PENSION PLANS

PENSION PLANS are used to fund retirement programs and may involve employers, the government, or both. Created to provide payments to workers or their families upon retirement, they also provide benefits in the event of death or disability. Self-employed persons generally have individual arrangements. Funding for pension programs may include employee contributions supplemented by matching funds from the employer, deferred profit sharing programs, stock purchase programs, or employee savings. Social security, a federal pension program established in 1935, may supplement employer and private pension plans.

Different pension plans exist for federal, state, and local government employees; military personnel; and public school teachers. An individual may enhance a pension plan through individual retirement accounts (IRAs) or 401(k) programs or through programs such as the Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF). Tax deferments allow retirement contributions to be funded with tax-free dollars, while retirement savings accounts may accumulate interest while delaying tax payments on their growth until funds are withdrawn, promising a larger income at retirement.

Military Pensions

Congress established the General Law pension system in 1862 to provide payments for veterans who had been disabled as a direct result of military service. Payments were determined by the degree of disability as determined by a local medical board. This was usually based on the ability to perform manual labor.

The federal government created a more general pension plan for Union Army veterans in 1890. Although originally designed to assist disabled veterans, it included the beginnings of a collective disability and old-age program for Union veterans of the Civil War. This law provided a pension regardless of whether the condition was caused by military service. Although the law did not recognize old age as a basis for receiving a pension, the Pension Bureau instructed doctors to authorize pensions for applicants over age sixty-five, unless the individual appeared exceptionally vigorous. One effect seems to have been the encouragement for more men to retire, so that, by the early twentieth century, retired Union Army veterans outnumbered nonveteran retirees.

By 1900, this program grew to the extent that it took up nearly 30 percent of the federal budget. Housed in its own building, the pension program provided benefits to veterans as well as their widows and dependant children. Almost a third of those between fifty-five and fifty-nine received pension payments, as did about 20 percent of those between sixty and sixty-five; 15 percent of those aged sixty-five to sixty-nine; and a bit less than ten percent of those seventy or older. The pension program seems to have contributed to these veterans' political power, and they made benefits an important issue in the early twentieth century. Not unlike today's senior citizens, they were well organized and lobbied Congress effectively, despite their small numbers. They tended to support high tariffs and campaigned to have the additional funds directed into the pension fund.

Private Pensions

In the final quarter of the nineteenth century, private pension plans were developed because of employees' growing desire for status, security, and higher salaries combined with management's needs for loyal, dedicated, and productive employees. Partly an expression of welfare capitalism, these early plans were also the result of a belief that benevolent and generous programs, such as pensions, could help create the durable, industrious, and devoted workforce management wanted.

The initial private pension plans were developed by the railroads. The American Express Company established the first one in 1875, followed five years later by the Baltimore and Ohio Railroad (B&O). In 1900, the Pennsylvania Railroad offered its employees a plan. Although these plans arose primarily from a desire to retain employees, they also reflected growing concerns about unions, the welfare of workers, and a wish to display corporate benevolence toward employees. The pension plan created by the B&O had a provision for old-age protection that would serve as an example for future plans, as it allowed employees to retire at sixty-five or, if they were disabled, at age sixty. Another interesting aspect of the plan was its treatment of old age as a disabling illness, providing retirees the same benefits as those who had suffered long-term disabilities. A unique feature of the Pennsylvania Railroad plan was the establishment of corporate control over the plan's administration, setting a precedent for the evolution of modern personnel administration. Other railroads that adopted pension plans soon copied this feature.

Despite the pioneering efforts of the railroads, few other corporations offered any sort of pension plan by 1900. Undoubtedly, the long-term commitment required by such plans discouraged many companies from offering them. Profit sharing plans were more popular, since the entire workforce could benefit from them, and occasionally, a firm might tie a pension program to its profit sharing plan.

