The History of Retirement

The history of retirement in the United States has its roots in the earliest days of Massachusetts. In 17th-century Plymouth colony, a colonist wounded defending the town against Indians would receive a pension to support himself and his family. Since the colonist was no longer able to farm or perform manual labor, he was “retired.”

While this may not sound much like what we have today, it was the first recorded instance of a publicly-funded retirement in the country. The basic concept was the same – ensuring financial independence and the ability to continue life in society after a person is no long able to work. Prior to the Industrial Revolution in the late 1800s, most Americans made their living tilling the earth and continued farming alongside their children and grandchildren until they were no longer physically able.

The tenacity of the elderly could be a source of frustration for children and heirs who waited impatiently to inherit from a parent who refused to retire and step down. Cotton Mather, celebrated Puritan and witch-hunter, was also an advocate of retirement, urging the elderly to peacefully retire and allow their children to take over. Although there are few recorded instances in the US, France experienced a rash of elder killings in as late as the 1880s as exasperated heirs committed patricide in order to inherit.

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The Industrial Revolution in America

In Germany, Chancellor Otto von Bismarck, facing the growing threat of Marxism, announced a plan in 1883 to pay any non-working German over the age of 65 a government pension. While this sounds generous, hardly anyone lived to 65 in the 1880s, with most people carried off by injury or disease well before that age. However, his actions led to the establishment of the de facto age of retirement that endures today.

While retirement in private industry was very rare at the turn of the 20th century, army pensions had been offered for many years to disabled and decorated war veterans. In fact, pension information from the early 1900s shows that many army veterans receiving government pensions chose to retire rather than work.

It wasn’t until a medical rationale for retirement was developed that the concept began to truly gain currency. Physician William Osler claimed in 1905 that it was a matter of established fact that the years between age 25 and 40 were the “golden years” of creative, constructive labor. Workers between 40 and 60 were tolerable if un-creative; however, the average worker over 60 was useless and ought to be removed from the work force.

The Industrial Revolution drastically changed the face of labor in the US as droves of workers left their farms for jobs in the city. With this new labor force came the need for livable wages and income security since workers no longer had the physical asset of the farm to sustain them but literally selling their physical and mental labor. The changing labor needs of factories made the differences between older and younger workers stark, with older workers sometimes unable to keep up with the speed of machinery and conveyor belts.

The American Express railroad company became the first major corporation to offer a private pension scheme in 1875. Banks and manufacturing companies followed suit and began offering employees company-sponsored pension plans to recruit and retain talent.

The Great Depression

The Great Depression brought conflicts between the superannuated and younger workers to a head, when the terrible economic times made every job precious. In the early 1930s, a movement to force mandatory retirement at age 60 took hold. In exchange, proponents promised that the federal government would pay each pensioner a monthly income of up to $200. Rather than commit to a government-sponsored payout, President Franklin D. Roosevelt passed the Social Security Act of 1935, which guaranteed lifelong income for workers over the age of 65 and disabled persons. In 1935 it was funded by a 1% tax on employers and employees on the first $3,000 of a workers income. Today, the Social Security tax rate is approximately 7.35% on both employers and employees.

During World War II, the federal government froze wages in an attempt to curb wartime inflation. In order to attract employees in a tight labor market (since so many workers were employed by the military or fighting overseas), private employers began offering increasingly generous pension plans. From 1940 to 1960, the number of people enrolled in company-sponsored pension plans increased from 3.7 million to 23 million, or nearly 30% of the workforce.

The Growth of Private Pensions

However, even with their financial security assured, seniors still did not want to retire. A Labor Force Participation Rate study shows that by the 1940s, over 50% of men over the age of 65 were still working. The wealthy discovered the life of leisure first and retirement communities began to pop up in the 1920s and 1930s, while golf courses increased in number as well. Technological innovations like the television and the highway systems helped bring the idea of leisure into the national conscience. The period of plenty following World War II also allowed Americans to relax and enjoy their newfound wealth. Labor Force Participation Rates show the shift to leisure, with the number dropping precipitously between the 1950s and 1980s, when just 24% of men over 65 were still working.

In the 1960s and 1970s, the federal government began to enact laws to regulate private pensions and to offer tax incentives to employers to offer retirement plans. Since the early 1960s, the self-employed have been able to establish “Keogh” plans – retirement accounts similar to those offered by corporate pension plans. To further level the playing field for the self-employed, the Employment Retirement Income Security Act (ERISA) act of 1974 established Individual Retirement Accounts (IRA) to allow those not covered by a private pension plan the ability to invest in a qualified plan.

ERISA also helped safeguard the safety of retirement plans and protect them from insolvency. Under ERISA regulations, employers are required to segregate retirement funds and guard them against unexpected events that could threaten solvency.

Over time, pensions shifted away from “defined benefit” to “defined contribution” plans. Defined benefit plans promise, like Social Security, a fixed benefit to be paid out over the course of retirement. This, however, puts the onus on the employer (or government) to make up any shortfalls in the event of poor investment management. Today, more employers offer defined contribution plans, which only guarantee the amount to be contributed by the employer. Actual benefits depend on investment performance, thus shifting the burden onto the employee. However, there also exists the possibility of greater upside for the employee since long-term investment performance may lead to a greater retirement savings. The popular 401(k) retirement plan is based on a 1978 congressional provision designed to offer tax breaks on deferred income. In the 1980s 401(k)s began to supplant pension plans as cheaper ways to allow employees to invest in securities. The growing popularity of these plans helped spark a period of intense growth in the financial industry as billions of dollars in retirement savings were shifted away from pension plans and into mutual funds and securities markets.

Today, retirement is a much-appreciated end to a working career. Life expectancies have skyrocketed in the past decades and people can look forward to living many years past retirement age. With retirement communities and senior-oriented leisure activities, today’s retirees are working hard at play.

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