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Passage of the federal Employee Retirement Income Security Act (ERISA) in 1974 was a landmark event in the evolution of employer-sponsored pensions , marking the shift from a period of laissez-faire regulation of retirement plans to a period of much more active government regulation. Although federal pension regulation was relatively lenient during the first three quarters of the twentieth century, the broader public policy environment that prevailed at least from the signing of the Social Security Act in 1935 until the passage of ERISA tended to encourage the creation of employer-sponsored pension plans and the proliferation of pension coverage. Nearly half of all workers were covered under such plans by the mid-1970s. At the same time, however, there were also widespread concerns, such as whether the existing pensions were broadly available to most employees or whether they instead served mainly as additional compensation for top executives. And there were occasional horror stories; some retirees discovered, for example, that their employers had not set aside the resources to pay the promised pensions. Developed in response to these concerns, ERISA imposed a range of new regulations on the pension system, but its initial provisions also encouraged the creation and maintenance of plans. During ERISA’s first decade the private pension 11 The Evolution and Implications of Federal Pension Regulation sylvester j. schieber 2 The author thanks Kyle Brown, William Gale, Gordon Goodfellow, Richard Joss, Alexander Miller, Tim Taylor, and Mark Warshawsky for helpful comments on earlier drafts. 02-3117-5 chap2.qxd 11/16/05 2:57 PM Page 11 system continued to expand and flourish. Since the early 1980s, however, the regulatory environment for employer-provided pensions has become significantly more restrictive, primarily because of efforts to change pension regulation in an attempt to increase federal tax collections, at least in the short term. This more restrictive environment for employer-provided pensions, combined with certain ways in which pensions interact with a mature Social Security system, has significantly changed the economics of retirement plan financing in the last fifteen years or so. One result has been a substantial curtailment of traditional defined benefit plans, in which the employer promises a certain level of benefits after retirement, and a corresponding shift toward defined contribution plans, in which the employer promises that a certain level of contributions will be made on behalf of an employee to a pension plan before retirement . In many cases, the funding patterns behind the remaining defined benefit plans have also been changed in a way that portends lower retirement benefits than in the past. This continuing evolution of the pension system has significant implications for the retirement prospects of the baby boom generation. A Brief History of Pensions In the United States employer-sponsored retirement plans first arose in the rail industry in the 1870s, out of industry concern about the continued employment of superannuated workers. The railroads initially reassigned older workers to positions as night watchmen or other jobs that minimized their risk to the companies’ rolling capital and the public’s safety. Often such reassignments were coupled with a reduction in pay to represent the reduced responsibilities of the new position. As the railroad industry matured and the average age of the work force increased, the industry became less able to create jobs that could absorb the flow of superannuated workers.1 The initial plans were created to satisfy three specific needs of the sponsors: to maintain an efficient work force, to encourage labor peace within a restive work force, and to retire older workers no longer able to perform their duties. The Grand Trunk Railway of Canada set up the first private retirement plan in North America in 1874 as a mechanism to attract, retain, and retire workers in the interest of running an efficient bureaucratic organization. American Express set up the first private retirement plan in the United States in 1875, but it was a loosely defined plan that was essentially a bookkeeping convenience for an existing ad hoc plan that provided assistance to employees injured or “worn out” on the job. In 1880 the Baltimore & Ohio (B&O) Railroad set up a more fully specified plan as part of a wider worker welfare initiative. This package was an attempt to improve relations with labor after a violent clash in the late 1870s. 12 The Evolving Pension System 1. Graebner (1980, p. 14). 02-3117-5 chap2.qxd 11/16/05 2:57 PM Page 12 [3.133.141.6] Project MUSE (2024-04...

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