Government Pensions

Although the federal government had established age as a basis for making pensions available to veterans of the Union Army in 1890, it would be another thirty years before a retirement and pension program was established for government employees. As with the private sector, government's interest in pension plans was related to efficiency and security. Generally speaking, civil service employees tended to hold on to their jobs because of the security they offered, but the late nineteenth century saw aging with in the bureaucracy become a problem. Many civil service workers were Union Army veterans, who were unlikely to be removed from their jobs for political reasons. These men stayed on in their positions, contributing to an aging and increasingly inefficient bureaucracy. By the beginning of the twentieth century, there was a growing interest in a retirement and pension policy for civil service employees, leading to the creation of the United States Civil Service Retirement Association (USCSRA) in 1900. This association spent several years collecting data and investigating methods by which a federal retirement policy could be established and funded.

These efforts drew the support of the administrations of Theodore Roosevelt and William Howard Taft. Roosevelt established the Keep Commission to investigate the question. The commission's final report offered statistical evidence that, as workers age, they become less efficient.

Taft furthered the movement with the formation of the Commission on Economy and Efficiency, which recommended a plan for civil service retirement. Taft endorsed the plan, and its call for compulsory retirement at age seventy and the creation of an employee financed pension fund. The USCSRA supported this recommendation, but action was prevented by a new group, the National Association of Civil Service Employees (NACSE), which favored a government funded program.

The debate continued into the Wilson Administration. Political concerns led Woodrow Wilson to with hold support for the issue until 1918, when he responded favorably to a proposed retirement bill. Southern Democratic opposition, however, helped delay passage of the bill until 1920. Civil service employees were now able to retire at age seventy, while others could retire as early as age sixty-two. Funding came from a small salary deduction. An amended law passed in 1926 increased the benefit package, after it became apparent that the original benefits provided in the 1920 law were inadequate.

The problems of unemployment and poverty among the elderly during the Great Depression led to the enactment of the Social Security Act. From the beginning of the New Deal, President Franklin D. Roosevelt's administration wanted a federally sponsored program that would furnish social insurance for the elderly and unemployed. The bill, passed in 1935, would develop into one of the most farreaching and complex laws Congress had ever enacted. The object of social security was to create

a system of insurance rather than welfare. While the law was originally designed to target a small group of people truly in need and unable to support themselves, the program has expanded to assist the elderly, the disabled, and the survivors of those whose payroll deductions contributed to the federal funds that are paid out. The key feature of the program linked benefits to those payroll deductions. This served to create a sense among contributors that they had a vested interest in the program and the right to collect benefits and pensions as promised under the law.

Current Pension Trends

Even so, the present concept of retirement did not emerge until the late 1960s or early 1970s. Prior to this, the Social Security Act had been amended several times to allow more and more workers into the system, but no significant improvement in retirement benefits had taken place, and the concept of social security as supplemental retirement income had not been challenged. But, continued high poverty rates among senior citizens added credibility to their complaints that the benefits were no longer sufficient. Between 1965 and 1975, benefit levels were increased five times, and in 1972, they were indexed in relation to the Consumer Price Index.

A reorganization of private pension plans also occurred in the 1970s. Noteworthy was the passage of the Employee Retirement Income Security Act (ERISA), which legalized vesting plans while giving workers some protection against the loss of benefits. Inflation also led private plans to provide automatic benefit increases to offset the rising cost of living. Additionally, because of increased participation, private plans began to encourage early retirement and offered greater benefits to those who took this option, instead of the reduced benefits that had been common before.

By 2000, there were growing concerns about the future of Social Security, primarily because of the program's expansion during the last decades of the twentieth century. By 2030, the number of persons eligible to receive benefits may double, while the number of those paying into the system will increase by only 20 percent. This has led to talk of privatizing social security or implementing reforms such as taxing all wage earners or allowing a semiprivate government agency to oversee and manage the program's investments to assure adequate funding for future beneficiaries. Another suggestion is to raise the retirement age to sixty-seven or seventy. Similarly, owing to an increasing number of major bankruptcies, by the early 2000s, the private sector was increasingly concerned about the well-being of corporate pension programs. In addition to this, the government was experiencing increasing pressure to take more significant steps to protect private pension plans as well as to assure the continued functioning of the social security system.

BIBLIOGRAPHY

Costa, Dora L. The Evolution of Retirement: An American Economic History, 1880–1900. Chicago: University of Chicago Press, 1998.

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. The Real Deal: The History and Future of Social Security. New Haven, Conn.: Yale University Press, 1999.

GregoryMoore

See alsoRetirement .