Economics of Aging

The Evolution of the Old-Age Retirement Income Support System

Retirement and retirement income systems are relatively new and evolving institutions. Paradoxically, industrialization created both the need and the opportunity for the nation's “old-age retirement income support system.” Improvements in nutrition, sanitation, and public health led to more people reaching old age and living longer once they were there. A growing economy raised living standards, providing new opportunities for leisure as well as for the expansion of public and private income and health protections for older Americans. Movement from agricultural and small-scale production to manufacturing production raised wages even as it increased insecurity. Workers became subject to the vagaries of economic cycles. Employers, often interested in workers who could keep up with the speed and dexterity demands of new technologies, required orderly means of turning over their workforces. Unions wanted employment opportunities in the growing manufacturing economy for younger members.

American workers and their families needed protection against many identifiable risks—risks related to disabling industrial accidents, deaths of workers, and old age as well as risks related to outliving one's savings or seeing retirement incomes eroded by inflation. Then, as is the case now, pensions—both public and private—provided a partial solution to the needs of working persons while simultaneously addressing the interests of employers and unions. By the mid-1950s, “retirement” had emerged as a new institution and as a normative expectation of older Americans.

Although income from employer pensions, employment, assets, and welfare is important, Social Security—the Old-Age, Survivors, and Disability [Page 180]Insurance (OASDI) program—is the heart and soul of the nation's retirement income system. Based on the social insurance approach to economic security, the program is designed to provide universal protections for the American public against selected risks. In exchange for making modest payments through regular employer and employee payroll tax contributions over the course of their work lives, working Americans earn for themselves and their families the right to benefits when earnings are lost as a result of retirement, long-term severe disability, or death. Because social insurance, unlike private insurance or private pensions, is designed to provide widespread basic protection, the system provides proportionally larger benefits to low-wage workers, even though high-wage workers generally receive larger monthly benefit amounts. Social Security was intended as a supplement to personal savings, employer-provided pensions, and (for some) earnings from continued work during their old-age years—not as the sole source of income that it often is.

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