Capital Investment Advisors

The Rise And Fall Of The American Pension

Pensions are the dinosaurs of retirement income. Once prevalent, pension benefits have gone by the wayside; almost entirely replaced by employee-driven retirement plans, such as 401(k)s.

Why the change? The answer has many layers, but the main reason pensions are dying is because people are living longer. During the heyday of pension benefits, workers lived an average of about three years in retirement. Today, it’s not uncommon to be retired for 30 years.

So, companies underestimated how long they would pay out benefits, while they also overestimated the gains they would make in their pension investment pools. Companies were going broke trying to honor their commitment to support their former employees.

But, let’s take it from the top and talk about the rise of pensions, and then the fall.

In 1875 the American Express railroad company was the first major corporation to offer workers a private pension scheme. In short order, banks and manufacturing companies followed suit, offering employees company-sponsored pension plans to recruit and retain talent.

On August 14, 1935, President Franklin D. Roosevelt signed the Social Security Act into law, providing some level of security for retirees. Pensions remained a rarity.

During World War II, the federal government froze wages in an attempt to control inflation. To attract employees in such a tight labor market (many workers were now enlisted in the military), 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. For a time, pensions reigned supreme in the area of financial support and security during retirement.

In 1963, however, car manufacturer Studebaker went bankrupt, and so did its pension plan. Over 4,500 workers lost 85% of their vested benefits. This event triggered the federal government to take action.

In the 1960s and 1970s, Congress enacted laws that regulated private pensions and offered tax incentives to employers to offer retirement plans. The Employee Retirement Income Security Act (ERISA) of 1974 was enacted, designed to secure the benefits of participants in private pension plans through participation, vesting, funding, reporting and disclosure rules.

ERISA established the Pension Benefit Guaranty Corporation (PBGC) and provided added pension incentives for individuals who were self-employed through changes in Keogh plans and for persons not covered by pensions through individual retirement accounts.

But, after 100 years of growth, pension plans started to decline in the mid to late 1980s. And, by 2006, many US companies had frozen their defined benefit pensions and replaced them with defined contribution plans (such as 401(k)s). As an example of the decline, in 1983 there were 175,143 pension plans in place for the US workforce, by 2008 there were only 46,926 plans. The Great Recession was the final straw; it resulted in a loss of $1 trillion in the value of assets held in private-sector defined benefit plans and an additional $1 trillion lost from state and local plans.

Today, only 22% of people are participating in pension plans from either the private-sector or state and local governments, according to the Pension Rights Center.

The PBGC has become the dominant provider of pensions benefits as companies continue to go belly up and are unable to meet their obligations to former employees. In 2018, the PBGC added 58 more failed single-employer plans, bringing its inventory to 4,919 plans. It paid out $5.8 billion in benefits to 861,000 retirees in those plans.

As of the end of 2018, the agency had a total of $164 billion in obligations and $112 billion in assets – meaning they have a $51 billion shortfall. Still, this is an improvement of $25 billion from 2017.

Many pensions have plans administered by the PBGC. While these folks know they are lucky to have a pension they do worry about the PBGC’s ability to protect their benefits.

While the PBGC is a federal agency, it isn’t funded with tax dollars, but instead by premiums collected from defined-benefit plan sponsors, assets from defined-benefit plans for which it serves as trustee, recoveries in bankruptcy from former plan sponsors, and with earnings from invested assets.

Even the PBGC itself admits the risk of insolvency. The entity “projects that the multiemployer program will be likely become insolvent in fiscal year 2025, and there is a less than 1% chance that the program will remain solvent in fiscal year 2026.”

My advice? Cherish those pension checks while you have them. They may not always be around. But remember, retirement is built on multiple income streams. Hopefully, the money from your Social Security benefits, investment income, and any other source will help you make it through, comfortably and happily.

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