Taking apart a common myth of economic nostalgia.

A common myth of economic nostalgia is that back in the good old days everyone had a defined-benefit pension, but then the greedy capitalists ganged up to exploit the workers under Ronald Reagan and now nobody has one. It is true that defined-benefit pensions used to be more common than they are today, but even at their peak, most workers didn’t have one, and the reason for their demise has a lot more to do with the fact that they were bad for workers.

That’s the topic of an article by Andrew Biggs of the American Enterprise Institute. He writes that from the employer’s perspective, defined-benefit pensions only “work” when they’re allowed to be offered on unfavorable terms from the employees’ perspective. Once Congress tightened oversight of defined-benefit pensions plans, most employers stopped offering them and transitioned to defined-contribution plans instead.

In a defined-benefit plan, an employer guarantees a certain payout to retirees. In a defined-contribution plan, an employer guarantees a certain proportion of an employee’s paycheck gets invested in a retirement account. Examples of the latter include 401(k)s and IRAs, where employees can choose how the money gets invested. There is no guaranteed return, but employees can adjust their level of risk in an account that they own.

“No guaranteed return” sounds worse for employees in the abstract, but as Biggs points out, plenty of workers weren’t getting much from their defined-benefit plans back in the day. In order to make the math work to pay out benefits as promised, employers had to make the rules such that employees had to stay with the company for many years before being eligible for benefits. These long vesting periods meant that workers felt tethered to their jobs, which was bad for them if they wanted to change jobs for whatever reason, and the ones who left their jobs before becoming vested had a bunch of money taken from them that they’d never get back.

Biggs writes:

For instance, in 1971 the Senate Labor Committee analyzed 87 private pension plans, who since 1950 had 9.8 million combined participants. Of the 6.7 million plan participants who had separated from their employers, 88% did not receive even a dollar of benefits.

And even among those who managed to collect, benefits were modest. The Labor Committee noted that “When the median for normal retirement of $99 a month [$832 in $2025] is added to the median Social Security retirement benefit of $129 a month, the total, $228 a month, is less than the $241 minimum monthly income required to sustain a retired urban couple, as reported by the Bureau of Labor Statistics in January, 1970.”

This isn’t exactly the Golden Age of retirement security.

Congress passed and Gerald Ford signed the Employee Retirement Income Security Act (ERISA) in 1974, in part to address the irresponsibility of single-employer pension plans. The law capped vesting periods at seven years and imposed oversight of pension plans to make sure they were properly funded. Before ERISA, many pension plans weren’t putting nearly enough money in to pay the benefits they promised, and the government would wind up being on the hook to bail them out when employees realized they were being lied to.

Not coincidentally, 1975 was the year defined-benefit pension participation peaked, at 39 percent of U.S. employees. Once employers were required to actually fund their pension promises and pay benefits to more workers, they gradually stopped offering them.

So it’s not true that everyone, or even a majority of workers, had access to a defined-benefit pension, and of those who technically had access, many received no benefits because they weren’t vested. Even at that high point in 1975 — a very weird year to pick as the “good old days,” given that it included the end of a year-and-a-half-long recession, and had an inflation rate of 9.1 percent and an unemployment rate over 8 percent — 61 percent of U.S. workers didn’t have a defined-benefit pension.

As you might expect, funding a pension plan costs money, and once employers had to bear those costs under ERISA, pensions stopped being attractive to employees. Biggs reminds us that employees pay for their pensions because “if employers’ costs for one benefit go up, they compensate by reducing wages or other benefits.” Employees would rather take those other benefits than bear the much higher costs of a defined-benefit pension.

Biggs writes that we can surmise this is true because, when given the choice, employees generally invest about 70 percent of their retirement savings in stocks. “A stock-heavy 401(k) doesn’t provide anything like a guaranteed benefit in retirement,” Biggs writes. “But what it does provide is a higher expected rate of return, which translates to lower contributions from every paycheck.”

Employees could simulate a defined-benefit plan today by investing larger chunks of their paycheck in low-risk bonds if they wanted to, but they mostly don’t. That probably means they wouldn’t take a properly funded defined-benefit pension even if it was offered. The cost is too high.

So why do pensions still exist in the public sector? Because they aren’t subject to many of the same rules under ERISA that private-sector pensions have to follow. That means state and local governments can still get away with not funding their commitments, saddling taxpayers with enormous burdens when crisis strikes.

“ERISA didn’t make traditional pensions illegal. It simply said that if an employer is going to promise pension benefits, it actually has to fund them,” Biggs writes. That common-sense rule spelled the end of private-sector defined-benefit pensions. That was good for workers, who would no longer be lied to about their benefits, and good for taxpayers, who would no longer be asked to bail out pension funds that were doomed to failure.