History of Retirement in the U.S.

Retirement has certainly changed a lot over the past couple of centuries. In this article we’ll explore what ‘retirement’ looked like at various phases in U.S. history. Sometimes it’s valuable to know where we’ve come from to help determine where we want to go. We’ll start with the pre-industrial revolution era and work our way up to more modern times and explore a bit about the culture and retirement philosophies. I think you’ll enjoy the journey, whether you take it by horse, railroad, or jet plane.

Pre-Industrial Revolution

Before the Industrial Revolution, retirement was virtually nonexistent. People worked until they were physically unable to continue, relying on family for support in old age, if they were fortunate enough to live that long. Life expectancy was shockingly low, averaging about 30-40 years. Several factors contributed to this:

High infant mortality: Many children did not survive past infancy due to disease, malnutrition, and lack of medical care.
Infectious diseases: Plagues, tuberculosis, and dysentery were rampant, with no effective treatments.
Poor sanitation: Contaminated water and lack of hygiene led to widespread illness.
Malnutrition: Food shortages and poor diets weakened immune systems, making people more susceptible to disease.

Despite these grim statistics, those who survived the childhood health issues, some could sometimes live into their 50s or 60s. However, retirement was still not a concept in this era. People worked as long as they physically could. Most people worked on farms or as craftsmen. Those who lived to old age often relied on family for support rather than any structured retirement system.

During the pre-Industrial Revolution period, survival was the priority!

Industrial Revolution and the Rise of Retirement

The Industrial Revolution brought significant changes to work and life expectancy. By the late 19th century, life expectancy had risen to 40-50 years. This was due to:

Improved sanitation: Cities developed sewage systems and cleaner water supplies, reducing disease spread.
Medical advancements: The discovery of vaccines, antiseptics, and antibiotics drastically reduced mortality rates.
Better nutrition: Increased food production led to healthier diets, improving overall health.

Company Pensions

The American Express Company established the first corporate pension in the U.S. in approximately 1875⁴. Before this, most businesses were small or family-run, and workers had no formal retirement benefits. American Express introduced the pension plan to provide financial security for long-serving employees. The plan applied to workers who:

Had been with the company for 20 years
Had reached age 60
Had been recommended for retirement by a manager
Had their retirement approved by the board of directors

Following American Express, other industries quickly adopted pension plans. By the 1920s, major companies in banking, railroads, and manufacturing began offering pensions. The Baltimore and Ohio Railroad introduced a retirement plan in approximately 1880, which was unique because it combined employer contributions with employee savings. By 1926, more than 200 private pension plans existed, covering thousands of workers.

These early pensions were generally defined benefit plans, meaning employers guaranteed a fixed monthly payment upon retirement. However, these plans were often unstable—companies could alter or terminate them at any time. The Great Depression exposed the vulnerability of retirees, leading to the creation of Social Security in 1935 to provide a government-backed safety net.

Formation and Expansion of Social Security

The Social Security Act was signed into law by President Franklin D. Roosevelt on August 14, 1935. It was drafted by the Committee on Economic Security, led by Frances Perkins, the first female U.S. Secretary of Labor¹

The program was designed as a social insurance system, providing financial security for retirees, unemployed individuals, and dependent children²

At the time, the primary goals of Social Security were to¹:

Provide economic security for elderly Americans who had lost their savings during the Great Depression.
Reduce poverty among senior citizens, which had exceeded 50% at the time.
Create a payroll tax-funded system, ensuring workers contributed to their future benefits.

Initially, Social Security provided lump-sum payments, but in 1940, it transitioned to monthly benefits to help with monthly cash flow requirements.²

During this era, retirement had become a realized dream and a hope to retire with some level of dignity, as longevity increased.

Post-1940s: Retirement as a Lifestyle

After World War II, retirement became a structured phase of life. Unlike the pre-Industrial era, most people did not work until they couldn’t. Retirement became a lifestyle expectation. Company pensions on top of Social Security provided a very financially feasible retirement. By the 1970s, pensions were widespread, but concerns over their stability, as evidenced by the failure of the Studebaker’s pension plan, led to the passage of the Employee Retirement Income Security Act (ERISA) in 1974.

ERISA set standards for private-sector pension and retirement plans⁵. The intention was to ensure that employers who offer pension plans follow strict guidelines regarding:

Participation & Vesting: Defines when employees become eligible and when their benefits become non-forfeitable.
Funding Requirements: Ensures pension plans are adequately funded to meet future obligations.
Fiduciary Responsibilities: Requires those managing pension funds to act in the best interests of plan participants.
Transparency & Accountability: Mandates that employees receive clear information about their benefits and rights

Despite ERISA, there were still a few problems looming:

1. The decline of traditional pensions

It was not expected that companies would start to shift away from defined benefit plans (funded by the company to provide a stable monthly income at retirement) to defined contribution plans (employees fund an investment pool and then as retirees, manage that asset pool). Although the shift was made for good business reasons, to remain competitive in a global economy, there would be some long-term consequences.

2. Longevity

When Social Security was designed, it was not designed for increasing longevity. Life expectancy continued to rise, reaching 70+ years by the 1960s. Key factors included:

Advances in medicine: Antibiotics, vaccines, and improved surgical techniques saved millions of lives.
Public health initiatives: Widespread immunization programs and disease prevention efforts extended lifespans.
Economic growth: Higher wages and better living conditions contributed to longer, healthier lives.

3. Expansion of Social Security

In the post-1940 era, many expansions to Social Security were implemented, mainly:

1939: Added benefits for spouses, children, and survivors³
1956: Disability Insurance, providing financial support for disabled workers²
1972: Expanded benefits for low-income workers and introduction of cost-of-living adjustments (COLA)¹
1983: Increased payroll taxes and raised the retirement age to ensure long-term solvency¹

Clearly, the post-1940’s era had shifted from ‘survival’ in the pre-Industrial era, to ‘hope’ in the Industrial era to one of an expectation.

Complexities of Retirement Today

Over time, Retirement Plans have become more complex and more and more responsibility is on the retiree than ever before. Defined contribution plans like 401(k)s and 403(b)s replaced traditional pensions, shifting retirement savings responsibility to employees. Other financial instruments, such as annuities, have evolved to provide ‘guaranteed’ income much like a pension of the past, although most are complex with high fees. Today, an individual’s retirement plan may include:

Social Security as a foundational income source
401(k) and IRA tax-deferred accounts
Roth tax-free accounts
Employer-sponsored pensions, though less common than before
Annuities to augment ‘guaranteed’ income streams to meet monthly expenses
Bond ladders
Dividend investing for income
Other traditional savings vehicles

Increasingly, Americans are faced with a dizzying array of strategies, products, and complexities to be managed just to have a retirement similar to the previous generation.

Retirement in America has gone from ‘survival’ to ‘hope’ to ‘expectation’ to ‘anxiety’ of self-ownership.