Retirement Plans

RETIREMENT PLANS

RETIREMENT PLANS, a relatively new element in the emergence of modern retirement as a social process. Prior to the twentieth century, the concept of mandatory retirement, and therefore the need to plan for such an eventuality, did not exist. For the elderly, retirement in the agrarian society of the colonial and early national periods was essentially a slow transition that led to transferring the property of the head of a household to an heir in return for money or services that might be required by the aged couple. This also assured the continuation of family ownership of the land. In towns and cities before industrialization, the small size of businesses, and the limited numbers of employees they had, meant that the financial burden of creating a pension program of some sort was too great for them to assume. Even with industrialization, most Americans were still engaged in farming as late as 1890, limiting the number of persons who retired. Older Americans tended to stay with their jobs for as long as they could, substituting skills and experience for a loss of strength and stamina in their later years.

Even so, the onset of industrialization and the emergence of larger corporations led to growing concerns about productivity and efficiency on the part of business as well as employee apprehensions regarding their security. These issues helped fuel the move toward mandatory retirement programs. Yet, by 1900, only a few businesses had developed pension plans for their employees, or established programs for mandatory retirement.

In 1935, the Social Security Act established old-age pensions for workers, survivor's benefits for victims of industrial accidents, and aid for dependent mothers and children as well as the blind and disabled. The funds for this program came from taxes paid by employers and employees alike. However, social security did not immediately accelerate the process of retirement. Older workers continued a long-established pattern of delaying retirement until they were physically unable to continue working. This trend continued into the 1950s, although retirement as a social occurrence had begun to increase in this decade. The fixed benefits inherent in the social security program and in private pension plans offered little in the way of financial security for potential retirees, particularly as inflation reduced their spending power.

The ongoing problem of poverty among the elderly led to increases in the benefit levels of social security between 1965 and 1975. To allow adjustments for inflation, benefits were tied to the Consumer Price Index in 1972. At the same time, the private sector began reorganizing its pension plans. The enactment of the Employee Retirement Income Security Act (ERISA) permitted vesting plans, while it also provided workers with some protection against any loss of benefits. Retirement savings became tax-exempt and allowed tax deferments, which lowered the cost of saving for retirement by permitting pretax dollars to be put into a retirement plan and deferring taxation of the gains made from the plan's investments until withdrawal. Private insurance companies had begun offering programs in the 1950s to help individuals prepare for retirement; now they began to expand those programs to offer more options geared to take advantage of these new retirement savings opportunities.

Retirement plans offer workers various choices to plan for their eventual retirement. Often, employers and employees both contribute to these plans, although some may be funded entirely by either an employer or a firm's workers. In general, withdrawals made before age fifty-nine and a half are subject to a 10 percent penalty. Withdrawals normally have to begin no later than one year after a person turns seventy and a half. Income taxes usually become payable once withdrawal begins; taxes are paid on the amounts withdrawn and not on the entire sum in the plan.

Among the common qualified retirement plans in place at present are the following:

Defined benefit pensions generally provide a specific monthly payment from the time of retirement until death. The benefit is normally calculated on the basis of the retiree's final salary multiplied by the number of years of employment. The employer typically funds plans such as these.

Profit-sharing plans are also employer funded, with employee contributions an option. Upon retirement, a person will receive a lump-sum payment. The company's contributions, and therefore the employee's retirement benefit, are tied directly to the company's profits.

Lump-sum retirement benefits are also paid on savings plans. The employer, too, customarily funds these, although employees may contribute as well. Employees may be allowed to borrow a portion of their vested savings.

In employee stock ownership plans (ESOP), employers periodically contribute company stock toward an employee's retirement plan. When the employee retires, the plan may offer a single payment of stock shares. Employees may have additional options after a certain age and length of service (usually fifty-five and ten years) to diversify part of the portfolio.

Tax-sheltered annuities (403b) plans may be offered by tax-exempt and educational organizations for their employees. Retirees are offered a choice of a lump-sum or a series of monthly payments. Plans such as these are funded by tax-deductible employee contributions.

Employers fund money-purchase pensions, although employee contributions may be permitted. This type of plan provides either a lump-sum payment or a series of monthly payments, with the size of the payments dependent upon the size of the contributions to the plan.

Savings Incentive Match Plans (SIMPLE plans) are designed for small businesses. These may be set up either as Individual Retirement Accounts or in some sort of deferred plan such as a 401(k). Employees fund them on a pretax basis and employers are required to make matching contributions. The funds in the account grow on a tax-deferred basis.

For small businesses, there are Simplified Employee Pensions (SEPs). As with other plans, a retiree's withdrawals may be taken as a lump sum or periodically. The employer usually funds these programs, although employee contributions may be allowed.

Keogh plans are designed specifically for self-employed individuals. Funded entirely from the worker's contributions, which are tax-deductible for the most part, they, too, permit disbursement on a lump sum or periodic basis.

Among personal retirement savings programs, Individual Retirement Accounts (IRAs) are probably the most popular. These plans are funded entirely by personal contributions, which are tax-deferred. IRAs are most commonly held in an account with a bank, savings association, credit union brokerage firm, insurance company, or mutual fund company. As with the other plans, benefits may be withdrawn periodically or in a lump sum after retirement.

BIBLIOGRAPHY

Graebner, William. A History of Retirement: The Meaning and Function of an American Institution, 1885–1978. New Haven, Conn.: Yale University Press, 1980.

Haber, Carole, and Brian Gratton. Old Age and the Search for Security: An American Social History. Bloomington: Indiana University Press, 1993.

Sass, Steven A. The Promise of Private Pensions: The First Hundred Years. Cambridge, Mass.: Harvard University Press, 1997.

Schieber, Sylvester J., and John B. Shoven. The Real Deal: The History and Future of Social Security. New Haven, Conn.: Yale University Press, 1999.

GregoryMoore

See alsoPension Plans ; Pensions, Military and Naval .

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