Chapter 9: Social Security

History of Insurance

Pension Plans

In the 1930s, most large companies sponsored pension plans, but employees had no legal right to benefits. The Great Depression resulted in many companies dropping their pension plans or cutting benefits. Others began requiring employees to contribute to the plans.

The railroads were the first to establish private pensions. Pensions covered most railroad workers by 1934. But, then came the Great Depression. With a steep decline in revenues, many companies could not pay benefits. So they cut wages, reduced benefits, and slowed the rate of retirements. These moves were not enough to save the plans. The federal government intervened, taking over the plans. It went on to create a railroad retirement system. Even today, the Railroad Retirement program replaces Social Security benefits for railroad workers. The federal government's intervention acknowledged that failures of private pension plans are, at times, a public policy matter.

Fast-forward to 1974. Congress passed the Employee Retirement Income Security Act (ERISA). It remains the most important pension law to date. Its intent was to establish eligibility, funding, and vesting standards. Vesting is how long it takes for an employee to become eligible for benefits. The act also created the Pension Benefit Guaranty Corporation (PBGC). PBGC is a federal agency that insures pension benefits if a company fails.

Today, more workers participate in retirement savings plans than in employer-paid pensions. The most common type of retirement savings plan is a 401(k). Employees make decisions on how much to contribute and how to invest. Often, employers contribute to the plans, too. While very different from pensions, 401(k) plans remain an important benefit to help people save for retirement.