June 27, 2019
Pensions – An Overview
A Brief History of Pensions
by Ron Kent, AFSCME Retiree
As many readers know, misguided legislative proposals currently circulate that would alter the Wisconsin Retirement System (WRS) for the public sector. Labor is also under attack by the dismantling of private-sector pensions through mismanagement and ineffective federal policies, including the underfunding of pension protections and tax code changes.
The origins of public and private sector pensions underscore the important role played by rulers, nations, legislatures, employer initiatives, or labor advocacy in creating, implementing, improving, and protecting pension plans.
Early History – Public Sector Pensions
The first pensions appeared in the Roman Empire in 123 BCE for the military, introduced by the tribune Gaius Gracchus. Later, landed estates were awarded to military personnel. Eventually, in 13 BCE, Emperor Augustus created a pension plan for soldiers who had completed twenty years of military service, funded first by general revenues and later by inheritance taxes and auction taxes. Veterans often received supplementary land grants. With the collapse of Rome this system vanished.
In the centuries before the 1600s, European feudal authorities arbitrarily issued land grants. Military pensions then surfaced in England in 1689 by an act of Parliament. In the 18th century Spain, France, Austria, and Prussia (under Frederick the Great) issued military pensions.
In the United States, military pensions arrived in the colonies as early as 1624 in Virginia, intended for persons disabled while in military service. The first formal pension appeared in 1636 in the Plymouth colony, followed by other governmental plans in the Massachusetts Bay Colony and in Maryland in the 1670s, and in New York in the 1690s. Pensions were often awarded based on the extent of disability, and included widows and orphans. The founders of the United States followed British example in offering army and navy pensions in 1776, financed in the army’s case as a pay-as-you-go system, and in the navy’s case by prizes captured by naval personnel.
19th and 20th Centuries – Private Sector Pensions.
In the United States, the Amalgamated Society of Engineers, a union of US and Canadian workers, became the first labor organization to offer a private pension in 1860. Subsequently, in 1875 the American Express Company offered the first old-age pension plan, with the employer paying all the costs. Five years later, in 1880, the International Molders Union of North America established the first private pension plan implemented entirely by workers. The International Typographical Union took another step in 1902, when it created the first union pension fund for aged and poor members. As for teachers, a private teacher pension plan was started in 1906 for colleges, which grew into the substantive system known as TIAA-CREF for retired college professors and staff.
Victor Berger, socialist from Milwaukee, introduced a resolution to the American Federation of Labor (AFL) as early as 1902 to provide old-age pensions to modest-income workers. Although the AFL first rejected the resolution, it later endorsed the idea in 1929. At the federal level, the US Civil Service Retirement Act of 1920 had already provided pensions for federal government workers, which may have helped to overcome initial AFL resistance to pensions. By 1949 US unions had brought private pensions into the bargaining process for millions of workers.
19th and 20th Centuries – Public Sector Pensions
In Wisconsin, as early as 1891, the Milwaukee Police and Fire pension plans became part of state statute, under Chapter 287. In 1937 the City of Milwaukee created its own retirement system, followed by Milwaukee County and Milwaukee County Sheriffs.
Wisconsin public school teachers tried in 1907 to create a pension plan, but it was ruled unconstitutional by the Wisconsin Supreme Court. Teachers later led the successful effort to establish the first Wisconsin-wide public-school teacher retirement law in 1911, funded by voluntary contributions.
In the 1920s and 1930s, the Wisconsin legislature continued to pass public-sector laws beneficial to workers in retirement. In 1921, the state legislature enacted the first joint contributory state-wide pension system for public teachers only (except Milwaukee) to cover public schools, normal schools, and the UW. It further passed laws improving pensions for the City of Milwaukee fire fighters (1923), state public school teachers (1929), and conservation wardens (1935).
In 1934 AFSCME, under President Arnold Zander, hired Roy E. Kubista as a pension researcher. Roy was a student of Professor Edwin Witte (UW-Madison) who had primarily written the Social Security Act of 1935. Kubista drafted the bill to create the Wisconsin Retirement System in 1943, a bill that Wisconsin Republican Governor Goodland then signed into law. Kubista drafted all subsequent improvements to the law, including disability coverages. Today the Wisconsin Retirement System (WRS), a defined benefit plan, serves over 557,000 retirees from the public sector. It is rated as one of the best funded systems in the United States.
All Wisconsin trade unionists should oppose current legislative attempts to weaken the WRS. Two sets of bills introduced by Senator Stroebel warrant opposition and defeat: 1) AB398/SB328 would change the pension calculation from the three highest years to five years, with the effect of lowering benefits; 2) AB397/SB329 would raise the early retirement age for regular employees from 55 to 57 and protective employees from 50 to 52; employees with injuries or serious health conditions would suffer in such cases.
Private Sector Pensions Today
Firms made the switch to defined contribution plans and 401(k) plans starting in the 1990s, in some cases because of pension law advantages. Under such plans private sector employees assume all the risks and must manage their own funds; with stock-market volatility, however, employees often are negatively impacted, especially if they are not trained to manage their own investments. Many private sector pensions were weakened by stock market volatility in the years after 2001.
In 2005, only 33 percent of private sector employees had pensions. Furthermore, defined benefit pensions fell from being offered in 1986 by 76 percent of firms in the private sector to only 22 percent in 2009 (probably even lower in 2015).
Recent attacks on private sector pensions such as the Teamster Central States Pension Fund remind us that labor needs to fight for federal legislation that would help protect our private sector brothers and sisters. The federal government should be urged by unionists to 1) bolster funds that must be set aside for defined benefit plans, that is, to fully fund the Pension Benefit Corporation pension insurance system; 2) eliminate onerous regulations on defined benefit plans; 3) restore some of the tax breaks for employers who choose to establish defined benefit plans; and 4) create greater assistance and tax law changes to advance defined benefit pensions for more workers, while at the same time implementing the return and further improvement of Glass-Steagle rules for banks that would restrict them from engaging in volatile stock-market financial investment strategies.
Wisconsin legislation being proposed by Senator Hansen (D-Green Bay) would protect private sector workers without any current pension through a voluntary private pension system overseen by skilled advisors.
Public Sector Pensions Today
The public sector still remains highly involved in defined benefit pensions. Public sector pensions, held in 1987 by 93 percent of all public sector employees, only fell to 88 percent in 2008. Several public sector state pension plans remain in deep trouble, however, notably in Illinois and in New Jersey, chiefly due to a lack of vigilant financial oversight.
How Wisconsin Benefits from Pensions
Overall, in Wisconsin, the recent economic impact of private and public sector pensions is very positive. According to the National Institute on Retirement Security, state and local pension funds in Wisconsin (including out-of-state funds) paid a total of $4.6 billion in benefits to Wisconsin residents in 2012, which supported a total of $6.6 billion in total economic output in the state and $3.7 billion in value added in the state. Moreover, in 2012, expenditures stemming from state and local pensions supported 47,969 jobs that paid $2.1 billion in wages and salaries, while producing $1.1 billion in federal, state, and local tax revenues. For each dollar paid out in pension benefits, $1.32 in total economic activity was added in Wisconsin. For every dollar taxpayers invested, pension plans support $5.23 in total economic activity in the state.
To Sum Up
Finally, this overview of pension history shows the need for real pension reforms that benefit all workers. Pensions need to be defended and expanded with the help of constructive legislation and collaborative participation of labor and its allies.