Understanding Pensions

The earliest private pension plans in the United States were those of the American Express Company in 1875 and of the Baltimore and Ohio Railroad in 1880. During the next 50 years approximately 400 plans were established, mostly in railroad, banking, and public-utility firms. Pension development in manufacturing was slower, since this was still a young industry with relatively few aged employees.

Insurers entered the pension business with the issuance of the first group annuity contract by the Metropolitan Life Insurance Company in 1921. The Equitable Life Assurance Society became the second company to enter the field by announcing in 1924 its intention of offering a group-pension service. Insurers have continued in the forefront of the pension movement.

Although the beginnings of private pensions date from the 1800's, the real growth in retirement programs came after World War II. In 1940 about 4 million people, less than 20 % of all employees in government and industry, were covered by private pensions. By 1982 more than 51 million wage earners and salaried employees, including about one half of all workers in private business and three fourths of all governmental workers, were enrolled in nearly 600,000 retirement programs other than Social Security. In the early 1980's, employees and employers contributed more than $45 billion annually to these plans. Plan assets were about $650 billion and experienced an average real growth (since 1975) of 9.2%. Nearly 9 million retired workers or their survivors received annual retirement benefits exceeding $17 billion under private pensions and more than 50% of recently retired couples had some coverage.

The rapid growth of pension plans since the 1940's may be attributable to developments that occurred during World War II. First, high profit taxes imposed on corporations encouraged some firms to establish plans. Since employer contributions to a qualified pension plan were tax-deductible expenses for federal income tax purposes, pension plans could be funded inexpensively. At the same time, these contributions were tax free income for the employee until he actually received his retirement benefits.

In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.

The terms retirement plan or superannuation refer to a pension granted upon retirement. Retirement plans may be set up by employers, insurance companies, the government or other institutions such as employer associations or trade unions. Called retirement plans in the United States, they are commonly known as pension schemes in the United Kingdom and Ireland and superannuation plans or super in Australia and New Zealand. Retirement pensions are typically in the form of a guaranteed life annuity, thus insuring against the risk of longevity.

If you are considering Retirement Planning, call for a free consultation today.