Search Results

In 1974, President Gerald Ford signed the Employee Retirement Income Security Act, which revolutionized American private retirement practices. The legislation created the Individual Retirement Account (IRA), the cornerstone of modern retirement planning. The creation of massive individual and corporate retirement accounts has significantly reshaped financial markets.

Most US federal retirement plans are now fully funded, but since plan assets must legally be invested in federal securities, fund surpluses are used to reduce overall federal budget deficits. As a result, current taxpayers are not charged with the cost of future federal retirement obligations. Nevertheless, federal rules do require the employing federal agency to budget for current personnel’s accruing liability of retirement promises. Therefore, policy decisions regarding the number of federal civilian and military personnel and the design of their retirement benefits may be made with a better understanding of the costs.

Employee Retirement Income Security Act of 1974 (ERISA) introduced a new conceptual frame of reference for federal pension policy. Although ERISA was known as the “pension reform law,” it has also had a major effect on medical provision in the United States. The political history of ERISA suggests that, without the threat of conflicting state laws, employers and unions that sponsor multistate health plans will oppose initiatives to create federal minimum standards for health plans or expand the liability of such plans. The tax treatment of pension plans created a significant disparity in the tax laws. ERISA’s limited regulation of welfare plans and its sweeping preemption provision produced a healthcare system in which there are different rules for plans sponsored by public- and private-sector employers and different rules for private-sector plans depending on whether a plan purchases insurance or self-insures. The major influences of ERISA on health policy are explained.

Today it is natural to associate mutual funds with retirement plans since funds are the largest funding medium for 401(k) and other defined contribution plans, as well as for Individual Retirement Accounts (IRAs). But for many years the retirement market was dominated by defined benefit plans, which did not invest in mutual funds. The revolution in retirement plans began in 1962 when Congress authorized self-employed individuals to establish “Keogh plans.” It accelerated with the enactment of the Employee Retirement Income Security Act of 1974, which created the first IRAs, and took a quantum leap forward in 1978 when Congress authorized the creation of 401(k) plans.

Reforms to the Employee Retirement Income Security Act (ERISA) embody a worker-security theory of pensions. This view received its most important early expression in the report of the President’s Committee on Corporate Pension Funds (Cabinet Committee). It became clear that the more stringent rules might apply to corporate plans when the Senate adopted Albert Gore’s (D, Tenn.) amendment to eliminate capital gains treatment for lump-sum distributions from any qualified retirement plan. The goal of the tax subsidy was to encourage firms to provide retirement income to employees. The technical group’s response to the Cabinet Committee’s proposals for expanding coverage and limiting tax avoidance was more ambivalent. Public Policy and Private Pension Programs appeared six months after Vance Hartke introduced his bill to create a termination insurance program and less than four months after Studebaker terminated the pension plan for workers in South Bend.

H.R. 2, now christened the Employee Retirement Income Security Act of 1974 (ERISA), was among the first measures Gerald Ford signed after assuming the presidency. More than two months after the House passed H.R. 2, House and Senate staffers appeared still to be deadlocked on a number of issues. The first installment of the staff summary covered jurisdiction, vesting, funding, and portability. These four issues of conferees are addressed, together with termination insurance, effective dates for termination insurance, preemption, fiduciary standards, and taxation of retirement plans. The Steelworkers and Auto Workers pressed the conferees to phase in insurance coverage for benefit increases. They also urged the conferees to reconsider their earlier decision to phase in coverage for existing plans. On September 2, 1974, legislators and committee staff, officials from the executive branch, and representatives of labor and management gathered at the White House. The ERISA of 1974 was law.

On Labor Day, President Gerald Ford signed the Employee Retirement Income Security Act of 1974 (ERISA). The enactment of ERISA presents a political puzzle. The political history of ERISA provides benchmarks for gauging how well current law suits emerging needs and an important counterpoint to the conventional wisdom about policy-making in the United States Congress. ERISA recast the federal government’s role in the private pension system. ERISA reflected a new conceptual framework for pension policymaking—the worker-security theory. Union officials who opposed pension reform used a related argument that stressed the economic constraints on the employment relationship. Jacob Javits’ tactics did not prevent members of Congress from exercising independent judgment in their consideration of pension reform legislation.

