/government workers should move to a 401(k) to replace Social Security....

There is a suggestion that businesses/government workers should move to a 401(k) to replace Social Security. What is a 401(k) and why is this a good or negative idea?

Solutions

Expert Solution

Social security Retirement is a scheme which provides monthly payment when we retire. A worker should atleast work for 10 years to qualify for this scheme. The later you retire the more the benefits we can avail in social security . For ex. If a person reitires at 70 ,he recieves around 24% more benefit then what he would have recieved if he had retired at full retirement age.

Whereas ,Under 401(k) ,This is a voluntary Retirement Scheme ,where a worker set asides a fixed amount of his salary aside for retirement. In this scheme the employer also set asides the same amount as the employee for each month.(upto certain extent only).Moreover we cannot start collecting 401(k) account benefits until we reach age 59 and a half .

Hence for a person who retires at late ages of 68-70 ,if only one scheme is available to a person,he should avail Social security retirement scheme,but he wants to retire early ,he can have any of the two.

(Normally people can avail both benefits at a time,the amount we save in 401(k) account doesn impact the Social security benefits as it is considered as Non wage income.


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