One of the most persistent retirement questions is, “Why are baby boomers so far behind in saving for retirement?” While there are numerous ideas and theories surrounding it, I found the alarming answer during an interesting review of retirement planning history.

1875

The American Express railroad company set a precedent by establishing the first private pension plan in America. Railroads, banks, utility companies, and manufacturing companies quickly followed suit and established pension plans funded mostly by the employer. For many of these plans, twenty to thirty years of service were required and retirement was mandatory at age 70. These lengthy requirements reduced labor turnover and offered a humane way to remove older, less productive employees.

1883

The "Iron Chancellor," Otto Von Bismark of Germany introduced a social security system to appeal to the German working class and to combat the power of the Socialist Party in Germany. Somewhat cynically, Bismarck set the retirement age at 65 since he knew hardly anyone lived beyond that age.

1916

By this time, most state and municipal governments provided pensions for firemen and police officers and, in most cases, teachers.

1926

The Revenue Act of 1926 allowed employer contributions to retirement plans to be tax deductible. This act made establishing retirement accounts for employees a valuable benefit for employers. By 1928 a number of labor unions also began providing pension benefits, mostly for members employed by smaller firms.

1935

Francis Townsend of California initiated a proposal for mandatory retirement at age 60 to help older, less productive employees exit the workforce. In exchange for retiring, he suggested the Government pay retirees up to $200 a month, essentially, a full salary for a middle-income worker at that time. In response to the costly idea, President Franklin D. Roosevelt proposed the Social Security Act of 1935, which increased the retirement age and made workers pay for their own pensions. Initially the program was funded by a 1% tax on both employers and employees on the first $3,000 of a worker's earnings. Somewhat similar to Bismarck’s original program, the average life expectancy in America at the time was still only 61.7.

1940

The first Social Security payment was made to Ida May Fuller. Miss Fuller received check number: 00-000-001 for $22.54 on January 31, 1940. A teacher and legal assistant from Vermont, She would later observe: "It wasn't that I expected anything, mind you, but I knew I'd been paying for something called Social Security..."

1958

The first employee-based retirement savings plan, a 403(b), was created by Congress for employees of tax-exempt corporations to encourage retirement savings. Typical 403(b) participants included teachers, school administrators, nurses, doctors, professors, researchers, librarians, and ministers.

1974

The Employment Retirement Income Security Act (ERISA) was created to regulate private pensions, ensuring their solvency. ERISA also created what is known as the traditional individual retirement account (IRA). The IRA was established so those without employee-sponsored pensions could save for retirement.

1978

Congress amended the IRS Code by adding section 401(k) whereby employees are not taxed on income they defer into a retirement plan. The 401(k) provision went largely unnoticed for two years until Pennsylvania benefits consultant Ted Benna realized its rewarding application. He originally called his interpretation of the 401(k) rule "Cash-Op," and even tried to patent it.

1981

Prior to 1981, IRAs were strictly for those without pension coverage. Workers who had pensions weren’t eligible to participate. The Carter Administration then extended IRA availability to even those with pension coverage.

1982

Hughes Aircraft Company, Johnson & Johnson, PepsiCo, JC Penney, and Honeywell were among the first companies to begin offering 401(k) plans, many of which officially began operation in January 1982.

1986

Congress replaced the defined benefit plan for federal civilian workers with a defined benefit plan and a 401(k)-type plan. This served as an official government endorsement creating the monumental shift from employer-sponsored defined benefit plans (pensions) to defined contribution plans (401k and 403b plans).

1992

The Unemployment Compensation Amendment imposed a 20 percent mandatory withholding tax on lump-sum distributions that are not rolled over into another qualified retirement plan, annuity, or IRA. It also liberalized rollover rules and required plan sponsors to transfer eligible distributions directly to an eligible plan if requested by the participant.

1997

The Roth IRA resulted from The Taxpayer Relief Act of 1997. In contrast to the traditional IRA, Roth IRA contributions are not tax deductible, however, no tax would be levied upon withdrawal of the funds. Roth IRA funds could also be invested indefinitely, unlike the traditional IRA which requires withdrawals by age 70 ½.

2001

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) raised both Roth and Traditional IRA contribution levels. The law raised the limit on contributions and allowed "catch-up" contributions by participants ages 50 and above. The maximum contribution amount was raised to $3,000 in 2003, $4,000 in 2005, and then $5,000 in 2008: The place we still sit unless you are over the age of 50 which then allows you to contribute $6,000.

2002

Congress enacted the Sarbanes-Oxley Act of 2002 in response to the Enron and WorldCom corporate accounting scandals. It set new standards for all U.S. public companies and mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports.

2006

The Roth 401(k) is born. Originally created through the 2001 EGTRRA, Employers could now amend their 401(k) plan documents to allow employees to elect Roth IRA type tax treatment for a portion or all of their retirement plan contributions. The Pension Protection Act (PPA) also established higher 401(k) & 403(b) contribution limits and encouraged automatic enrollment.

What’s alarming is that despite the number of significant tax and legal changes that have taken place within the retirement planning system over the last 25-30 years, the age at which you should retire was established over 127 years ago. Equally disturbing is that since Social Security was created, the average life expectancy has grown by more than 16 years or 25% yet no relevant changes have been made to the program despite it’s near term insolvency.

Another important historical event provides insight into why people are behind in saving for retirement and why they avoid talking about it. Essentially, the transition of responsibility for retirement savings that took place in the 1980’s was a monumental shift that no one could have anticipated or appropriately planned for. 401(k) plans were initially introduced as a supplement to pensions and social security, not a replacement. Yet, 401(k) or defined contribution type plans today represent the primary and often only retirement funding vehicle people have access to use.

Furthermore, this seismic shift from company sponsored pension plans to individual retirement savings plans is slightly more than 25 years old. The baby boomers are the first group to face this new retirement era and have many challenges ahead of them including the burden of saving and investing for up to 70% of their retirement, making those savings last for 20-30 years, and dealing with two of the worst economic environments in the history of investing (internet & housing bubbles) … and during the most critical time for them to build their retirement savings.

Quite frankly, it’s surprising the group is not further behind or hasn’t completely given up. It’s no wonder people avoid talking about retirement because everything they read, see, and hear is designed to scare them or make them feel bad about being behind. The reality is, this is not your parents or grandparents retirement and people are behind and concerned for very real reasons.

The question now becomes how do we move beyond historical facts, scare tactics, and guilt to solutions and positive outcomes?

P.S. Leave me a comment if you liked the article or found it helpful. Also, if you're interested in a copy of my latest FREE guide: Three Things No One Tells You About Retirement please click here.

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