Where Retirement Benefits Came From

Martin Luther King once said, “We are not makers of history, we are made by history.”

When I was in school, I had a hard time coming up with a good reason to study history. My history teacher was very theatrical and tried to bring the subject to life by changing the tone of his voice from a whisper to a shout, but his extraordinary effort was lost on me. I just thought he was a little kooky. But if we are indeed shaped by history, then studying it may help us understand how we got to where we are today and where we might be headed in the future.

The topic of retirement was what actually made me passionate about learning more about the past. To me, it’s a fascinating story.

The inability to work due to illness, disability and the frailty of old age is nothing new. Saving for retirement dates back to the ancient Greeks, who stockpiled precious oils that kept well over time. Gradually, our ancestors developed the idea of charity and responsibility of family members to take care of each other.

One of America’s founding fathers, Thomas Paine, backed one of the earliest forms of social insurance, proposing an inheritance tax, with the funds distributed to those aged 50 and older to guard against poverty in old age. This was in 1795, more than 100 years before our modern Social Security system was created.

Prior to civilian federal employees having a formal retirement benefit, retirement benefits were granted to veterans of military service. Civil War veterans and their survivors participated in a program of disability, survivors and old-age benefits similar in some ways to the later Social Security programs.

Military pensions became an important source of economic security. In 1893, such pensions accounted for 37 percent of the entire federal budget, totaling $165 million.

By 1910, more than 90 percent of living Civil War veterans were receiving benefits. (But the number of beneficiaries was less than 1 percent of the total U.S. population of that era.) I can remember hearing stories of surviving widows of Civil War veterans receiving pensions as late as 1999.

Private sector company pensions also pre-date the federal civil service retirement system. The first was created in 1882 by the Alfred Dolge Company, a builder of pianos and organs. Employees contributed a mandatory 1 percent of their pay and the company added 6 percent interest.

Other companies also began implementing pension programs. But as late as 1915, only 15 percent of the American workforce was covered by any kind of pension program. By 1932, only 5 percent of the elderly in the United States were receiving pension benefits.

For federal civilian employees, May 22, 1920, marked the creation of the Civil Service Retirement System by an act of Congress. In order to retire under the new system, you had to have a minimum of 15 years of service and be deemed disabled by a medical condition or have reached the mandatory retirement age of 70. Class A retirees—those who served in government for 30 years or more—were granted a pension based on their highest 10 years of average salary. They received 60 percent of their average salary as a pension benefit—with a minimum of $360 per year and a maximum of $720. Additional groups of beneficiaries extended to Class F, those with 15 years of service (but less than 18). They received 30 percent of their average pay, with a minimum of $180 a year and a maximum of $360.

For some perspective, you could buy a house in 1920 for about $1,200.  Most items in a grocery store were under 50 cents.

Just like today, retirement benefits were paid on the first of the month and employees had to complete a retirement application to receive their benefit. The employees’ retirement contribution at that time was 2.5 percent of basic pay. The Civil Service Retirement and Disability Fund was created to pay out benefits. It still exists today, and provides benefits to both CSRS retirees and those under the newer Federal Employees Retirement System.

In 1935, President Franklin Roosevelt signed the legislation creating the Social Security system. At that time, only primary workers received benefits. A 1939 change in the law added survivor benefits and benefits for retirees’ spouses and children. In 1956 disability benefits were added. A man named Ernest Ackerman got the first payment under the program in January 1937—for 17 cents. This was a one-time, lump-sum payout--which was the only form of benefits paid during the start-up period, from January 1937 through December 1939. A woman named Ida May Fuller was the first recipient of monthly Social Security benefits, in the amount of $22.54 per month. She had only paid into the system for three years, but she lived to age 100, and ended up collecting a total of nearly $23,000 in Social Security.

If you want to learn more about the history of retirement, Social Security provides a great online resource. There you will find not only a written history, but oral history accounts and photos and videos that vividly capture how the modern retirement system has evolved.