The year 1875 might best be remembered as the year when Nikola Tesla began studying mechanical and electrical engineering at Austrian Polytechnic, William Marcy “Boss” Tweed escaped Ludlow Street Jail before fleeing to Spain, and Oliver Lewis road Aristides to victory in the first Kentucky Derby.
Tesla studied under the light of the kerosene lamp as neither he nor Einstein had harnessed the electricity needed to power the incandescent light.
You probably remember seeing a picture of Tweed on a tintype photographic plate because Eastman had yet to invent his flexible film roll. And if you wanted to go to Kentucky to see the first ever Derby, you’d have to ride your horse and buggy to get there.
Something else happened in 1875. That was the year the American Express Company began the first corporate pension plan in the United States (Canada’s Grand Trunk Railway created the first private company pension in North America the year before).
Since then it seems we’ve placed the pension plan on this pedestal that represents more legend than fact.
What will it take for policy wonks, media pundits, and ivy-covered researchers to get over their pension envy?
Unless and until we come to grips with the real purpose and objectives of our country’s first corporate pension plans, our thinking regarding retirement planning will remain skewed.
Understanding the true history of pensions may help us understand the reasons behind their ultimate decline (see “The Rise and Demise of Corporate Pension Plans,” FiduciaryNews.com, September 6, 2017). Corporate pensions began in the nineteenth century as our country moved from the agrarian age to the industrial age.
Prior to this shift, preparing for retirement was understood to be a family responsibility. By the early twentieth century, companies assumed this role, hoping to solidify their relationship with their workers.
This somewhat contradicts the popular view of pensions as a perk designed to mollify workers so as to dissuade them from striking or quitting.
Indeed, perhaps we feel this way because, following American Express and Grand Trunk, the B&O Railroad created its own version of the pension. According to Steven A. Sass (The Promise of Private Pensions, the First Hundred Years, Harvard University Press, 1997), “The B&O had offered pensions to win the cooperation of labor as a class and assure the smooth and continuous operation of the enterprise.”
But Sass also says the early twentieth century explosion in pension plans was inspired not by the B&O experience, but by another railroad. As opposed to both Grand Trunk and the B&O, the Pennsylvania Railroad made compulsory retirement the centerpiece and primary objective of its pension plan.
The Pennsylvania Railroad’s example prompted other companies to start their own pension plans. Sass says, “Publicity generated by the Pennsylvania announcement ignited a vigorous pension movement which spanned the first two decades of the twentieth century.”
Thus, in the early years of pension growth, companies used the vehicle not with the intention of providing income upon retirement, but with the clear desire to establish expectations with regard to the parameters of employment.
The pension plan defined the age at which someone must retire and, through its vesting requirements, the maximum age at which someone would be expected to start working at that company. There was therefore an implied trade-off: Lifetime income in exchange for total dedication to the company. Employees would really sell their soul to the company store.
Well, only some employees. Small and medium-sized companies failed to participate in the pension movement. If they grew large enough they did, but, for the most part, both the costs and the risks dissuaded them from adding pensions to their benefits.
For one thing, these smaller firms had younger employees, so the demand for pensions simply did not exist. In addition, since these were newer firms, they hadn’t yet acquired the need for career employees. To emphasize the point, Sass says “just four firms in 1924 – The Pennsylvania and New York Central Railroads, AT&T, and U.S. Steel – employed one-third of all pension plan participants.”
In hindsight, we should have learned the lesson of the pension plan when the Morris Packing Company failed in 1923. Since pensions weren’t guaranteed (they wouldn’t be until ERISA was passed in 1974), when Morris folded, it sold all its assets and stopped making pension payments.
Employees sued, but the courts said they could make no claim against Morris, the plan sponsor. Unfortunately, we would learn this lesson again in 1964 with the collapse of the Studebaker pension (cited by many as the impetus for ERISA).
By the time ERISA was created, however, the national economy had already begun its slow evolution away from the industrial landscape that forged the need for the corporate pension plan (as well as the government-based Social Security program).
Pensions only functioned when workers could count on spending their entire careers at one company. The present gig economy doesn’t allow for that. Young adults today can’t imagine working for the same company for three years let alone thirty years. The demands of the pension system do not meet their lifestyle choice, a choice made possible by our shifting (and advancing) economy.
Today, the wonders of technology have given us LCD lights, digital snapshots, and muscle cars. Who would want to be forced to go back to kerosene lamps, tintype photography, and horse-drawn carriages?
Why then, do we expect to post-employment life to rely on similar nineteenth century retirement plan technology?