History of Pension Plans

The earliest private pension plans in the United States were those of the American Express Company in 1875 and of the Baltimore and Ohio Railroad in 1880. During the next 50 years approximately 400 plans were established - mostly in railroad, banking, and public-utility firms. Pension development in manufacturing was slower, since this was still a young industry with relatively few aged employees.

Insurers entered the pension business with the issuance of the first group annuity contract by the Metropolitan Life Insurance Company in 1921. The Equitable Life Assurance Society became the second company to enter the field by announcing in 1924 its intention of offering a group-pension service. Insurers have continued in the forefront of the pension movement.

Although the beginnings of private pensions date from the 1800's, the real growth in retirement programs came after World War II. In 1940 about 4 million people, less than 20 % of all employees in government and industry, were covered by private pensions. By 1982 more than 51 million wage earners and salaried employees, including about one half of all workers in private business and three fourths of all governmental workers, were enrolled in nearly 600,000 retirement programs other than Social Security. In the early 1980's, employees and employers contributed more than $45 bullion annually to these plans. Plan assets were about $650 billion and experienced an average real growth (since 1975) of 9.2%. Nearly 9 million retired workers or their survivors received annual retirement benefits exceeding $17 billion under private pensions and more than 50% of recently retired couples had some coverage.

The rapid growth of pension plans since the 1940's may be attributable to developments that occurred during World War II. First, high-profit taxes imposed on corporations encouraged some firms to establish plans. Since employer contributions to a qualified pension plan were tax-deductible expenses for federal income-tax purposes, pension plans could be funded inexpensively. At the same time, these contributions were tax-free income for the employee until he actually received his retirement benefits.

Creation of price and wage stabilization programs to control prices and wages during the inflationary World War II and Korean War periods was another major factor that helped stimulate the growth of pensions. Since requests for higher wages were routinely denied under wage controls, management and labor sought relief and were allowed to establish and liberalize fringe-benefit programs-including pensions.

In the later postwar years the rate of growth of new plans fell off substantially. Employee interest centered on cash wage increases that had been denied under wage controls. In the latter part of the 1940's, however, union leaders in the coal, automobile, and steel industries made pension plans a central issue in their negotiations. The renewed interest in pensions was in part an effort to stem a tide of popular criticism generated by heavy wage demands viewed as excessive by the public. Another factor was that some labor leaders now considered that pensions should supplement Social Security, which they felt was inadequate as a sole source of retirement income. Labor's drive for pension benefits was aided by a National Labor Relations Board ruling in 1948 that employers had a legal obligation to bargain over the terms of pension plans. Consequently, since the 1950's new pension plans have been established, existing plans have been liberalized, and employer-sponsored programs have been supplanted by negotiated contracts.

A final factor encouraging the spread of pension plans is the social and political atmosphere that has prevailed since the 1930's. During this period the American people have become conscious of the pressing need to provide for their future economic security. The Depression of the 1930s swept away the life savings of millions and created a feeling of insecurity that shook the very foundations of the country. Economic reform took the form of old-age and survivors' insurance (OASI), a proposal for income maintenance in old age.

Since OASI was intended to be only a "floor" (or minimum) of protection, the way was left open for supplemental benefits to be provided through private measures. Society came to expect the employer to hear a share of this burden by providing some retirement benefits. In response to these social pressures, employers in increasing numbers turned to formal pension programs as the most economical and satisfactory method of meeting the problem.