Retirement Is Only 150 Years Old (And We're Still Getting It Wrong)

Have you ever stopped to think about how weird retirement actually is? As a concept, it's barely 150 years old — and the version we know today is even younger than that.

In this episode, we're going back to the beginning. Before we can talk about 401(k)s, retirement planning, or building wealth for your future, it's important to understand where retirement came from in the first place — because it didn't come from where most people think.

We'll cover how ancient Rome used retirement benefits as a political tool, why Otto von Bismarck essentially invented the modern pension in 1880s Germany (and why he did it), how the Great Depression forced the United States to create Social Security, and why the pension system that defined mid-century retirement was already showing cracks by the 1970s.

Retirement wasn't created out of generosity. It was created out of necessity. And understanding that changes how you think about planning for your own.
Next episode: The Revenue Act of 1978 — and the completely accidental way it transformed retirement in America forever.

Chapters:
00:00:00 – Retirement Is Weirder Than You Think
00:01:59 – Ancient Rome Had Pensions (For Selfish Reasons)
00:03:16 – How One German Politician Invented Modern Retirement
00:06:20 – America's Slow and Scattered Start
00:06:53 – The Great Depression Changed Everything
00:07:48 – The Golden Age of Pensions
00:09:32 – Why the System Started Breaking Down

Transcript

Have you ever stopped to think how weird the concept of retirement actually is? I know, I'm sure you probably haven't, but to be honest with you, it actually is something that I've thought about more and more as of late. I mean, this whole idea that people over the age of 65 just decide to stop working and start living off savings, it's a brand new concept. It's something that in the grand stage of human history, only just started happening. Because humans have been around for thousands and thousands and thousands of years, but the modern concept of retirement is really only about 150 years old. And even then, the retirement as we know it now is even younger. So retirement isn't a natural thing. It's a purely human invention, but it exists because of politics, economics, longer lifespans, and employer incentives. So I've decided that I want to take a step back with the show and really start at the beginning, revisit retirement and its history. And then from there, we're going to move forward again with the overall concept of retirement, planning for it, and of course, how the 401k fits into it all. But let's talk first about retirement before retirement, or at least retirement, how we know it today. I mean, most of human history, people worked until they die. And if older adults did make it to a stage of life where they could no longer work, they relied on family support or community support. If they're fortunate enough to own land, then they maybe didn't have to work. But a lot of times they didn't have those three things. They then relied on charity because retirement requires two things that most societies did not have if we're looking back at history. Those are extra money and then enough years of life after work. I mean, most people did not live that long. It's only until recent history that we've seen life expectancies reach as high as they are. Now, there are some early global examples of retirement. One of the maybe better known is the Roman military. And they're maybe the ones who set the precedent, if you will. Roman leaders offered benefits to retired soldiers. It was sort of a form of, you served, now you're taken care of. But this wasn't necessarily retirement for everyone. And it really had an ulterior motive. It wasn't really a, oh, thank you for serving. No, it was, we really are scared about you possibly rising up against us in the future. We kind of want to reduce the likelihood of that happening. So let's go ahead and pay for your retirement. I mean, it was really the Roman Empire just trying to keep itself in charge, if you will. So the idea existed, but it definitely wasn't widespread. It would take many, many more years for the birth of the modern retirement, if you will. And so we have to go back all the way to the 1880s in Germany, actually, to find where sort of modern retirement really got its birth, if you will. And really, here's why it happened. Back in the 1880s, Germany was going through a period of rapid change, especially socially and politically. They still had the German Kaiser at that time. And Otto von Bismarck, I think I'm getting the name right. Yeah, Otto von Bismarck, he was the chancellor of Germany at that time, who was really responsible for the overall unification of the country. He was having issues with workers' movements and a rise of Marxism. It was around this time that Marxism was first coming into the common lexicon, if you will. And Bismarck was looking at things, going, kind of see some trouble on the horizon. So what am I going to do? And he decided to create government social programs to help reduce the unrest. The idea that the state protects you, you're less likely to revolt against it. So he created this idea of retirement. Workers over the age of 70 were essentially forced out of the workforce and told, "You will get a state-funded pension." So again, retirement wasn't created because the government was feeling sentimental and wanted to give a thank you to older workers. It was, "We really need to get you out of the workforce so that the younger folks have jobs and they are less likely to cause a revolution." It was really the need for stability that created the modern retirement, at least in its early days back in Germany. Now, why didn't retirement take off? I don't think it's too hard to really understand the appeal of retirement, but there were a lot of driving forces that led to modern retirement as we know it. Industrialization, first and foremost, changed the overall nature of work. Farmwork could adapt to aging, but factory work really punished aging. So as we moved from agrarian societies to industrial societies, it was necessary to have a younger workforce and older workers necessarily weren't built for the factory environment. And urbanization as a result of this industrialization really weakened the family safety net. Families started spreading out. They weren't all