World War II, and its aftermath, changed everything - even something as remote from world affairs as provision for U.S. workers' retirement years.
The war was largely responsible for the shape and size of the corporate-sponsored pension system in the United States today.
Although it was not obvious as the war ended 50 years ago next week, the pressures built up in the economy during the fighting, and unleashed with the arrival of peace, led to explosive growth in pension benefits and the assets to back them.
As a result, more than 42 million of private-sector employees have pension coverage to supplement Social Security. Also, their retirement years are more secure, backed by more than $3 trillion in assets by the end of 1993.
Before the war, there were relatively few pension plans. If they were funded at all, it was through insurance company annuities.
The war and its aftermath led to many changes:
Some unions negotiated pension benefits because wages and prices were controlled during the war.
Immediately after the war, pent-up demand sparked inflation, which eroded the value of Social Security benefits, not automatically tied to inflation at that time.
A 1948 National Labor Relations Board ruling - in a case brought by the United Steelworkers of America against Inland Steel Co. - validated pensions as a legitimate bargaining issue. That ruling was upheld by the U.S. Court of Appeals.
The pent-up domestic demand, combined with the demand for goods and services needed to rebuild Europe and Japan, led to a post-war economic boom in the United States, and a bull equity market that lasted until the late 1960s.
Banks entered the pension business in competition with insurance companies, and the post-war bull market in equities led pension funds to begin investing in stocks.
But before the war, few employees enjoyed any pension benefits.
"There was very little pension coverage until World War II," said Dan M. McGill, professor emeritus, the Wharton School of the University of Pennsylvania, Philadelphia, and author of the book "Fundamentals of Private Pensions."
No comprehensive figures exist on the number of corporate pension plans that were formed before the war. All data on plans, regardless of the source, are rough. There were no requirements that companies with plans file reports.
Robert D. Paul, director and retired chairman of The Segal Co., a major pension consulting firm based in New York, estimated 18% of the private work force was covered by some sort of pensions before World War II.
In 1940, of nearly 28.2 million private, non-agricultural wage and salary workers, some 17% of full-time and 15% of all non-agricultural workers, including part-time workers, were covered by pension plans, according to Trends in Pensions 1992, published by the Pension and Welfare Benefits Administration of the Department of Labor.
But pension coverage grew during the war.
At the war's end in 1945, of 34.4 million private, non-agricultural wage and salary workers, some 21% of full-time workers and 19% of all workers were covered by pension plans, according to the study.
Historical researchers see 1940 to 1950 as the era when modern, widespread corporate-sponsored pension programs began.
The unique domestic economic demands of the war contributed indirectly to promoting pension plan formation.
Among the contributing factors was an excess profits tax on corporations, which essentially taxed all profits at 90% or 93%.
"World War II made establishing pensions attractive because there was a freeze on cash wages," said Mr. McGill. "There was a shortage of labor because of military demands. So to attract labor in a competitive market, companies raised benefits. Companies were taxed at a 93% rate. So companies could set up a pension plan and it would cost them just seven cents on the dollar."
In addition, wage and price controls were imposed to try to contain inflation that could develop from labor shortages and the slowing of production of ordinary consumer goods and services to meet needs for military manpower and procurement.
The federal War Labor Board oversaw employee-management issues during the war, holding down wage increases to try to contain inflation. Some experts see the War Labor Board as promoting fringe benefits as an alternative to pay raises.
Pension become attractive
"World War II made pensions attractive because there was a freeze" on normal wages paid in cash, said Mr. McGill.
Not all agree with this interpretation.
"Corporate plans as we know them today didn't exist" in the war years, said Ben Fischer, distinguished public service professor at the H.J. Heinz School of Public Policy and Management, Carnegie Mellon University, Pittsburgh.
Before the war, Mr. Fischer said, "Working people and lower-level management had no access to them (corporate pension funds), or if they did, their pensions were pennies."
"Some parental plans existed," he added. "There were a few pensions in some companies, taking care of special cases, such as disabilities, or executive plans."
The War Labor Board didn't promote pensions in place of wage increases during the war, Mr. Fischer added.
The fringe benefits companies offered during the war consisted mostly of vacation and holiday time off and shift differential in pay, rather than pensions, Mr. Fischer said.
But other researchers believe corporate pension plans grew during the war, although they grew much faster in the post-war years.
William J. Wiatrowski, writing in the Monthly Labor Review, noted, "To stabilize prices the War Labor Board restricted wage increases but was more lenient in allowing improvements in benefits. Employers responded by offering a variety of benefits in lieu of increased wages.
"Increases in compensation provided during the war period consisted largely of items that were considered 'non-inflationary,' that is, items that did not increase cash wages and, therefore, boost demand. Time off with pay, limited medical care for employees and families, and pension benefits met this requirement."
But all of the researchers, including Mr. Fischer, agree that in the immediate post-war years, the pent-up pressures for wage and benefit increases no longer could be contained.
