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A survey of the development of pensions in the United States, addressing such issues as what employees want from pensions, what incentives the employer has to create pensions, and what desirable effects industrial pensions have on the economy.Pensions are retirement insurance: They offer protection in case you live long enough to quit collecting a paycheck and can stop working. In the United States, pensions are provided by both public and private sectors. Private sector pension funds are the largest formal financial institution for lifecycle saving, with assets of trillions of dollars.Pensions developed when more traditional forms of lifecycle saving became more difficult to carry out, job tenure increased, and there was a movement away from the spot labor market. Employers wanted to create a stable, experienced work force that was reluctant to leave --- that is, a stock of firm specific human capital. Thus they had an incentive to create a deferred wage. And workers wanted retirement insurance that was secure. As developing countries begin to employ an older work force with longer job tenure, the demand for defined benefit pensions will rise.Which institution can best provide pensions: the employer, a financial intermediary, or the state? If markets fluctuate because of financial instability, workers will prefer defined benefit plans, and they will want them to be provided by the institution in which they have the most faith.Funding is important in the long run. Sound accounting practices would dictate that the cumulative reserves match pension liabilities as they accumulate. The regular contribution to these funds would be the deferred part of the wage. But historically, in the United States, pensions were funded only when profits were high or tax incentives or regulation dictated.Developing countries will need a sound corporate tax structure and must be willing to forgo some immediate tax revenue, to create a large pension savings fund.This paper --- a joint product of the Finance and Private Sector Development Division, Policy Research Department, and the Financial Sector Development Department --- was presented at a Bank seminar, "Financial History: Lessons of the Past for Reformers of the Present," and is a chapter in a forthcoming volume, Reforming Finance: Some Lessons from History, edited by Gerard Caprio, Jr. and Dimitri Vittas. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Daniele Evans, room N9061, telephone 2024738526, fax 2025221955, Internet address pinfo@worldbank. org. (21 pages)The full report is available on the World Bank FTP server