Today it is quite natural to associate mutual funds with retirement plans. After all, mutual funds are the largest funding medium for 401(k) and other defined contribution plans as well as for individual retirement accounts (IRAs). Mutual funds constitute one quarter of all U.S. retirement plan assets. The close association between mutual funds and retirement plans is a relatively new phenomenon. For many years, the corporate retirement market was dominated by defined benefit plans, which did not invest to any significant degree in mutual fund shares. Management of the smaller universe of defined contribution plans was dominated by banks and insurance companies, which did not make use of mutual funds. The revolution in retirement plans began quietly in 1962 when Congress permitted self-employed individuals to establish retirement plans. It accelerated with the enactment of the Employee Retirement Income Security Act of 1974, which created the first IRAs, and took a quantum leap forward in 1981 when Congress permitted all workers to have IRAs and the Internal Revenue Service adopted regulations laying the groundwork for 401(k) plans.

This chapter elaborates how Studebaker Corporation came to play its role in the political history of the Employee Retirement Income Security Act (ERISA). The Studebaker-Packard Corporation terminated a pension plan the United Auto Workers (UAW) had negotiated for employees of the Packard Motor Car Company. Studebaker became “the most glorious story of failure in the business.” The Studebaker Corporation and the Packard Motor Car Company created pension plans for their production employees during the Congress of Industrial Organization’s (CIO) “pension stampede.” The Kaiser and Hudson shutdowns led the UAW to push for vesting in its next round of collective bargaining. Studebaker-Packard had avoided bankruptcy in 1958 by restructuring its debt, a move that passed “real control” of the firm into “the hands of New York bankers.” The Studebaker shutdown and the report of the President’s Committee put pension risks on the congressional agenda and launched the campaign for pension reform.

This chapter examines issues surrounding retirement plans for workers from the public sector. The retirement benefits of public-sector workers account for a disproportionately large share of the retirement system’s total outflow. The locked-in generosity of these public-sector plans—particularly compared with the current state of private-sector retirement plans—is fast becoming a political issue as well as a fiscal one. The chapter first reviews the scope of state and local public employee retirement plans, which are exempt from most of the Employee Retirement Income Security Act (ERISA) requirements. It then considers public concerns about some public retirees receiving outlandish pensions before analyzing public pensions in a compensation context. It also discusses abuses that highlight agency risk issues with public pensions, along with challenges in measuring public pension costs and paying for them. Finally, the chapter looks at the fiscal implications of growing unfunded public pension obligations and the political controversy sparked by legal protections for public pensions.

This chapter examines issues concerning employer-sponsored pension plans. By the late twentieth century, the employer-sponsored retirement system was becoming an increasingly larger slice of the retirement pie. When Congress passed the Employee Retirement Income Security Act (ERISA) in 1974, Social Security delivered $57.6 billion in benefits, while private-sector defined benefit plans and defined contribution plans delivered only 22.5 percent of that amount—slightly less than $13 billion. But private retirement programs gained steadily and, by 2000, were paying out benefits worth two-thirds of those provided by Social Security. While opinions might vary about the private retirement system’s delivery of retirement benefits and contribution to household savings, there is wider agreement about how the system affects retirement patterns. This chapter also discusses the implications of retirement patterns on retirement plans.

This chapter examines the implications of the shift from defined benefit plans to defined contribution plans. In 1975, almost 68 percent of the benefits that were paid out of private employer-sponsored pension plans came from defined benefit plans. Over the next thirty-five years, the roles of defined benefit and defined contribution plans were reversed. When the Employee Retirement Income Security Act (ERISA) was implemented in the mid-1970s, the operations of defined contribution plans were remarkably different from those today. Since ERISA took effect, some defined contribution plan sponsors had been allowing workers to direct the investment of their retirement assets. The chapter also looks at the rise of 401(k) plans—also known as do-it-yourself pensions—and the retirement security concerns they raised. Finally, it considers the Pension Protection Act of 2006 that institutionalized automatic enrollment and contribution increases and created “safe harbors” for 401(k) plan sponsors that introduced these auto features.

