The $25 Trillion System of Retirement Savings Needs Fixing

Few Americans today know much about Studebaker or Packard automobiles. Classic car aficionados recall their sleek, innovative designs, but the brands are also a reminder of another bygone era: the traditional defined benefit pension.

Studebaker and Packard merged in 1954 and later went out of business. Their pension plans were terminated, leaving thousands of workers without their expected benefits. That, along with other pension plan failures, prompted efforts to make retirement savings safer, culminating in federal legislation that has shaped much of the current retirement benefit landscape.

The Employee Retirement Income Security Act, or ERISA, which was signed into law in 1974 by President Gerald R. Ford, marks its 50th anniversary this year.

The law protected private sector pensions by imposing funding requirements, rules for employee eligibility and fiduciary standards requiring plan sponsors to act solely in the interest of its participants. It also created the Pension Benefit Guaranty Corporation, a federally sponsored insurance fund that backstops failing pension plans.

But those tighter requirements and costs led many employers to stop offering traditional pensions and to the rise of 401(k) plans and Individual Retirement Accounts and their dominance in the private sector today.

Pensions never covered all U.S. private sector workers — 62 percent were covered in 1983 compared with a mere 18 percent in 2022, according to the Center for Retirement Research at Boston College. But workers who had them benefited from automatic participation, professional investment management and guaranteed lifetime income streams.