The Pay-stubs Don’t Lie

By Gao Yang

So, you got the job! The only thing left to dread is the bore of orientation and that horrid stack of official paperwork waiting for your countless signatures­—quite the initiation!  After a few days of training, you’re on your way to your first paycheck. But what does a paycheck really mean? Current earnings, hours worked, tax adjustments – considering that it’s all listed quite systematically, all of this must be important. Unfortunately, too many people skip right to the net pay line and disregard the rest.

For decades, there has been serious controversy over a tax that is automatically deducted from our paychecks. When started in the late 1930s, the Social Security Act seemed to be a valid solution for decreasing poverty in old age. However, Alicia H. Munnel’s reports from Boston College’s Center for Retirement Research have caused many to realize that social security income is becoming obsolete.

This sparks the question: Should U.S. workers be allowed to invest their Social Security earnings in private investment accounts?  U.S. workers pay into the Social Security fund and employers must equally match that amount.  Why can’t workers take their earnings and invest them in accounts that will give them higher yields?  In reality, social security tax is not a retirement fund.  Taxes paid in now are being paid out almost immediately to those currently in retirement and other social programs.  When current workers retire, funds disbursed will be based on the future contributions of future workers, in addition to future market trends.  The concept is simple.  We pay into the social security fund now to help support our retired seniors, hoping that future generations will do the same for us.  According to Karen A. Zurlo from Rutgers School of Social Work in the State of New Jersey, ongoing debate over the disbursement of Medicare and Social Security funds gives U.S. workers a reason to want more control over their retirement.  However, diminishing the Social Security System would logically put many at risk for not having any retirement income.

If you’re lucky, that stack of official paperwork due at orientation contains information on retirement plans.  The page is probably titled “Setting up Your 401(k).”  So many proceed without investigating how it works, how much to contribute, or how retirement accounts grow. After speaking with financial advisors, human resource specialists, and tax accountants, 401(k)s seem no more than an off-limits savings account with more cons than pros.

According to Zurlo, the past 30 years have shown a shift from defined benefit packages to individual contribution plans offered in the workplace.  As more employers push workers to take on defined contribution plans, findings show that employees are unknowingly taking the loss. Contrary to popular belief, 401(k)s and IRAs are not the only retirement accounts out there.  Clients are taking advantage of annuities and life insurance products, which also gain interest and give payouts. However, due to legal terminology, only certain accounts can be marketed as retirement tools, leaving citizens unaware of such non-traditional options.

Unlike Social Security tax, retirement plans are optional.  According to Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research, 60% of workers in New York do not have access to a pension or 401(k).  Many small businesses can’t afford to fund retirement plans. Andrew Ujifusa, a reporter on education policy, writes that in 2012, the Teacher’s Retirement System in Illinois only had enough funds to cover 40% of its liabilities. Legislators in the state of Illinois proposed closing pension plans to new teachers.  Such occurrences explain why Zurlo’s report show workers desperate to retire are willingly taking the loss of defined contribution plans.

The general lack of knowledge about retirement vehicles on the market serves as a reason to keep our Social Security system. Too many are already underprepared for retirement. Keeping a standard Social Security tax is a fair precaution taken to ensure that those without retirement in mind have some monetary support when they can no longer work.  However, the quality of one’s retirement is still his or her responsibility.  The next time you skip to the net pay line, remember that what you see is truly what you get. Your investment is already in your hands.

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