Pension and retirement plans Summary

  • Last updated on November 10, 2022

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.Pension plansRetirement plans

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, Social Security Act of 1935Social Security retirement pensions began only gradually; monthly benefits did not begin until 1940, when only $40 million was paid, while railroad benefits (originating in 1934) were then $117 millions. Modifications to Social Security accelerated pension payout, and benefits passed the $10 billion mark by 1960, by then being ten times railroad benefits. Public employee retirement benefits were then about $2.6 billion.

Private Pensions

As early as the 1740’s, some churches provided pensions for clerical widows and orphans. Railroads;pension plansRailroads, the nation’s first really big business, began pensions during the 1870’s. American Express, then a railway freight forwarder, initiated a program in 1875. The program offered old-age assistance up to $500 a year to persons injured or “worn out” in service to the firm. The Baltimore and Ohio Railroad offered a more systematic plan in 1880, responding to violent labor unrest throughout the country in 1877. Pensions were free but not large–the maximum was one-third of former wage.

This magazine illustration shows veterans, some disabled, waiting in line to receive pensions in 1866.

(Library of Congress)

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.

Teacher Pensions

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 Teachers Insurance and Annuity AssociationTeachers Insurance and Annuity Association (TIAA). TIAA was incorporated as an insurance company, and its inception became a model for the modern private pension system, of which it has remained an important part. Contributions could be made by both teacher and employer, and would be invested in the manner of life insurance reserves, chiefly in bonds and mortgages. Benefits, paid monthly on retirement, were based on the actuarial analysis of the accumulated reserve. Except for a death benefit, the program reserves could not be withdrawn and were not subject to employer control. Programs were vested–that is, the qualifying teacher had a contractual right to the benefits. The programs were transferable from one university employer to another.

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.

The Great Depression

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 Railroads;pension plansrailroad pensions came under severe stress. In response, railroad workers pressed successfully for the government to take over providing railroad pensions.

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.

Tax Taxation;pension plansrates on corporate profits and personal incomes increased greatly during the 1930’s. Contributions to pension funds offered either tax avoidance (for corporations) or tax deferral (for individuals). Therefore, pension plans were developed aimed chiefly at higher-paid employees. Tax law was changed in 1942 to provide that pension-fund contributions could be deducted as business expenses (thus reducing measured profits and tax liability) only for plans that covered the vast majority of a firm’s employees.

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 United Mine Workers of America;pension plansUnited Mine Workers of America (UMWA) was established as the outgrowth of a major strike in 1946. Revenue came from royalties paid by employers on every ton of coal. By 1955, pension payout was about $70 million. The fund had only a small reserve; benefits were mostly paid out of current revenues. In 1949, the Supreme Court held that pensions were a subject on which employers were obligated to bargain with unions. Major corporate programs were then negotiated in such Congress of Industrial OrganizationsCongress of Industrial Organizations (CIO) strongholds as steel and automobiles. They brought pension benefits to rank-and-file workers, achieved high funding levels (though uninsured), and provided defined-benefit pensions. Largely as a result of union pressure, private pension coverage expanded from 19 percent of the workforce in 1945 to 40 percent in 1960 (about 42 million workers). Over the same period, the number of pensioners increased from 310,000 to 1.8 million, and payout increased from $220 million to $1.7 billion. Government retirement benefits were much larger: In 1960, Social Security retirement payments were $8.2 billion, and government employee retirement benefits totaled about $2 billion.

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 Employee Retirement Income Security Act of 1974Employee Retirement Income Security Act (ERISA). Major provisions included the creation of the Pension Benefit Guaranty CorporationPension Benefit Guaranty Corporation (PBGC–“Penny Benny”), which insures defined-benefit pension programs (defined-contribution programs are adequately secured by accumulated assets). Coverage per person in 2004 was around $40,000. Covered employers pay a premium into the insurance fund. Covered pensions were to be vested, assuring benefits to workers who remained with the firm for ten years. Many companies permitted vesting after five years.

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.

The Twenty-First Century

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.

Further Reading
  • 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



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