Today’s blog was written by Tristan Fitzpatrick and originally posted on August 19, 2020.
Pensions have played a critical role in retirement security from the earliest days of the republic, going back to the American colonies offering pensions to soldiers who were injured during the Revolutionary War. Today, we’re looking back on the history of public pensions in the United States, and why it matters for the future of retirement security.
Beginnings of Public Pensions
163 years ago, in 1857, New York City created the first public pension plan in the country. It offered a lump sum payment for the city’s police officers if they were injured while serving the public. In 1878, this plan was changed to provide a pension for police officers who were 55 years old and had served the city for at least 21 years.
The city continued to be a pioneer in creating the nation’s first public pension plans 17 years later when the Manhattan borough became the first jurisdiction in the country to offer a pension plan for its public educators.
Progressive Era and the New Deal
During the Progressive Era, a period of political reform for workers’ rights in the late 19th and early 20th centuries, policymakers adopted public pensions in more areas of the country. For example, Massachusetts established the first public retirement system for state employees in 1911. North Dakota and California also created public pension plans for educators in 1913, followed by Connecticut and Pennsylvania in 1917, and New Jersey in 1919.
It wasn’t until President Franklin D. Roosevelt signed the Social Security Act of 1935 into law during the New Deal, however, that local and state governments began offering public pensions en masse for their employees. Under the Social Security Act as it was originally written, local and state government employees were excluded from participating in Social Security due to constitutional concerns over taxation. As a result, public employers started extending pensions to provide a secure retirement to their workers. Between 1935 and 1950, about half of the major state and local government pension plans in the country were created.
The Social Security Act would eventually be amended after 1950 to allow state and local government employees to participate in both the program and a public pension plan. However, in several states, many public employees still are not eligible for Social Security because of their pension plan not including coverage for it. According to the National Association of State Retirement Administrators (NASRA), most or nearly all of the public employees in Alaska, Colorado, Louisiana, Maine, Massachusetts, Nevada, and Ohio do not participate in Social Security, making their defined-benefit pensions a critical source of income in retirement.
Adoption of the 401(k) in the private sector and the future of retirement security
In 1978, Congress passed the Revenue Act, which created defined-contribution accounts like 401(k)s. 401(k)s were originally designed for wealthy individuals to skimp money off of their taxes, but private-sector companies soon realized that they too could shave money off of their bottom line by using these accounts as retirement plans for their employees, instead of providing defined-benefit plans.
After its introduction, 401(k) use skyrocketed in the private sector. As of 2018, more than 58 million Americans participate in a 401(k). However, they have been a disaster for private-sector workers’ retirement security. 401(k)s were marketed as a way for workers to save money on their own to prepare for retirement, but with a rising cost of living eating away at the value of people’s paychecks, many workers simply aren’t able to adequately save enough to retire. According to Fidelity Investments, the median amount in its 401(k) accounts is just $24,500, which is not nearly enough for a dignified retirement.
The widespread adoption of 401(k)s in the private sector also gave public pension critics ammunition to attack public workers’ retirement security, despite the evidence that public pensions provide a more secure retirement at a cheaper cost to state and local governments than 401(k)s. For example, in West Virginia, these adversaries lobbied the state legislature to switch newly hired public educators into a 401(k) style defined-contribution system instead of the West Virginia Teachers Retirement System (TRS). The experiment proved to be so disastrous that in 2015 West Virginia re-opened TRS and almost 80 percent of public educators in the state switched back to the defined-benefit plan.
While public pensions may not be spring chickens anymore, policymakers would be wise to protect them given their long and storied history of preventing our nation’s retired public servants from falling into poverty.