Retirement, as a concept, has evolved significantly over the centuries. For much of history, the idea of retirement was virtually nonexistent. People worked until they could no longer do so, relying on family or charity in old age. It wasn't until the late 19th and early 20th centuries that formal retirement systems began to take shape, largely through the advent of pensions.

This is Part 1 of a 3-part series on the history of American retirement. Continue to Part 2: The Fall of Pensions and Rise of 401(k)s, or jump ahead to Part 3: Why the Current System Is Not Enough.

Originally published: September 19, 2024

The origins of pensions

The idea of rewarding long service with a pension dates back to ancient Rome, where Emperor Augustus created the aerarium militare, a military treasury, in 6 CE to fund one-time discharge payments for veteran soldiers after 16 to 20 years of service. Modern, recurring old-age pensions came much later. In 1889, German Chancellor Otto von Bismarck introduced the world's first national old-age social insurance program. The original law set the qualifying age at 70, not 65 as is often assumed, and the age wasn't lowered until 1916, nearly two decades after Bismarck's death.

Pensions in the United States

In the United States, corporate pensions arrived shortly after Bismarck's program. The American Express Company established the country's first formal private pension plan in 1875, covering employees age 60 and older with 20 or more years of service who could no longer perform their duties. It took another six decades for the federal government to build a national safety net. The Social Security Act of 1935 created the country's first federal old-age insurance program, funded through a new payroll tax on wages. The original program was narrower than it is today, excluding roughly half the workforce, including farm and domestic workers and the self-employed.

The post-war boom

The period following World War II saw a substantial increase in the number of pension plans, driven largely by organized labor. In 1949, the National Labor Relations Board's Inland Steel decision established that pensions counted as wages, making them a mandatory subject of collective bargaining rather than a discretionary employer gift. The following year, the United Auto Workers and General Motors reached the Treaty of Detroit, a five-year contract that included a fully funded, non-contributory pension. Other major industries followed, and employer-sponsored defined benefit plans, which promised a specific monthly benefit based on salary and years of service, became widespread through the 1950s and 1960s.

Pensions as a standard

By the mid-20th century, pensions had become a standard component of the American employment landscape. In 1980, about 38% of private-sector workers participated in a defined benefit pension, the high-water mark before a long decline. For a generation of American workers, this era is often viewed as the golden age of pensions, when the promise of a comfortable, employer-funded retirement was within reach.

The bottom line

The rise of pensions transformed the concept of retirement, providing workers with a reliable source of income in their later years. These defined benefit plans, backed by employers and sometimes the government, became a cornerstone of retirement planning. However, as the economic landscape began to shift in the latter part of the 20th century, the sustainability of these pension plans came into question, leading to significant changes in retirement planning.

Continue reading: The History of Retirement Part 2: The Fall of Pensions and Rise of 401(k)s

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This article is for informational purposes only and does not constitute financial, tax, or investment advice. Consult a qualified financial professional before making retirement planning decisions.