Retirement is a modern idea….and when I say modern I mean when you look at the history of civilization kind of modern. The idea of working for X number of years to save enough money to not work for X number of years at the end of your life was first pioneered in the late 1880’s. Not very long ago when we really think about it.
In the early years, retirement was a small stipend of income for military veterans and their widows to help cover their living expenses after the Civil War. (Fun fact: this is the root of the US Social Security Administration retirement benefit we know today) This idea was adopted by the corporate sector in 1875 when the American Express Company begin offering private pensions to older workers to reward them for years of faithful service. (source: US Government via PBGC January 1, 2024) During the Industrial Revolution, older workers would slow down the assembly lines and employers could encourage these older workers to “retire from their employment” with the idea of a stipend of income for the rest of their lives. This notion grew and evolved into what most of us think of as the golden age of pensions, when a person would work for 30 years at the same company and retire with a stipend of income, gold watch and golf membership for a comfortable 20 years of not working. Then things changed. Drastically.
In 1974, the US Congress banned an emerging trend of employers giving retiring workers cash in lieu of pension deposits and enacted Internal Revenue Code Section 401(k) as a legal way to allow a different way of saving for an employee’s retirement. The first 401(k) plan was acknowledged in 1978 by Hughes Aircraft Company, just three weeks after the new Section 401(k) went into effect as the Revenue Act of 1978. For a few years, they were just a footnote of retirement planning but in 1981, the IRS issued new guidance allowing employee contributions. Then things changed. Drastically.
The power of saving for retirement was given to the employee, not just held by the employer anymore. For the first time, employees could defer their own income into these tax sheltered retirement accounts and not rely just on their employer for future income. And with the ability to take an income at age 59 ½ instead of the traditional age 65 of a pension, employees could now retire earlier which meant they would have to save more to make the money last their now longer retirements. Employer matching became more important. Catch-up contributions became more important. Tax control became more important. The pendulum started to shift, and pensions became less important as employees no longer wanted to stay 30 years for a stipend of income anymore…they were making their own. Pensions started to get bought out and the burden of retirement income quickly was placed on the shoulders of every person to do what they could for themselves. Then things changed. Drastically.
In 2012, US State governments recognized the retirement crisis that was unfolding: the vast majority of employees were not covered by a pension and were also not saving for their own retirement. Research showed that employees were 15 times more likely to save for retirement if that had access to a workplace retirement plan, yet almost half of all Americans did not have access to one. (source AARP via Gusto Inc. July 11, 2022). To combat this, and help people have access to save for their own retirement, more than half of all US states have enacted mandatory retirement savings programs to be implemented by employers with over X employees (each amount varies by state) with a tax penalty for non-compliance. Each state has developed their own “Super Roth IRA” program that an employer can facilitate if they do not have their own retirement plan in place. The idea of workers being left behind in their old age had become undeniable, forcing older people to become more dependent on state aid.
This brings us to today: a landscape of hundreds of retirement choices and only a 150-year history of retirement itself. I wonder what the next chapter of retirement will look like? With longevity increasing, does this mean that a stipend of income has to last longer? Or will our working years start lasting longer, reversing from the idea of an “early retirement” to a more “passive income” as to still work and enjoy life at the same time? I am a firm believer that history tends to repeat itself, so after we have adapted to this change in the retirement narrative there will be change again. And it will be drastic.
Key Words: 401(k), pension, mandatory state retirement plans
Kimberly Enders CFP® CWS® CERTIFIED FINANCIAL PLANNER™
Enders Wealth Management
37800 Van Dyke Ave, Suite 125
Sterling Heights MI 48312
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