By Sylvester J. Schieber*
The Social Security Program
was established in 1935 to provide income maintenance for retired American workers.
Over the years from 1935 to 1975, program
coverage expanded and new program elements were added. During the 1940s, the
employer-based pension movement that had begun in the late nineteenth century
began to expand rapidly. Together with other important developments in government
and private policy (such as employer-provided health insurance for retirees),
these programs made for a “golden era” for American retirees.
Th e mid-1970s through
the end of the century was a period of transition from the golden era to what
we see today. One very signifi cant step in this transition was the realization
by employers that they could let employees make pre-tax contributions to defi
ned contribution retirement plans and engage employees more directly in fi nancing
their own retirement. Th rough the 1980s the magnitude of retirement benefi
t obligations began to come into focus while health costs were exploding, making
health benefi t plans, especially those for retirees, far more burdensome than
most employers had ever anticipated.
By the 1990s, there was
a an increasing awareness that the baby boom generation was going to make claims
on the public retirement system far in excess of the revenue streams feeding
it. While some retirement policy analysts were raising growing concerns about
the direction the pension system was headed, booming fi nancial markets in the
late 1990s led many to perceive the move toward the new world order was okay.
Th e retirement phenomenon, largely a vestige of the last half of the twentieth
century, seemed to be alive and well as we approached 2000.
The new millennium brought
with it a cold dose of reality. Financial market turmoil taught defi ned contribution
participants that their retirement balances do not always
increase in value. It taught defi ned benefi t plan sponsors that off ering
a pension required periodic contributions to the plan, a lesson that many had
forgotten over the prior 15 years. In the meantime, the cost of employer-sponsored
retiree health benefi ts had shriveled this element of the system to near extinction.
Th e newly realized cost of pension sponsorship, the legal challenges to hybrid
pensions adopted during the prior 15 years and policymakers’ failure to
clarify the regulatory landscape led many employers that had continued to sponsor
a pension to freeze them in the early 2000s. Amidst a growing level of angst
about retiree health costs, policymakers concluded they had to add a pharmaceutical
benefit to the Medicare program. Despite this seeming bolstering of the retirement
safety net, there was growing awareness that our retirement system was badly
out of balance. We now appear to implicitly understand that the golden era of
retirement may be history yet we have not embraced the reality that follows.
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*Sylvester J. Schieber is
Chairman of the Social Security Advisory Board (SSAB) and a private consultant
on retirement and health issues. He retired from Watson Wyatt Worldwide in September
2006 where he had served as Vice President/U.S. Director of Benefi t Consulting
and Director of Research and Information.
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