American Retirement Model – Social Security

American Retirement Model – Social Security

The German government under Chancellor Otto von Bismarck in 1889 introduced a national statutory health insurance system, which is credited with being the “prototype of a ‘social insurance state’”. As such, it combines public plans, financed through compulsory payroll deductions with public administration. Bismarck’s motivation was to support the welfare of German workers in a way that would maintain the German state working at utmost effectiveness, and to block efforts at “more radical socialist alternatives”.

Forty-Six year later, and following six years of a devastating national economic depression, then President Franklin Delano Roosevelt signed the American parallel to Germany’s social security insurance into law on August 14, 1935. In his remarks at the signing, he stressed the hope that this law would:

"… lessen the force of possible future depressions, to act as a protection to future administrations of the Government against the necessity of going deeply into debt to furnish relief to the needy--a law to flatten out the peaks and valleys of deflation and of inflation--in other words, a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness." President Franklin Delano Roosevelt, August 14, 1935

Since its enactment, the American social security system of has provided a safety net of income to millions of citizens. Established as a system of payments and benefits for: old-age workers, victims of industrial accidents, unemployment insurance, aid for dependent mothers and children, the blind, and the physically handicapped. http://www.archives.gov/press/press-releases/2010/nr10-128.html

The origins and concept of the “Three Legged Stool” are somewhat obscure. In basis, the Three Legged Stool refers to the financial security derived from an employee’s private pension plan from their employer, the employee’s own private investments and savings, and benefits from Social Security, thus “three” legs of support. Initially, the employee’s private pension plan was in the form of a traditional defined benefit pension plan; however, today that most often takes the style of a defined contribution plan, i.e., 401(k). http://www.ssa.gov/history/stool.html

While Social Security was never intended to provide for 100% of a retired or disabled employee’s needs after employment, it was envisioned at a safety net and to provide a significant portion of their prior income and benefits. While opinions vary, many authorities perceive that a retiree will need 70-80% of their pre-retirement income in order to maintain a similar lifestyle they enjoyed prior to retirement. Currently, depending on the retiree’s pre-retirement income, Social Security will replace something in the range of 15-25% for a typical non-highly compensated employee. The remainder has to come from the other two legs of the stool.