The 1942 Revenue and Stabilization Acts birthed employer retirement accounts

Evidence

In 1942, two acts of Congress—the Revenue Act and the Stabilization Act—incentivized employers to create pensions and offer other benefits. Pensions, which are typically sponsored by an employer or union, allow both workers and companies to set a portion of their earnings into a retirement account. Workers avoid paying taxes on the contribution, or on any interest earned on the account, which is typically invested. There are two different types of employment-based retirement accounts: defined benefit plans and defined contribution plans. Defined benefit plans, more commonly referred to as pensions, are generally found in union-represented workplaces. A defined benefit plan guarantees a payout at retirement, regardless of how much is invested. It’s low-risk for employees and puts the burden of the payout on the employer—which is why employers don’t like them, and in recent decades have shifted toward defined contribution plans. Defined contribution plans like 401(k) accounts, which are now the most common kind of employment-based retirement plan, depend on worker contributions, sometimes with employer-matched funds. They also don’t guarantee income; if, at retirement, a worker’s account balance is $1,000, that’s the sum total of the worker’s retirement benefit. — Dorothy A. Brown, The Whiteness of Wealth, 355

Categorization

• DEFINE: Distinguishes defined benefit pensions (unionized workplaces) from defined contribution 401(k)s — the mechanism by which the post-1942 tax incentive landscape shaped who could build retirement wealth.