Ronald Reagan's legacy deeply touches the U.S. retirement system.
Mr. Reagan's success in stimulating the economy by reducing taxation and regulation led to the greatest expansion of the economy since World War II. It propelled the bull market that began in 1982 and essentially lasted until the 2000 bursting of the dot-com bubble, interrupted by only one down calendar year, 1990. That boom led to a giant increase in pension assets, facilitated by their increasing use of equity investments, whose value rose with the rally in the markets.
Pension funds became, as was said at the time, the biggest lump of money in the world.
Under Mr. Reagan's presidency, inflation and interest rates fell, though many business, labor, government and academic experts said that could not happen in the midst of an economic boom and an ever-swelling federal deficit.
That reduction — brought about with the help of Paul Volcker, Federal Reserve chairman appointed by President Carter — produced a bull market in bonds for pension funds and other investors, though it also increased pension liabilities by lowering the discount rate used to value them.
Lower inflation slowed the erosion of purchasing power of pensions, a boon to beneficiaries, many of whom do not receive inflation-adjusted pensions.
Despite the rise in pension assets, Mr. Reagan's administration saw the peak of defined benefit plan growth and the beginning of the decline that continues today. Actions taken during his administration in some ways contributed to the decline.
The enormous rise in merger and acquisition activity, stimulated by surplus pension assets at many companies, led to the termination of scores of pension plans, as corporate raiders often sought to capture those excess assets to help pay for corporate takeovers.
Congress eventually halted terminations to grab excess assets. But the price was high, for taking away a corporate sponsor's ownership of surplus assets gave it less reason to value defined benefit plans. Companies became more willing to freeze or terminate their defined benefit plans. The continuing move away from defined benefit plans is a phenomenon more attributed to the affordability of pension contributions in the face of business competition and changes in career patterns.
Pension security suffered another blow during Mr. Reagan's tenure. Congress passed the Omnibus Reconciliation Act of 1987, which limited funding of defined benefit plans to 150% of the accrued benefit obligation. This reduced companies' ability to fund the plans in good times, and reduced the cushion of assets available to weather difficult times. The adverse affects of that act continue to this day.
Also during the Reagan administration, the 401(k) plan was born. Mr. Reagan's Treasury Department wrote regulations that interpreted tax law to create the 401(k) plan, which coincided with Mr. Reagan's interest in boosting American savings. Later, however, the Reagan administration proposed eliminating 401(k) plans in favor of individual retirement plans. Although it backed off that idea, the administration reduced the amount that could be contributed to a 401(k).
Back in Hollywood, when he was a labor leader as president of the Screen Actors Guild, Mr. Reagan played a critical role in the formation of four union pension funds covering actors, screenwriters, directors and other movie industry personnel.. Those plans today have assets of some $7.5 billion.
As policy-makers and people who influence them reflect on Mr. Reagan's legacy, some economic experts continue to deny the positive impact of Reagan's policies for the economic boom. Instead, they attribute it to the stimulus of government deficit spending. But that's sour grapes and disingenuous analysis; none of them predicted at the time his economic boom.
The success of Mr. Reagan's ideas has led to a general acceptance around the world — even in China and Russia — that promoting a market economy is the best way to stimulate economic development. Nothing contributes to the security of pension benefits as much as a vibrant economy and market, the kind Mr. Reagan engineered.