pension

The Columbia Encyclopedia, 6th ed.
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pension

pension, periodic payments to one who has retired from work because of age or disability. Pensions, originally thought of as charity, are now viewed as an essential part of the social responsibility of employers or of the state. In the Roman Empire there was a well-established pension system to care for soldiers who were disabled or had grown old. The French government early in the 19th cent. and then the British (1834) made provision for superannuated public servants.

In the United States pensions in various forms have been given to veterans of all wars since the Revolution; military pensions are now covered by the Servicemen's and Veterans' Survivor Benefits Act (1957). Retired servicemen and servicewomen receive, after 20 years of service, 50% of their base pay at time of retirement, with automatic increases as indicated by the Consumer Price Index. Civil-service pensions were developed later in the United States than in W Europe. Old-age pension plans were drawn up by cities for certain groups of public employees—firefighters, police officers, and teachers—which provided for compulsory contributions from the employee. Pensions for federal employees were authorized in 1920.

The idea of extending such protection to all citizens also appeared earlier in Europe (notably in Germany) than in the United States, where it was a 20th-century development (see social security). Many corporations and groups (such as labor unions, professional associations, and colleges) had made provision for pensions before the social security legislation was passed in 1935, and many groups now have pension plans that supplement social security.

Until the 1940s, pension plans in private industry were set up primarily on the initiative of the employer. As workers gained the right to submit pension plans to collective bargaining, the number of people covered in the United States by pensions grew from 4.1 million in 1940 to 65.6 million in 1999, about 44% of all workers. With more than $6.9 trillion in assets in 1997 (up from only $2.4 billion in 1940), these plans exert a major impact on the economy because the money is invested in stocks, bonds, and real estate. At the same time, the financial health of pension plans can be adversely affected by drops in the value of their investments, as happened after the late 1990s stock market bubble burst, or the bankruptcy of the employer. The Employee Retirement Income Security Act (1974) established regulations to protect pensions from mismanagement and created a federal agency, the Pension Benefit Guaranty Corporation, to insure them. The Pension Protection Act (2006) was intended to strengthen pension plans.

During the 1990s there was a shift in the type of pension plan that employees were covered by. The number of people covered by defined benefit pension plans leveled off as companies attempted to reduce costs by forcing employees to contribute to their own plans, such as 401(k) plans (defined contribution plans), or by terminating the plans. Under a defined-contribution plan, contributions are made to an account for an individual employee, but no specific income is guaranteed at retirement. In a 401(k) plan, the most common type of defined contribution plan, income that would have been paid to the employee is deposited pretax in an account and invested; it may be matched to some degree by a contribution from the employer. Such plans also differ from traditional defined benefit plans in that the contributions are voluntary, and as a result employees are only covered if they choose to contribute to an account. Under such plans employees also may be allowed some degree of control over how the contributions are invested.

See R. Lynn, The Pension Crisis (1983); J. Matthews, Social Security, Medicare and Pensions (1988); R. L. Deaton, The Political Economy of Pensions (1989).

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