Labor began to demand both wage increases and increased benefits.
In fact, a commission set up by President Harry S. Truman, trying to mitigate labor disputes in major industries, recommended establishing employer-paid pensions to hold down wage increases and post-war inflation, said Mr. Fischer.
Social Security an impetus
The development of the Social Security System provided another impetus for the growth of private pension programs, said Robert J. Myers, former chief actuary of the Social Security Administration.
Social Security contributed to the formation of pension plans by also bringing more appreciation of the need to provide retirement income to workers.
Almost coincident with the start of World War II on Sept. 1, 1939, Social Security paid its first monthly benefits in January 1940, he said.
"Social Security benefits, despite inflation during and after the war, weren't increased," he said. (Social Security was increased for the first time only with the 1950 amendments to the legislation that created it, he said.) In the 1940s, "workers said, 'Hey, Social Security is not going to amount to anything,' so they wanted (private) pensions."
And, as workers began to seek retirement programs, some companies suggested there was no need for private plans because the government already provided one through Social Security. But often these companies opposed every proposed increase in Social Security, forcing employees to look to their companies to provide private pensions.
In 1946, for example, steel industry officials refused to negotiate pensions with the union. They told labor representatives "a public pension plan already exists called Social Security," said Kenneth S. Kovak, former assistant director of the legislative department, United Steelworkers of America, Washington.
"But the companies had always opposed Social Security increases in benefits," he said.
"Up to that time (the late 1940s), companies wouldn't talk to workers about pensions," said Mr. Fischer, who formerly was an aide to the Steelworkers and the Congress of Industrial Organizations.
The support for pension development came from other areas as well, such as demographic trends. Not until 1930 did people on average begin living past their working lives, making pensions an issue. The life expectancy at birth for males born in 1900 was less than 47 years; in 1930 it was nearly 60 years; and in 1950, almost 66 years, according to the American Council of Life Insurance, Washington.
Also, people began working longer at the same company. Rising wages, giving workers a better standard of current income, also led them to want more in fringe benefits.
Meanwhile, some major federal controls important in the founding of the modern private pension system were instituted a few months after the United States declared war on Japan and Germany in December 1941.
The key one was the Revenue Act of 1942.
Start of modern pension system
"Pension historians regard it (the Revenue Act) as the start of the modern pension system," said Samuel H. Williamson, director of the Center for Pension and Retirement Research, Miami University, Oxford, Ohio.
The Revenue Act, among other features, prohibited qualified retirement plans from discriminating in favor of higher-paid employees.
Thus, companies could only deduct from income taxes contributions to pension plans that covered broad segments of their work force. They could not take deductions for plans that covered only, say, salaried workers.
But Mr. Williamson believes wartime wage and price controls and high corporate tax rates were even more important in spurring pension growth.
Income taxes also were a factor in workers beginning to campaign for pension plans. After the war, rising wages pushed workers' earnings so high they were required to pay income taxes. Before then, few ordinary workers paid income taxes.
And in 1948, the federal government began withholding taxes, said Mr. Fischer.
"So wages became less of an issue and taxes more of an issue," he added.
"Workers began to focus more on other benefits, including pensions and health care."
Workers began agitating for pensions using a number of arguments, including pensions as deferred wages.
In 1946, the United Mine Workers of America campaigned to establish a welfare fund, likening pensions to depreciation on equipment, according to Mr. McGill's book, quoting John L. Lewis, UMW president at the time.
"(T)he cost of caring for the human equity in the coal industry is inherently as valid as the cost of replacement of mining machinery .*.*. or any other factor incident to the production of a ton of coal for consumers' bins," Mr. Lewis is quoted as arguing.
The fact-finding board in the 1949 steel industry labor dispute endorsed the human depreciation concept as an underlying rationale for pensions, according to Mr. McGill: "(A)ll industry .*.*. owes an obligation to workers to provide .*.*. full depreciation in the form of old-age retirement - in the same way as it does now for plant and machinery."
"(H)uman machines, like the inanimate machines, have a definite rate of depreciation."
But at least until major labor rulings after the war, no organization - government or corporate - strongly promoted pension plan formation. Even labor was ambivalent.
Labor becomes proactive
Only during the late 1940s did labor in general begin for the first time to endorse and advocate the creation of corporate pension plans.
In the 1930s, employees "were glad to get wages," or even just a job, Segal's Mr. Paul said, noting how the Depression reduced any demand for retirement benefits.
The union movement was still in its beginnings in the 1930s. "Unions were fighting for recognition," Mr. Paul said. Just in 1937, unions won the right to negotiate for the rank and file after a sit-down strike, Mr. Paul said. So pensions weren't an issue for labor then.
It "would take until the late 1940s before any significant progress would be made" in pension plan creation, Mr. Paul added.
By the late 1940s, "labor's attitude had changed a lot," Mr. Williamson said.
