The Beta Test Generation

Will Today’s Generation of Retirees Succeed or Flounder?

Right now, for the first time since the 1950’s, the majority of the retiring generation is doing so without the guaranteed income of a company pension.

Many don’t realize what a ground shifting statement that is.

Most people don’t realize, but retirement is a relatively new concept in the United States. Fewer know that the idea of individually funded retirement is even newer. 150 years ago, almost no one thought of retiring. In fact, the idea of retirement, as something we should all aspire to attain, has only been around for roughly 60 years. We think of retirement as the norm because during our lifetimes and our parent’s lifetimes, working for a number of years and then retiring has been the cultural expectation. We lack context. That is why it’s so important to understand the history of retirement. Understanding the history of retirement gives us the context necessary to understand retirement today.

Colonial Times to 1885

In the beginning there were four stages of life: birth, childhood, work and death. In other words: no retirement. If you lived, you worked. That was the American way. In 1850 77% of men over 65 still worked. At that time the average life expectancy was 38 and the average work week was 56 hours long. If a man did grow too old to be productive he would be expected to withdraw to the charity of his family or church. During this time 85% of the population was under 30 years old.

The Industrial Age 1885-1929

During this time large corporations became the dominant form of business. Everything in the economy was focused on efficiency. The largest industry in the country transitioned from agriculture to manufacturing. Older workers were no longer fast enough with the machines and they slowed down productivity. Seeing this problem, employers wanted to utilize the new influx of younger workers, but at the same time didn’t feel comfortable pushing older workers out on the streets. For that reason many employers in the manufacturing industry started offering small pensions on a voluntary basis. By 1920 mandatory retirement and small corporate pensions became the preferred method for moving older workers out of the workforce.

From 1870 to 1930 the number of white males over the age of 60 that were retired increased from 23% to 42%.

The Great Depression 1930-1940

Before the Great Depression there wasn’t any governmental support for retired workers. During the Great Depression, the Federal Government began to see the retirement of older workers as the greatest tool to get the younger unemployed population into the workforce.

The first Federal retirement policy was the Railroad Retirement Act of 1935. During the industrial revolution, railroad construction across the nation was a huge source of employment. By 1931 16% of all railroad employees had been laid off. Even though 84% of retired railroad workers had been promised pensions, these pensions were completely voluntary and therefore when the economy took a hit, these employers cut their benefits. The act required railroad employers to guarantee the pension benefits they had promised.

The Social Security Act of 1935

The Social Security Act, as a part of the New Deal, attempted to put the younger population to work by removing the older and aging population. With the SSA Act of 1935, the older population was expected to transition from the working population to a strictly consumer role.

The Post War Era 1940-1975

With Social Security in place, the system of retirement began its cycle. Instead of the four-part lifetime cycle of birth, childhood, working years and death, the “retired years” stage of life was added to the mix.

By 1940, 56.5% of men over 65 were no longer in the workforce.

personal pension

World War II changed everything. During WWII, the government imposed wage freezes to fight inflation. For that reason, employers had a harder time attracting workers. Employers began offering fringe benefits such as paid health insurance and pensions. In 1940 only 12% of workers in the private sector had pensions although by 1945 17% of workers did. In 1945 WWII soldiers returned home from the war and began looking for jobs. The government saw this and instituted legislation to encourage employers to offer pensions with significant tax breaks. Many of these pensions required the retirement of their employees at a certain age.

Looking Forward to Retirement Became “normal”

It was during this time that the idea we have right now of retirement really began to spread.

For the first time in history, retirement began to be looked at as the epilogue of a life well spent. Retirement became a status symbol and the pot of gold at the end of a long working rainbow. For the first time in history, workers looked at retirement as the time of your life where you are rewarded for your years of loyal service.

By 1975 over 55% of private sector employees had pensions available to them, up from 12% only 35 years earlier. In 1974 congress passed the Employee Retirement Income Security Act (ERISA) which required the guarantee of pension payments for retired workers. Pensions were key and most retirees had them.

The 401(k) Era

The revenue act of 1978 ushered in a new trajectory for retirement in America. Within the act, in section 401(k), it provided a way for individuals to defer paying taxes on their income by putting them into a savings vehicle. This allowed for employees to limit their taxable income and put away money for retirement.

With the creation of 401(K)’s, employers saw an opportunity to offer retirement accounts without having to be responsible for a pension program. By transitioning from a defined benefit (pension) plan to a defined contribution (401(k)/ IRA) plan, companies reduced their administrative costs and no longer were exposed to the market risk of their pension fund investments. Over the next 30 years, the number of individuals covered by a company pension declined and the number of company 401(K) plans increased. As of 2013, only 18% of individuals in the private sector were covered by a company pension.

percentage of population participating in pension plans

The Beta Test Generation

For the first time since the mid 1950’s the majority of individuals in the private sector are retiring without pensions. The defined contribution experiment is coming to fruition and the generation that’s next in line is waiting with bated breath, to see how it will all play out.

Instead of relying on the guaranteed income of a company pension, most retirees are drawing income from their portfolios containing a portion of unguaranteed market investments.

Most people planning for retirement don’t realize that pension managers use a two-step process.

Pension plan managers invest on behalf of their long term employees in a diversified portfolio of securities and other yield returning investments. Some pension managers, when an employee becomes of retirement age, take a portion of the pension pool and give it to an insurance company. Others pay directly from the pension pool. For those that hand over a lump sum to an insurance company, the insurance company then guarantees income to the retired employee for as long as the retired employee lives.

See these articles for an explanation of how pensions work:

Article by the Financial Times Press:

Article by

Retirement Mountain

Investors in today’s day and age tend to focus on the first stage retirement, known as the accumulation stage. The accumulation stage is the years leading up to retirement. Most don’t transition how they think about money and how they’re invested to fit the second stage of retirement, the distribution stage.

We find many people don’t have a cohesive and calculated plan for turning the corner and turning on retirement income that will last.

With this beta test generation, how they draw their income will determine if they have a successful retirement and maintain the lifestyle they are accustomed to, or have to sacrifice their lifestyles to stay afloat.

For that reason, it is important to know your options for generating retirement income and to work with a retirement income specialist.

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Additional Resources:

Forbes Article:  “The Greatest Retirement Crisis in American History”

AARP Article: “The Importance of Your Pension”

NY Times Article: “Our Ridiculous Approach to Retirement”