This Labor Day will mark the 50th anniversary of the passage of the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA is a landmark piece of comprehensive bipartisan legislation governing private sector employee benefits, particularly retirement plans and accounts. It passed through an orderly Congressional process nearly unanimously, with the full support of President Nixon, after more than ten years of careful study, discussion, and debate. Although it has been amended and updated many times since its initial passage, it is appropriate to evaluate whether ERISA has succeeded on the terms that its authors put forward.

Senator Jacob Javits—Republican from New York and the main creator and advocate for ERISA—claimed it would “encourage, rather than discourage, growth in the private pension system because it will renew the confidence of working people in the security and performance of the private pension promise.” “Most workers will be able truly to retire at retirement age and live decently,” he said on the Senate floor. “This legislation will make better pension plans and undeniably, better pension plans will make a significant contribution to the economic security of large numbers of older people who need a much more realistic level of living in retirement. Even a substantially liberalized Social Security could not do the job private pensions can do.”

ERISA established minimum vesting standards—nonforfeitable rights of an individual, after a few years, to receive a future retirement benefit or assets based on his earned credits or contributions made on his behalf. It requires a plan’s sponsor to permit an employee to participate in a retirement plan as long as he is above a minimum age and period of service. For defined benefit plans, whether sponsored by a single-employer or a union-multiemployer arrangement, stricter funding rules were put in place to pay for the economic costs of legally defined pension benefits earned; these requirements have been strengthened over the years, especially for single-employer plans.

Furthermore, new auditing, reporting, and disclosure requirements—both to plan participants and to the federal government—were imposed. In order to assure that most pension obligations be met in the event that a defined benefit plan terminates before full funding is achieved, a federal insurance agency, the Pension Benefit Guaranty Corporation (“PBGC”), was established, funded by premiums paid by sponsors and resources captured from bankruptcies. Increased tax incentives were given to self-employed persons to set up retirement plans, and any worker not covered by an employer plan could establish an individual retirement account (“IRA”) to enjoy the same tax advantage as covered workers. Additionally, portability of benefits was encouraged by allowing tax-free rollovers to and from IRAs. ERISA imposed stricter fiduciary standards on plan sponsors and administrators, for diversified, prudent, and conflict-free investing. All of these provisions are enforced by the IRS and the Department of Labor or private legal actions.

What is the historical record on the primary claims of ERISA’s authors?

It is largely favorable, with some notable exceptions. Before ERISA, many single-employer defined benefit plans failed and even long-serving participants and retirees suffered large losses. After ERISA, these plans were insured, leading to worker and retiree losses being minimized and no general government revenues being transferred. Recently, the PBGC insurance fund for single-employer plans has had few claims; it currently has a $44 billion net positive position and its future prospects are good. By contrast, the PBGC insurance fund for multiemployer plans, under weak funding requirements, was bailed out in 2021 and its future prospects are still doubtful.

According to researchers at the Social Security Administration, in 1976, only 31 percent of households aged 65 and older got any non-Social Security retirement plan or account income, 25 percent were below the poverty line, and almost 30 percent received almost all of their income from social security benefits. By contrast, in 2015, 69 percent of individuals got income from retirement plans or accounts, only 7.1 percent were in poverty, and only 13.8 percent relied nearly entirely on Social Security. Moreover, when looking at the total income among individuals aged 65 or older by source, retirement plans and accounts account for 36 percent and Social Security only 30 percent. Finally, retirement plan participation by workers in the private sector has also improved somewhat over the years, from 48 percent in 1999 to 53 percent in 2023, according to the Bureau of Labor Statistics.

So, on net, ERISA seems to have worked out well. There are still flaws—state and local government workers are at risk from pensions that are often poorly funded, with risky investments and long vesting periods. But in the thoughtful and bipartisan process that led to ERISA and whose flexible and adaptive tradition, and relatively low draw on the federal budget, continues in subsequent retirement legislation may lie the formula for public policy success.

Dr. Warshawsky was Assistant Secretary of Economic Policy at the Treasury Department leading the Bush Administration’s effort on pension reform that resulted in the Pension Protection Act of 2006. 

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