living under the same roof. So older adults couldn't always live with adult children so they didn't have that family safety net that they could have relied on in years past. Top of that, we've got longer life spans. Retirement doesn't only matter if you live long enough to experience it, and now humans are starting to live longer and long enough to retirement. Another big shift that led to retirement really taking hold is a growing middle class. More people had wages, they had predictable income, they had disposable wealth. And so it's, what do you do with this disposable wealth? Well, you start to save it for the future. And then of course, there was an economic need to make room. I already alluded to what happened in Germany, how the older workers were taking jobs from the younger workers. Well, that's kind of exactly what's happening here is that there's an economic need to make room. Retirement moves older workers out so that younger workers can come in and start earning for themselves. And employers start seeing retirement as a tool. It's a workforce management tool. It's a way to say, okay, we can bring in some younger folks with some higher energy levels who will also be cheaper than those who are older. So retirement is a way to get the older folks out and get younger people in. Now the US before social security kind of had a rough start when it came to retirement. The United States didn't necessarily jump in right away. There was no national retirement system early on. There were the occasional pension programs that existed. Some municipalities and local governments put out some pension programs for their people. Railroads definitely were one of the early adopters of these pension systems and there were other patchwork arrangements over the years. But retirement was a privilege. It wasn't necessarily a default. Most people still in the early days of retirement in the United States, they still worked as long as they physically could. There still wasn't a safety net in place. But here comes the 1930s. There is massive societal shift as a result of the Great Depression. The government is really coming in and trying to figure out how they can help. And the Social Security Administration is created and now we have the Social Security System. The Great Depression caused massive unemployment, caused poverty among older Americans especially. Families are strained. Savings were entirely wiped out by the stock market crash. So Social Security arrives and creates sort of a baseline income floor. Makes retirement feel more like an official thing. It was definitely the start of, okay, retirement is a thing here in the United States. When it introduced the idea of a national retirement age and a structure built around it. But Social Security didn't just provide money, it normalized retirement as an overall stage of life. And as a result of that, we started seeing the rise of pension programs. They were the first privately funded retirement system here in the United States. Pensions grew as a major retirement engine during the mid century. Employers offered guaranteed income after work. It was sort of a thank you, if you will, for all of your years of service. And it was very common in large corporations, government jobs, and then especially union supported workplaces. And they really took off because there were strong corporate profits and there was a lot of growth in the post war eras. And workers wanted a lot of stability and employers wanted retention and predictability. The aspects of the economy back then enabled all of this to happen. And pensions reinforced the idea of career to retirement. You worked for the same place for 30, 40 years, and then they took care of you after that. Pensions made retirement feel like a finish line that you could actually reach. And so by the 1970s, we have a system in place.(...) Retirement has become a mainstream expectation and it has pillars supporting it. One, you have social security, which is the foundation. Then you have pensions for many, many workers, especially in larger employers, which at that time really dominated the economy. And then there were personal savings involved, but really it was those first two things that really propped up retirement in its early days. But then we started to see cracks beginning to form. It was like, oh shoot, the party maybe can't last as long as we had hoped. Employers began realizing that pension programs are very, very expensive, especially the bigger that they get. And then the workforce and the economy began shifting. We went from a very industrialized society to one that is now becoming more and more dominated by other industries like finance, healthcare, and technology. And so the next era is about to really define who carries the responsibility for retirement. So looking back at it, retirement didn't always exist. And in the grand scheme of things, it's a brand new concept. It was invented because society needed it to. It was starting to evolve in a way, especially because people were living longer and so retirement started to take hold. But it's really important to realize that we're still really figuring things out. We have no idea what the next 10, 20, 30 years is going to hold. So while we do have some history to learn from, there's not a lot of history here to learn from. So we're still kind of making mistakes as we go. And I think we made early mistakes early on with the pension system, because all of a sudden we had all of these people in this pension system that ultimately wasn't sustainable. Social security is another thing that we're finding out isn't sustainable. So by the 1970s, these cracks are beginning to form. Companies are starting to be very concerned about what's going to happen with their pension programs. Workers are also concerned as well. And it's a question of where do we go from here? I mean, at that point, retirement as people knew it in the modern sense was only about 30 or 40 years old. And already we're reaching an inflection point about what's going to happen next. Well, in my next episode, what I'm going to talk about is something that did happen. We'll discuss the Revenue Act of 1978 and how it really changed the landscape as we know it for retirement. But what's very interesting about the Revenue Act of 1978 is that its impact on retirement in the United States was purely by accident. So that'll be the next episode.