Social Security vs 401k: Difference and Comparison

The employee, when working, is tense during the period after he cannot work, i.e., after retirement. What will happen to how can he afford his expenses and other things?

Key Takeaways

1. Social Security is a government-run program that provides retirement, disability, and survivor benefits, while 401k is an employer-sponsored retirement savings plan.
2. Social Security is funded through payroll taxes, while 401k contributions come from employee and employer salaries.
3. Social Security benefits are based on a worker’s lifetime earnings, while 401k benefits depend on the contributions made to the plan.

Social Security vs. 401k

Social security is the tax earned during the working year of an employee, which is given to him every month after retirement, whereas 401k is the retirement benefit of an employee generated from them only and sponsored by the employer, which is also offered every month after retirement. 

Social Security is a program in the United States providing retirement benefits and benefits for the disabled and survivors.

401k is a type of plan in the United States where an employee can contribute a few percent of his pre-tax income as a saving for the post-retirement period; this amount is further invested in cash, stocks, mutual funds, bonds, etc.

Comparison Table

Parameters of Comparison	Social Security	401k
Meaning	It is considered a defined benefit an employee is guaranteed after retirement.	It is considered a defined contribution made by employees and output, mainly based on the market.
Basis of Income	Taxed earned during the working year.	It is directly taken from the paycheck.
Eligibility of Employee	Ten years of work is mandatory.	Twelve months of services must be at least 21 years old employees can start investing.
When Employee can I begin collecting	Minimum at 62 less than 100%, at 65 age full retirement 100% benefits, and at 70 age more than 100% benefits.	Minimum age 59 (have some exceptions for emergencies) and maximum 70 age.
It is a type of	It is a type of Insurance.	It is a type of savings.

What is Social Security?

It is a type of insurance that benefits different people, such as post-retirement benefits, benefits to the disabled, and benefits to survivors.

1. Retirement Benefits: this is the benefit an employee receives after retirement. If he is taking early retirement, he will get relatively less than the 100% benefits, whereas, on his full pension, he will receive 100% social security benefits.
2. Disability Benefits: people who are disabled or going to die in the coming years are also eligible for these benefits.
3. Survivors Benefits: Under this, the deceased’s family is also eligible; a few terms must be fulfilled.

What is 401k?

401k is a plan under which an employee contributes to a retirement account sponsored by the company/employer. It is called a saving or contribution type of plan. It is considered a good option for an employee to have post-retirement benefits. 

There are mainly two types of 401k plans:

1. traditional 401(k)s and
2. Roth 401(k)s or Designated Roth account.

In case when an employee resigns, having a 401k following is the option they consider:

1. They withdraw the money, and although it is not very beneficial in case of urgency, they have this option.
2. Move the money into Internal Revenue Service.
3. They can leave it with the company or employer and start with a new 401k account in a new company.
4. They can take or move their old 401k to a new 401k wherever they work, although every company does not allow this option.

Main Differences Between Social Security and 401k

1. Social Security is the tax earned during the working years, and 401k is taken directly from the paycheck.
2. Social Security is a type of Insurance, and 401k is a type of savings. 

References

1. https://www.sciencedirect.com/science/article/pii/S1573442002800118
2. http://www.pensionplanadmin.com/Newsletter%20Articles/About%20401(k)%20Plans.PDF
3. https://ideas.repec.org/p/boc/bocins/401k.html

Last Updated : 13 July, 2023