The History of Retirement Part 1: The Rise of Pensions

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.

The origins of pensions

The concept of a pension can be traced back to Roman times, where soldiers were granted pensions as a reward for their service. However, modern pensions began to emerge in the late 19th century with the establishment of state-sponsored pension schemes. One of the earliest examples was Germany’s social insurance program, introduced by Chancellor Otto von Bismarck in 1889. This groundbreaking system provided financial support to workers who reached the age of 70 (later reduced to 65), marking a significant shift in how societies viewed retirement.

Pensions in the United States

In the United States, the first pension plans were primarily offered by government employers and a few large corporations. The American Express Company established one of the first corporate pension plans in 1875. However, it wasn’t until the passage of the Social Security Act in 1935 that pensions became more widespread. This landmark legislation provided a safety net for retired workers, ensuring they would have some income after leaving the workforce.

The post-war boom

The period following World War II saw a substantial increase in the number of pension plans. The booming economy and the rise of powerful labor unions played a significant role in this expansion. Unions negotiated pension benefits as part of collective bargaining agreements, leading to the proliferation of employer-sponsored defined benefit (DB) pension plans. These plans promised workers a specific monthly benefit upon retirement, often based on salary and years of service.

Pensions as a standard

By the mid-20th century, pensions had become a standard component of the American employment landscape. They provided workers with a sense of security, knowing they would receive a guaranteed income in retirement. This era is often viewed as the golden age of pensions, where the promise of a comfortable retirement was within reach for many American workers.

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, which we will explore in the next part of this series.