Pension and retirement plans became expected job benefits during the twentieth century, increasing the overhead of employment for many firms but also providing workers with significant income on retirement. Late in the century, many pension funds failed, as it was revealed that major employers had borrowed money from their employees’ pensions that they were unable to pay back.
Government pensions in the United States began with pensions to veterans of the Revolutionary War and to their dependents. Each subsequent war brought its own pension program. By 1917, the federal government had paid out over $5 billion in pensions, 90 percent of which were paid to veterans of the U.S. Civil War. The number of military pensioners rose steadily from 126,000 in 1866 to nearly one million in 1893-1906. Annual payments surpassed $100 million in 1890, and World War I took them over $200 million. Veterans’ pensions were enlarged as a form of relief during the Great Depression, rising above $300 million in 1934. World War II sent the programs into new magnitudes, passing $1 billion in 1946 and $2 billion in 1948.
Retirement pensions for federal civil service workers were created in May, 1920, initially covering 330,000 workers and providing annual annuities of $180 to $720. Numbers of pensioners and expenditures rose very slowly. Not until 1947 did the number of pensioners exceed 100,000 and the payments exceed $100 million. Many state and local governments also created employee pension programs after 1920. By 1930, ten states had adopted general old-age pension programs, beginning in 1923 with Nevada, Montana, and Pennsylvania.
All of these were dwarfed by the creation of Social Security and Railroad Retirement programs. Under the initial 1935 statute,
As early as the 1740’s, some churches provided pensions for clerical widows and orphans.
This magazine illustration shows veterans, some disabled, waiting in line to receive pensions in 1866.
The Pennsylvania Railroad adopted an informal pension program in 1886, then formalized it in 1900 to encourage workers to retire. By 1900, five other major business firms were offering pensions, including such well-known names as John Wanamaker, Sherwin-Williams, and Procter and Gamble. By 1919, thirty-eight railroads had pension programs, and these covered 75 percent of the industry workforce. Most followed the Pennsylvania model. Programs did not involve employee contributions, and they provided defined benefits based on level of previous pay and length of service. Retirement was compulsory at the age of seventy.
Universities also initiated pensions during the 1890’s, when Columbia, Harvard, and Yale led the way. In 1905, generous donations from Andrew Carnegie extended pensions to many professors: too many, in fact–the financial base had to be reorganized. This involved the creation in 1918 by the Carnegie Foundation of the
Company pension plans were typically treated as current expenses, without accumulated reserves. In 1923, the Morris Packing Company, a meat processor, went bankrupt and ceased payments to its four hundred retirees. Current employees had contributed to the pension plan; they now lost those contributions. Corporate bankruptcies have remained a problem area ever since. The Metropolitan Life Insurance Company entered the business of managing pension plans in 1920, recognizing its close parallels with life insurance. Their pension business expanded rapidly. Most pension programs were, by 1929, not supported by segregated, dedicated assets.
As the unemployment rate increased after 1929, many firms used forced retirement as a way of reducing their workforce. The number of pensioners doubled from 1927 to 1932. Plans that depended on current corporate revenues were in trouble. Surprisingly, a number of new plans came into force between 1927 and 1932, almost all managed by insurance companies. The extensive system of
The original Social Security Act of 1935 conformed very closely to the conservative actuarial guidelines of insured private pensions. Contributions were to be accumulated and benefits paid only after such accumulation. The result was a program that was initially more of a revenue system than a pension system. Amendments in 1939 accelerated payouts, but potential benefits were not generous, especially for higher-paid workers. Paradoxically, then, private pension plans expanded in numbers and dollar amounts. Between 1930 and 1940, the number of persons receiving private pensions rose from 100,000 in 1930 to 160,000 in 1940, and annual payout increased from about $90 million in 1930 to $140 million in 1940.
By 1939, twelve national labor unions provided pensions for members, with payouts of about $2 million. World War II brought a vast increase in union membership and power. The Welfare and Retirement Fund of the
About two-thirds of private pension plans were uninsured. Most had trustees, often major banks and trust companies. Employers valued the flexibility of such plans, which often took advantage of the small percentage of retirees relative to total employment. In many cases, an employee who left the firm before retirement would retain no benefits from that employer. Because so many programs did not accumulate large reserve funds, pensions depended on the survival of the sponsoring corporation. When Studebaker closed its automobile manufacturing operations in 1964, it left some seven thousand workers with little or no pension benefit.
Pension funds were vulnerable to abuse. An example was the Central and Southern States Pension Fund (CSPF) created by Jimmy Hoffa’s International Brotherhood of Teamsters in 1955, which loaned generously to union officials, paid bribes to government officials, and subordinated pensioner welfare.
In 1974, Congress adopted the first comprehensive federal program to regulate private pension funds: the
The Department of Labor was given authority to monitor pension-fund financing. Firms were required to achieve full funding for vested pension claims–though this goal was not achieved. Individual Retirement Accounts (IRAs) were authorized. Individuals were permitted to invest tax-deferred funds into approved programs, subject to withdrawal limits. By 1981, the nation’s IRA accounts totaled $400 billion.
In 2000, the Pension Benefit Guaranty Corporation had accumulated assets exceeding liabilities by $10 billion. Then rough times set in. The shaky condition of stock prices impaired pension fund assets. A series of major corporate closings began with Bethlehem Steel (October, 2001), which imposed $3.7 billion of unfunded liabilities on the insurance agency. Nearly twice as much arose from United Airlines in 2005. By 2006, PBGC liabilities exceeded assets by $19 billion. The liabilities were the present value of expected future payouts. Current cash flows met current cash needs (as was true for Social Security as well). The asset shortfall was a forecast of problems to come, as pension obligations would increase over time. Underfunding of insured pensions was estimated to total $350 billion in 2006. By 2006, PBGC covered about 44 million workers involved in thirty thousand defined-benefit pension plans.
Whatever their difficulties, pension funds had become, in the new millennium, a major financial force. With total assets of $4.7 trillion in 2004, they held about one-fourth of all corporate stock. Stock investment had expanded rapidly following the pioneering establishment in 1952 of the College Retirement Equity Fund by TIAA.
In 2006, about half the civilian labor force was covered by private pension plans, including 80 percent of union workers and 60 percent of full-time workers, but only 24 percent of service workers. Employers had taken a strong move toward defined-contribution plans, which held little risk for employers compared with defined-benefit plans. Employers also strongly promoted 401(k) plans, first authorized in 1982. These were voluntary for employees, who would contribute to their choice of approved investment programs, often with matching funds from the employer.
Brown, Jeffrey R. “Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation.” Journal of Economic Perspectives 22, no. 1 (Winter, 2008): 177-198. Good update on the evolution and problems of Penny Benny. Costa, Dora L. The Evolution of Retirement. Chicago: University of Chicago Press, 1998. Provides a comprehensive context for pensions, which are the focus of chapter 8. McGill, Dan. The Fundamentals of Private Pensions. 2d ed. Homewood, Ill.: Richard D. Irwin, 1964. McGill was longtime head of the Pension Research Council. Successive editions of this classic work provide a good updating. Myers, Robert J. Social Security. 4th ed. Philadelphia: Pension Research Council, 1993. Myers was a longtime high administrator in the Social Security system and wrote authoritatively as an insider. Sass, Steven A. The Promise of Private Pensions. Cambridge, Mass.: Harvard University Press, 1997. The evolution of private pensions is superbly developed in the context of business management.
Bush tax cuts of 2001
401(k) retirement plans
Savings and loan associations
Social Security system