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December 1991, Vol. 114, No. 12
Evolution of employer-provided defined benefit pensions
Patrick W. Seburn
Employers in the United States began to provide pension benefits for their employees more than a century ago. Since then, increases in life expectancy and the society's decision that its workers should enjoy an adequate income in their retirement years have led to the widespread private pension system that exists today. As pension coverage has expanded, so has the availability of data designed to keep employers, employees, and policymakers aware of pension plan developments.
The first employer-provided retirement plan in the United States was the industrial pension plan of the American Express Company, implemented in 1875.1 In 1880, the Baltimore and Ohio Railroad established the first formal plan to be financed jointly by employer and employee contributions it covered more than 77,000 workers. By 1987, there were more than 232,000 private defined benefit2 pension plans in the country, covering nearly 40 million workers. These plans had assets of nearly $900 billion.3
The first private retirement plan, offered by American Express, was unusual in that it applied only to disabled elderly employees.4 A worker was eligible only upon completing 20 years of service and reaching age 60. Additionally, the company's general manager had to recommend retirement, subject to approval by the executive committee of the board of directors. The annual benefit was 50 percent of the worker's annual average pay during the 10 years preceding retirement, up to a maximum of $500 annually. Four decades later, in 1915, the company was still operating under the same plan, except that the age requirement had been dropped. The plan was terminated in 1918, when the firm's express business was transferred to the American Railway Express Company. The American Railway Express Company continued to contribute to pensions on an informal basis while the American Express Company adopted a new plan in 1921.5
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1 William C. Greenough and Francis P. King, Pension Plans and Public Policy (New York, Columbia University Press, 1976), p. 27.
2 Defined benefit pension plans and defined contribution plans are the two major types of retirement income devices used by private and public organizations in the United States. Defined benefit pension plans calculate retirement benefits using specific formulas, generally based on salary, years of service with a firm, or both. Employers are obligated to provide benefits based on these calculations.
Defined contribution plans generally specify an employer contribution, but not a formula for determining benefits as in a defined benefit pension plan. Instead, individual accounts are set up for participants, and benefits are based on amounts credited to these accounts, plus investment earnings. This article deals primarily with defined benefit pension plans.
3 John A. Turner and Daniel J. Beller, eds., Trends in Pensions (U.S. Department of Labor, 1989), p. 421.
4 Murray W. Latimer, Industrial Pension Systems in the United States and Canada, 2 vols. (New York, Industrial Relations Counselors, 1932), vol. 1, pp. 21-22.
5 Ibid., P. 28.
New survey data on pension benefits. August 1991.
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