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ERISA at 45: How did we get here?

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For most people, anniversaries are usually a time to reflect and celebrate some momentous event such as a birthday or wedding. For others, it becomes a time of reflection and the impetus to change course, like someone reaching middle age who leaves a corporate job to teach at-risk youth.

September 2019 marks the 45th anniversary of President Gerald Ford signing the Employee Retirement Income Security Act, commonly called ERISA. Of course, the issue of retirement income security is as relevant as ever, particularly given questions about the long-term sustainability of current Social Security benefit levels. So perhaps we can use this occasion to review the issues that the legislation was intended to address, how the environment has changed over the past 45 years, and what changes may be needed to bolster retirement security for the next 45 years.

Historical perspective

The American Express Company is generally credited with setting up the first U.S. private pension plan in 1875. But it was during the period from the start of World War II through the Korean War – in part due to wage-price controls, high tax rates, and union interest – when many private sector employers introduced pension plans as a form of compensation. (The number of workers covered under private sector pension plans went from 4 million in 1940 to over 17 million by 1958.)

But before ERISA was enacted, pensions were lightly regulated and there was little recourse for workers if organizations failed to deliver on their pension guarantees. A 1973 report indicated at least a quarter of all employees participated in plans that did not vest benefits until retirement, regardless of service. Another major concern was the mismanagement and embezzlement of pension funds, particularly those benefiting collectively bargained workers.

Studebaker

The incident many cite as sparking major reform involved the December 1963 shutdown of the Studebaker auto plant in South Bend, Indiana, laying off over 4,000 workers. The pension plan was terminated with vested participants age 40-59 receiving on average only 15% of their accrued benefits; workers under age 40 received nothing regardless of service.

Throughout the 1960s, Congress gradually granted the U.S. government more enforcement power over private pensions. But in the wake of Studebaker and other scandals, there were calls for stronger action to be taken.

ERISA and its aftermath

In February 1972, the U.S. Senate Labor Committee published a report which cited the following key “deficiencies” in private pension plans: inadequate vesting provisions, inadequate funding, loss of portability of earned benefits on relocation, plans underfunded at plan termination, abuses by employers and fiduciaries, and inadequate information for employee participants. The final ERISA legislation of 1974 attempted to address many of these issues, including establishing a pension insurance system funded by employer premiums.

At its core, ERISA was intended to help secure the promise employers made – in the form of defined benefit programs – to provide a percentage of an employee’s compensation during retirement. But in 2019, the employer “promise” that ERISA was seeking to secure back in 1974 has largely disappeared. Instead, defined contributions plans are now the sole workplace retirement benefit offered to most employees; it is up to each individual to save and invest for their retirement. And policy makers are still grappling with the question of how the U.S. government can help provide workers with retirement income security in the 21st century.  So, if the object of the original ERISA legislation – securing employer provided pensions – is irrelevant to today’s worker, what now?

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