"Up until then unions wanted compensation in wages, not pensions."
During the war, union strength and influence grew greatly as the percentage of the work force belonging to unions grew from 25% in 1940 to more than 35% in 1945.
Mr. McGill, in his study, calls the change in attitude of unions to favor company-sponsor pensions one of the key factors in the growth of the modern private pension system.
"Until the late 1940s or early 1950s, organized labor was, in the main, either indifferent to the pension movement, or openly antagonistic to it," Mr. McGill writes.
"(C)raft unions viewed employer-sponsored pensions as a paternalistic device to wean the allegiance of the workers away from the unions to the employers. They also harbored a fear that pensions would be used to hold down wages."
But since the 1949 steel strike, Mr. McGill writes, "organized labor has been a vigorous and potent force in the expansion of the private pension movement."
The union representatives argued the National Labor Relations Act, which provided fair labor relations guidelines, didn't preclude pensions as a bargaining issue, said Paul Whitehead, lawyer with the United Steelworkers, Pittsburgh.
But "the driving force to our modern pension plan was the union," said Segal's Mr. Paul. "Every union negotiated pension plans after the Inland case."
Inland Steel case critical
The Inland Steel decision was the impetus to the creation or expansion of pension plans in the steel, auto and other industries.
In 1946, the United Steelworkers of America sought to make pensions an issue in their strike, said Mr. Kovak, the former steelworkers' executive. "But the National Labor Relations Act didn't cover pensions," he said. "So we lost that issue in the strike."
The steelworkers, specifically Local 1010 in Indiana Harbor, which represented the workers at the Inland Steel mill in East Chicago, Ind., took the issue to the National Labor Relations Board.
The board ruled in 1948 that Congress intended pensions to be part of wages, and fell under "conditions of employment" mentioned in the act, although not specifically defined. The act imposed the obligation of employers to negotiate fair issues of wages and conditions of employment.
Inland appealed the ruling to the federal courts. The U.S. Court of Appeals for the 7th Circuit upheld the NLRB's ruling.
The decision made pensions a negotiable issue for all unions, not just Steelworkers. The ruling meant a union could legally strike if a company refused to fairly bargain pension issues.
The Steelworkers union, however, couldn't take advantage of the ruling until its three-year contract expired in 1949.
(The ruling covered only active employees, Mr. Whitehead pointed out. Only in 1971, did the U.S. Supreme Court uphold an NLRB ruling making pensions of retirees a negotiable, that is, legally strikable, issue.)
The Steelworkers first used the Inland ruling in their 1949 contract negotiations, which broke down into a strike after the steel companies declined a recommendation by a commission set up by President Truman, trying to mitigate labor disputes in major industries, to establish employer-paid pensions to hold down wage increases and post-war inflation.
The strike was resolved with the company accepting pension terms along the lines suggested by the commission.
Other unions, including the United Auto Workers, soon followed. Pension plans sponsored by non-union companies also grew, in part as a means to keep pressure off of workers from organizing.
General Motors Corp. didn't have a pension plan until 1950, according to a company media relations spokesman. "Before that there was only a voluntary contributory plan for selected high-level employees," he said.
Self-insured plans begin
Once the auto companies established pension plans, they began to revolutionize them by using self-insured plans, Mr. Paul said.
"In their contracts, General Motors Corp. and Ford Motor Co. wanted self-insured pension plans because they wanted to invest in stocks," Mr. Paul said. "Insurance companies invested their assets in bonds, because (the New York state insurance commission made it) illegal to invest pension reserves in common stocks." The state commission was the leading influence in determining insurance rules in other states as well, Mr. Paul said.
"Ford and GM hired banks to manage their pension funds," he added. "Banks had no stock restrictions."
The banks invested in both stocks and bonds. In the bull market sparked by the end of the war and the boom caused by the release of pent-up demand and the reconstruction of Europe and Japan, stocks greatly outperformed bonds, reducing the cost of pension plans.
Other major companies, as they established, expanded or began to fund pension plans, began to follow the auto companies' lead into stocks as well as bonds.
"There was a great expansion of pensions during the war, but not of funding instruments," Mr. McGill said. "At that time they used primarily group deferred annuities."
"Until 1948, you could say the pension business was owned by the insurance industry," Mr. Paul said. "But beginning in 1948, the axis of strength began to shift out of the insurance companies to banks and private consulting firms .*.*.
"The New York insurance commission changed its rule on banning insurance companies from investing in stocks for pension plans in the early 1950s."
This gave insurance companies a chance to compete on an equal footing with banks, as corporations moved from plans funded through annuity contracts to plans funded through managed investment portfolios.
It would be another decade before the shift from insured to non-insured pension plans invested in a mix of stocks and bonds would be complete.
But the shock waves to the economic, industrial relations and investment systems, set into motion by World War II, had by 1950 begun to radically restructure the nation's retirement system and the way its promises were funded and its assets invested.