Plan Types Pensions and Policy Approaches

The U.S. retirement income system is analagous to a three-legged stool. The first leg is the public Social Security system, which covers virtually all workers and provides benefits based on lifetime earnings at sixty-five, and reduced benefits at sixty-two. The second leg consists of employer-provided supplementary pensions, which cover roughly half the workforce. These tax-subsidized plans are sponsored by private employers, by the federal government for its employees, and by state and local governments for their workers. The third leg consists of individual saving, which occurs in tax-subsidized Individual Retirement Accounts or directly in nonsubsidized forms. Those sixty-five and older currently receive roughly half of their non-earned income from Social Security, one quarter from employer-provided pensions, and one quarter from private saving. Social Security accounts for virtually all retirement income at the low-end of the income scale; employer-sponsored pensions are important for middle- and high-income individuals.

Private pension plans in the United States date from 1875, but the early plans were financially vulnerable and most were bankrupted in the 1930s by the Great Depression. Contemporary U.S. pension plans, both private and public, are rooted in the desire for financial security that became part of the national psychology after the onset of the Depression. Although World War II initially consumed much of the nation's resources that might have been directed toward improved provisions for old age, wartime wage controls greatly stimulated the expansion of private plans. Since legal limitations on cash wages impeded the ability of employers to attract and hold workers in the tight civilian labor markets, the War Labor Board attempted to relieve the pressure on management and labor by permitting employers to bid for workers by offering attractive fringe benefits. Pension benefits cost firms little in view of the wartime excess profits tax and the ability to deduct contributions. The growth of new pension plans fell off markedly in the postwar period as employees focused on cash wages to recover ground lost during the period of wage stabilization, but by 1949 pension benefits again became a major issue of labor negotiation.