This chapter examines issues regarding the distribution and costs of Social Security benefits. Since the passage of the Employee Retirement Income Security Act (ERISA), much of the policy dialogue about employer-sponsored pension plans has focused on the “who” and the “how much” of the tax preferences. Policymakers’ concerns about high earners reaping too much subsidy from the tax deferral have led to repeated restrictions and reductions in pension contribution and benefit limits. Essentially the same concerns prompted policymakers to legislate widespread discrimination provisions and testing to ensure that retirement benefits were spread widely and fairly. The chapter considers policy issues of employer-sponsored retirement plans in relation to Social Security, along with payroll tax costs and benefits of Social Security participation. It presents data on the tax benefits of employer-sponsored retirement plans to show how the Social Security system interacts with private pensions. It also discusses the implications of Social Security spousal benefits and concludes by turning to the U.S. retirement policy.

This chapter looks at the early development of employer-sponsored pension plans. The evolution of employer-sponsored pensions from the 1910s until the passage of the Employee Retirement Income Security Act (ERISA) in 1974 was strongly influenced by two key factors: governmental regulations, primarily for the tax treatment of pension plans and benefits, and the implementation of Social Security. The chapter examines early federal regulations of employers’ retirement plans, how Social Security encouraged employer plan sponsorship, and the introduction of defined benefit plans.

This chapter focuses on the regulatory regime for employer-sponsored pension plans. The Employee Retirement Income Security Act (ERISA) was fundamentally about securing pension benefits as workers earned them. Hence, ERISA required defined benefit plan sponsors to fund benefits on an orderly basis as they accrued. This chapter discusses the concept of “tax expenditure,” the Reagan administration’s controversial proposal to cut expenditures by reducing Social Security benefits, and the Financial Accounting Standards Board’s promulgation of accounting rules that required plan sponsors to use the projected-unit-credit cost method for accruing pension benefits. It also considers the Revenue Act of 1978 that gave rise to 401(k) plans.

This chapter examines how the retirement plan regulations adopted during the 1980s, intended to bring more lower-earning workers into retirement plans and ensure they received an equitable share of the tax-preferred benefits, went awry. It shows that, during the five years following the passage of the Employee Retirement Income Security Act (ERISA), coverage under private tax-qualified plans remained essentially flat. In 1980 and again in 1985, private employer-sponsored pension plans covered 46 percent of the workforce. Coverage dropped to 45 percent in 1990 and inched back up to 46 percent in 1995. Possibly offering a glimmer of hope, coverage climbed to 50 percent in 1999. One reason for the lack of pension progress was that the regulations changed the fundamental economics of the tax preferences for defined benefit plans. These regulations also affected pension funding behavior. The chapter also analyzes the policy environment for pensions in the early 1980s in relation to that for Social Security.

This chapter looks at the three risks associated with employer-sponsored pension plans during the 1950s and 1960s: agency risk, forfeiture risk, and default risk. It begins with a discussion of principal agent problems in pension management before turning to forfeitures and defaults in employer pensions. It then examines the wide range of reforms proposed for private pensions, with particular emphasis on legislation such as the Employee Retirement Income Security Act (ERISA).

This chapter looks at the Employee Retirement Income Security Act (ERISA), a piece of legislation that dramatically refocused federal oversight of employer-sponsored pension plans. The overall intent of ERISA was to insure that pension coverage was made available to workers on a fair and equitable basis and that participants received their retirement benefits. ERISA includes four titles covering employee benefit rights, tax matters, periodic valuations of pension obligations and assets, and pension benefit insurance. While there were concerns about government over-regulation as ERISA was implemented, retirement plans seemed to flourish during the early years under the new regulatory regime. Between 1975 and 1987, the number of tax-qualified defined benefit plans and defined contribution plans rose. ERISA also made workers’ private pensions more secure at exactly the time many people were beginning to worry about the long-term outlook for Social Security. This chapter also considers the implications of moving from the current tax treatment of pensions toward a more comprehensive income tax treatment.

Defined contribution (DC) pension plans have helped many individuals accumulate assets for retirement. However, DC plans do not typically offer retirement income options. We first consider the question of whether DC plans offer retirement income advantages compared to retail options. We find that DC plans advantages include costs, access, and efficacy. However, successfully extending DC plans into the income phase of retirement requires recognizing the importance of choice. Companies choose what features to offer in their 401(k) plan, and individuals choose whether to avail themselves of available options. The remainder of the chapter explores some of the key aspects of company and individual preferences that must be recognized if successful policies and income options are to be developed for DC plans and participants.