401K plans in the US and Germany
US citizens who are preparing for their retirement may well have a pension plan under the 401k system, German citizens may have similar plans to help them in their financial planning for retirement. As you probably know planning for your pension isn’t just about long term saving - but securing that you’ll be able to live at the same standard that you enjoy now. You surely want to be able to do all the things you’d like to when you have a lot of free time and therefore it is highly recommended to set up a well-balanced retirement plan. So, what is the difference between the American 401K financial retirement plan and its German counterparts?
401K plans in the US system
The idea for those 401K pension plans was born in the late 1970s when the US Congress passed a Tax Reform Act in 1978 which allowed for any savings from earnings being put into a retirement financial plan to be exempt from taxes, until the day the pension savings get paid out or withdrawn. After becoming law as Internal Revenue Code section 401, para (k) - hence the term 401K pension plans - the first of these private savings plans came to life in 1982. The 401K pension plans make it possible that part of the salary or loan can be transferred into an 401K account directly by the employer before the person receives the monthly paycheck; and the total value of the transfer can be up to 15% of the salary. 401K accounts are mutual funds, and basically, the money that runs into a 401K account is re-invested into stocks as well as bonds. Some companies offer special 401K account facilities for their employees that can include financial contributions by the employer. These employees usually take out at least a small portion of the money in the 401K accounts and invest it in the company(s) they’re working for. This has like every investment benefits and risks. The employer is more or less enhancing the remuneration package and the employee putting money into the 401K pension account is transferring part of the sum back into the company. This concept also provides an additional incentive for the employees to work hard to ensure the ongoing success of the employers company(s), thereby taking care of the outcome of their own pension plan. But you should not underestimate the risks of it because the person saving for retirement has made part of the plan depending on the success of just one company.
401k counterparts in Germany
Like most European Union countries, Germany did have more of a ‘welfare state’ approach to the pensions and retirement funding than the USA. However, in this fast changing world of modern politics it seems like that under the new Barack Obama administration the USA could take a veer to the left towards a socially more balanced system , whilst Germany has recently moved a step to the right to a more capitalist, ‘every man for himself’, approach. Several demographic factors have accelerated this shift in policy by the German government towards individual personal retirement plans: unemployment is at the highest level of the last few years in Germany whilst the birth rate is decreasing and so the age profile of the nation is giving reason to concern since the number of working citizens is decreasing compared to the growing number of retirees. Additionally, the economic consequences of reunification are still being felt in some German states. Subsequently the new millennium ushered in several tough pension reforms- the so-called Riester Reforms. The essence of these reforms is that every German person is now responsible for his own retirement savings and pension plan - gone is the “purely collective Pay-as-you-Go” pension plan supervised by the state. Individuals can make contributions to their own pension saving plan voluntarily and employers do not have to contribute. So the government had to introduce significant subsidies and tax incentives to provoke participation in these retirement savings plans by even the lowest paid workers. Also, many of the new pension funds will be collective occupational ones, rather than strictly individual ones – giving some responsibility for the pension to the employer. From 2002 on the employees got access to employer pension plans that set out that part of the employee’s salary is automatically held back and contributed to the plan by the employer, whether or not the employer transfers money to the retirement account individually.