For most American workers, retirement is viewed as the crowning achievement of a life well lived. We have evolved to view retirement as the default destination for all and even a birthright. However, the idea of retirement is a relatively new one in our history. The concept has only been with us for about 100 years. During this time retirement has changed dramatically. However, our society has not always adapted and changed along with it. We still hold onto notions of retirement that were designed for a bygone era. For example, the age at which we hope to retire has some remarkable staying power as you'll soon read. So let's get into it.
A little over a century ago, the US was still an agrarian and largely self-employed society. There was no retirement. You worked alongside your family members until you died or could no longer work. According to census data from 1880, 81 percent of seventy-year-olds were still in the labor force. It would take the Industrial Revolution and mass migration to urban areas for our modern retirement system to develop.
1900’s – 1920’s: Birth of Retirement
By the dawn of the 20th century the industrial revolution was well under way in America. Many American workers moved to urban centers and worked in factories. The work was hard, long, repetitive and dangerous. Around the same time, engineers like Frederick Winslow Taylor and Frank Bunker Gilbreth, Sr. were developing the Efficiency Movement. The goal of the movement was to eliminate waste and inefficiency in all facets of society.
Unfortunately for older factory workers, they were viewed as inefficient compared to their younger counterparts due to their lower production capability, education and training. Age discrimination was not only legal but and it was widely practiced. For many older workers retirement was forced rather than chosen. This gave way to Progressive Era pressure on corporations and governments to help displaced workers.
In the early 1900s, the Civil War Pension program for Union veterans of the Civil War was the only full-fledged Federal government-sponsored pension plan in existence in America. However, efforts were underway at the state level to create old-age pension plans. One of the very first bills introduced was in the Massachusetts state legislature in 1903, but it did not pass. It took another few decades for old-age pensions to catch on at the State level but by the end of 1934, twenty-eight states and two territories (Alaska and Hawaii) had created old-age pension laws.
1930’s – 1940’s: The Rise of Social Security and Private Pensions
In 1935, Congress passed the Social Security Act and President Roosevelt signed it into law. Federal Social Security would now replace the state old-age pension plans. Social Security established the retirement age at 65 because life expectancy in 1935 was only 60 years old. One of the primary motivators to passing Social Security was the hope that it would bring down Great Depression era unemployment. The belief was that by giving older worker an incentive to leave the labor force it would create gaps to be filled by younger workers. It is interesting to note that this was not the first time 65 was used as the de facto retirement age. In 1889 Chancellor Otto Von Bismarck of Germany announced that he would pay a state-provided pension to any German at or over the age of 70. Later in 1916 the number was lowered to age 65.
Social Security certainly helped entice older workers to leave the labor force but its influence paled in comparison to private pension plans. American Express founded the first private pension plan in 1875, a rarity at the time. In 1899 only thirteen private pension plans existed. This number would continue to grow throughout the century and peak around 1975. Tax incentives and a desire to “more [humanely] remove older, less productive employees” spurred the growth of the private pension plan. Plans at this time were predominantly Defined-Benefit pension plans where the burden of market risk and retirement income fell on the employer. Retiring employees were assured a fixed monthly guaranteed income benefit.
1950’s – 1970’s: The Mass Marketing of Retirement and Leisure
During the 1950’s we start to see the rise of mass marketing of retirement. It is believed that the term “Golden Years” was first used during this period. Advertisers attempted to position retirement as one of the greatest periods in ones life. Around this time the first retirement community was formed, leisure activities grew enormously and became much less expensive. Retirees began migrating to warmer climates like Florida and California. In many ways this was the golden period of retirement in America.
When the Revenue Act of 1978 was passed, it contained a provision allowing employees to defer a portion of their compensation pre-tax. This provision later became tax law under IRC Sec. 401(k). And thus the 401(k) was born. Johnson & Johnson is one of the first major corporations to begin the process of adopting a 401(k) plan in 1979.
1980’s – Today: The Decline of the Pension and a Shift in Responsibility
With the 1980’s we saw significant changes to America’s retirement system. Most importantly, employers switched from using defined benefit plans (pensions) to defined-contribution plans (401(k)’s), shifting responsibility for financing retirement from the employer to the employee. In 1974, 44 percent of private-sector wage and salary workers were in a defined benefit plan; by 2004 that number was down to 17 percent. In 1983, there were 175,000 private pension plans, by 1998 this number had dropped to 56,000. The reasons for the shift are plentiful: changes in government regulations, changes in the makeup of the workforce, business risk association with funding guarantees to employees, and, of course, cost.
Today retirement is more expensive and lasts longer than ever before, and the responsibility for financing it falls mostly on the individual. This makes retirement seem out of reach for many. I believe that one major contributor to this problem is that as a society, we are still anchored to the idea that 65 (or so) is the ideal retirement age. This notion is at best outdated and at worst dangerous for many. A more prudent strategy would be to engage in work you find interesting and fulfilling and plan to make it a part of your life for longer. I also think it’s a good idea to keep your hours reasonable and your work/life balanced throughout your career to avoid burn-out and the need to retire as an escape. Alternatively, you could find a way to generate income working for yourself and not someone else. Perhaps this is something that begins as a hobby in your working years and transitions to part-time work in retirement. Work is natural and it is a part of our identities. I believe it is no coincidence that some of the most successful Americans including Warren Buffett do the work they love indefinitely.
The issue today, much like it has been throughout our history, is that often retirement is not a choice we make but one that is made for us. This notion is as disconcerting today as it has been throughout history. However, unlike in much of our history, today we can choose to become financially independent. We can choose to spend less, save more, and free ourselves from the need to work. Financial independence should be be ultimate goal of a life well lived rather than retirement itself.
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment advice. If you have any questions regarding this Blog Post, please contact us.