Inventing Retirement: We’ve Done It Before, Let’s Do It Again

by on July 26, 2013

A brief history lesson tells us that while the nation might be facing a retirement crisis, retirement itself is a relatively recent invention. Understanding how retirement evolved reminds us that we can have a lot of influence over what comes next. The nation might be facing a retirement crisis, but what does that mean? In fact, what does “retirement” mean?  [Be sure to check out our 25 Simple ETF Portfolios]

7.26This is not an academic question. The more we think about what we mean by retirement, the more we will understand that retirement is an invention, and a fairly recent one. Recognizing that should remind us that we are in control of our future. If we need to reinvent retirement – something that seems very likely — that’s fine. After all, we’ve done it before.

History Lesson:  I’ve Been Working on the Railroad

The short (albeit incomplete) answer to the question of who invented retirement is “the railroads.” But in order to explain that, and explain why that matters, we need to understand that retirement was not simply part of the natural order of things [also see The Complete History of SPY].

Check out the following chart. It shows the percentage of men over the age of 65 still in the workforce [1] from the last part of the 19th century through the 20th:


click to enlarge

At one time, when most Americans still worked on farms or in trades, you were expected to contribute economically throughout your life, even after you shifted away from hard labor as you aged. Once manufacturing took over the lion’s share of the workforce, most men worked past 65 unless they were disabled. Clearly something began to change as we reached the 20th century.

What changed was the nature of work. No longer tied to farms or trades, the workforce became more mobile. One of the ideas for encouraging greater stability was the creation of the workplace pension plan. In 1880, the Baltimore and Ohio Railroad took the plunge and established a pension plan to cover its 77,000 employees. [2] The idea of a paid retirement took root [see 25 Wild ETF Charts From 1H 2013].

Pension plans soon revealed an unexpected benefit: they helped manage the workforce. Railroad work was difficult and dangerous; pensions encouraged older workers to retire and allow younger workers to take over demanding jobs. (For more, see here.) Pension plans began to spread in the private sector, supported by the government through favorable revenue acts, peaking at 45% of workers by the 1980s. (A useful chronology can be found here)

Public employee pensions also grew. When Social Security was enacted in 1935, 65 was established as the normal retirement age, completing the “invention” of what we now consider retirement [see 8% Yield ETFdb Portfolio ETFdb Pro Members Only].

The Past is Prologue

Today, retirement is changing. 65 may no longer be the normal age for retirement and increasingly we need to pay for retirement ourselves through savings. But think about where we are compared to previous generations. We live longer, are healthier and have more human capital.

What’s happening today is that we are emerging into a new retirement that we are creating just as we as a society created the “old” retirement less than 100 years ago. While it may be an uneasy transition, we can each try to stay in control of this new retirement through our personal actions, through the leaders we elect and through the choices we make in the marketplace.

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[1] Data is missing for 1870, but it would be unlikely to change the trend.