For many Americans, the prospect of retirement invites dread. Modern-day employees retire later and with less in their savings accounts than their parents and grandparents. Over the past decade, the proportion of Americans working past the age of 65 has increased by 60%. Despite that, retirees are carrying more debt than ever before. And most troublingly, retirees often have sparse savings by the time they finally take their well-earned rest: Only 3.2% of retirees leave their jobs with enough to live comfortably without working. These stark figures demonstrate that the modern American retirement system is not working—and one source of these troubling statistics is the death of the company pension and the rise of the 401(k).

This is a story about corporations transforming a system of shared risk into one of acute risk shouldered solely by employees. It’s a story about the decline of the social contract ethos once shared by employers and employees. And it’s a story that has been told before. But as the 401(k) has grown in prominence, it’s also a story that has gone largely unknown by the latest generation. This post seeks to tell that story to new generations of employers and employees in the hope that the next generations can produce a more workable retirement system.

The “Good” Old Days

In the early 20th century, Americans lacked robust safety nets for retirement. Elderly individuals were particularly vulnerable, and the occurrence of financially ruinous events like the Great Depression made clear the need for a stable fund to ensure future economic security — and with it, the growth of the company pension, often in the form of a defined-benefit plan. Under these plans, employers invested a portion of their profits on behalf of employees and paid out the proceeds to its employees when they retired. Employees received guaranteed, predetermined payments for the rest of their lives. In turn, employers gained a loyal, dependable workforce. At the height of their use, over half of private sector workers had their futures secured by a defined-benefit plan.

Pension plans are not without their problems. Because they rewarded employee loyalty, they’re often less useful to transient workers. Even those employees who remain with a company for decades may experience problems: Under the pension system, employees’ retirement funds are generally unavailable for emergency withdrawals, leaving employees in a tough spot when they needed quick access to funds. Employees can also lose access to some retirement benefits if the employer makes bad investments.

The Death of the Pension

But even with these problems, the pension system did not begin its rapid decline until the late 20^th century. Congress had long sought to clarify the federal tax code, and it did so by passing the Revenue Act of 1978. Section 401(k) allowed employees to avoid paying taxes on deferred compensation, such as bonuses, and tax specialists quickly realized that under § 401(k), executives could house their large bonuses in a company-offered retirement plan, which would allow the large bonus to grow pre-tax. The only catch was that the Act required corporations to offer the same retirement plans to their everyday employees. And so, the modern 401(k) retirement plan was born. 

The creation of the 401(k) might have been inconsequential were it not for the fact that major, pension-offering companies saw that the plan could save them money. At the same time, American society grew more interested in ideas of individual initiative and financial responsibility, making self-managed retirement politically viable. With economics and politics on their side, companies began to abandon their pension plans and phase in 401(k)s.

The Problem with 401(k)s

The 401(k), however, was far from perfect. First, 401(k) plans require individual financial management, and many lower and middle-income Americans have not had the benefit of a robust financial education. Even with financial education, lower and middle-income workers often have less money to contribute after covering their bills and expenses. And in the event of an emergency, an employee might empty their 401(k)s by making “hardship withdrawals.” Ultimately, this means that 401(k)s disproportionately benefit the wealthy over lower and middle-income workers.

Second, 401(k) plans make workers both fund the plan and bear the risk of investment and economic downturn. Whereas employers once funded their employees’ retirement, employees now fund their own retirement with occasional matching contributions. This shrinks the real effect of retirement benefits and forces employees to defer their salaries rather than receiving them in full.

Third, the shift towards self-sufficiency creates a moral problem. In their ideal forms, pension plans placed a premium on company loyalty, incentivizing employers and employees to maintain a something resembling a respectful working relationship. In return, employers helped their workers retire in dignity and comfort. To be sure, problems abounded between workers and employers even under the pension system: Often, employers only agreed to improvements on working conditions and pay—including retirement benefits—after workers unionized and agitated for better treatment. But the overarching concept of the pension system still represented a symbol: the existence of a social contract between society’s workers and employers, along with a sociocultural expectation of how we ought to treat retirees. The 401(k)’s emphasis on independence eviscerated the notion that the corporation bears responsibility for the quality of life of our retirees. Instead of a relationship of mutual stewardship, employers and employees now only experience a transactional relationship. And, as such, society has come to treat a comfortable retirement like a privilege rather than a right.

Towards a New Solution

The flaws of the 401(k) plan demonstrate that no one creating a retirement system from scratch would want this. And pension plans now have many actual or suggested safeguards that alleviate problems with transient workers and insolvent investments. But pension plans were never perfect, either.

Instead, the history of retirement funds and their failures demonstrates that society should move towards a system of greater socialized risk — in other words, a system that actually provides retirement benefits to all retirees. Many have pointed to Social Security as the solution, but Social Security was only ever meant to act as a backstop to other retirement plans. And it’s clear that employers will not unilaterally and altruistically offer better retirement plans to their employees. As such, new workers should focus on organizing to shift the heavy burden of retirement security from the individual shoulders of workers to the collective shoulders of society at large. As the working relationship becomes increasingly transactional, workers should channel their power into unions working towards a more dignified retirement future for all.