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Economic History of Retirement in the United States

Joanna Short, Augustana College

One of the most striking changes in the American labor market over the twentieth century has been the virtual disappearance of older men from the labor force. Moen (1987) and Costa (1998) estimate that the labor force participation rate of men age 65 and older declined from 78 percent in 1880 to less than 20 percent in 1990 (see Table 1). In recent decades, the labor force participation rate of somewhat younger men (age 55-64) has been declining as well. When coupled with the increase in life expectancy over this period, it is clear that men today can expect to spend a much larger proportion of their lives in retirement, relative to men living a century ago.

Table 1

Labor Force Participation Rates of Men Age 65 and Over

Year Labor Force Participation Rate (percent)
1850 76.6
1860 76.0
1870 —–
1880 78.0
1890 73.8
1900 65.4
1910 58.1
1920 60.1
1930 58.0
1940 43.5
1950 47.0
1960 40.8
1970 35.2
1980 24.7
1990 18.4
2000 17.5

Sources: Moen (1987), Costa (1998), Bureau of Labor Statistics

Notes: Prior to 1940, ‘gainful employment’ was the standard the U.S. Census used to determine whether or not an individual was working. This standard is similar to the ‘labor force participation’ standard used since 1940. With the exception of the figure for 2000, the data in the table are based on the gainful employment standard.

How can we explain the rise of retirement? Certainly, the development of government programs like Social Security has made retirement more feasible for many people. However, about half of the total decline in the labor force participation of older men from 1880 to 1990 occurred before the first Social Security payments were made in 1940. Therefore, factors other than the Social Security program have influenced the rise of retirement.

In addition to the increase in the prevalence of retirement over the twentieth century, the nature of retirement appears to have changed. In the late nineteenth century, many retirements involved a few years of dependence on children at the end of life. Today, retirement is typically an extended period of self-financed independence and leisure. This article documents trends in the labor force participation of older men, discusses the decision to retire, and examines the causes of the rise of retirement including the role of pensions and government programs.

Trends in U.S. Retirement Behavior

Trends by Gender

Research on the history of retirement focuses on the behavior of men because retirement, in the sense of leaving the labor force permanently in old age after a long career, is a relatively new phenomenon among women. Goldin (1990) concludes that “even as late as 1940, most young working women exited the labor force on marriage, and only a small minority would return.” The employment of married women accelerated after World War II, and recent evidence suggests that the retirement behavior of men and women is now very similar. Gendell (1998) finds that the average age at exit from the labor force in the U.S. was virtually identical for men and women from 1965 to 1995.

Trends by Race and Region

Among older men at the beginning of the twentieth century, labor force participation rates varied greatly by race, region of residence, and occupation. In the early part of the century, older black men were much more likely to be working than older white men. In 1900, for example, 84.1 percent of black men age 65 and over and 64.4 percent of white men were in the labor force. The racial retirement gap remained at about twenty percentage points until 1920, then narrowed dramatically by 1950. After 1950, the racial retirement gap reversed. In recent decades older black men have been slightly less likely to be in the labor force than older white men (see Table 2).

Table 2

Labor Force Participation Rates of Men Age 65 and Over, by Race

Labor Force Participation Rate (percent)
Year White Black
1880 76.7 87.3
1890 —- —-
1900 64.4 84.1
1910 58.5 86.0
1920 57.0 76.8
1930 —- —-
1940 44.1 54.6
1950 48.7 51.3
1960 40.3 37.3
1970 36.6 33.8
1980 27.1 23.7
1990 18.6 15.7
2000 17.8 16.6

Sources: Costa (1998), Bureau of Labor Statistics

Notes: Census data are unavailable for the years 1890 and 1930.

With the exception of the figures for 2000, participation rates are based on the gainful employment standard

Similarly, the labor force participation rate of men age 65 and over living in the South was higher than that of men living in the North in the early twentieth century. In 1900, for example, the labor force participation rate for older Southerners was sixteen percentage points higher than for Northerners. The regional retirement gap began to narrow between 1910 and 1920, and narrowed substantially by 1940 (see Table 3).

Table 3

Labor Force Participation Rates of Men Age 65 and Over, by Region

Labor Force Participation Rate (percent)
Year North South
1880 73.7 85.2
1890 —- —-
1900 66.0 82.9
1910 56.6 72.8
1920 58.8 69.9
1930 —- —-
1940 42.8 49.4
1950 43.2 42.9

Source: Calculated from Ruggles and Sobek, Integrated Public Use Microdata Series for 1880, 1900, 1910, 1920, 1940, and 1950, Version 2.0, 1997

Note: North includes the New England, Middle Atlantic, and North Central regions

South includes the South Atlantic and South Central regions

Differences in retirement behavior by race and region of residence are related. One reason Southerners appear less likely to retire in the late nineteenth and early twentieth centuries is that a relatively large proportion of Southerners were black. In 1900, 90 percent of black households were located in the South (see Maloney on African Americans in this Encyclopedia). In the early part of the century, black men were effectively excluded from skilled occupations. The vast majority worked for low pay as tenant farmers or manual laborers. Even controlling for race, southern per capita income lagged behind the rest of the nation well into the twentieth century. Easterlin (1971) estimates that in 1880, per capita income in the South was only half that in the Midwest, and per capita income remained less than 70 percent of the Midwestern level until 1950. Lower levels of income among blacks, and in the South as a whole during this period, may have made it more difficult for these men to accumulate resources sufficient to rely on in retirement.

Trends by Occupation

Older men living on farms have long been more likely to be working than men living in nonfarm households. In 1900, for example, 80.6 percent of farm residents and 62.7 percent of nonfarm residents over the age of 65 were in the labor force. Durand (1948), Graebner (1980), and others have suggested that older farmers could remain in the labor force longer than urban workers because of help from children or hired labor. Urban workers, on the other hand, were frequently forced to retire once they became physically unable to keep up with the pace of industry.

Despite the large difference in the labor force participation rates of farm and nonfarm residents, the actual gap in the retirement rates of farmers and nonfarmers was not that great. Confusion on this issue stems from the fact that the labor force participation rate of farm residents does not provide a good representation of the retirement behavior of farmers. Moen (1994) and Costa (1995a) point out that farmers frequently moved off the farm in retirement. When the comparison is made by occupation, farmers have labor force participation rates only slightly higher than laborers or skilled workers. Lee (2002) finds that excluding the period 1900-1910 (a period of exceptional growth in the value of farm property), the labor force participation rate of older farmers was on average 9.3 percentage points higher than that of nonfarmers from 1880-1940.

Trends in Living Arrangements

In addition to the overall rise of retirement, and the closing of differences in retirement behavior by race and region, over the twentieth century retired men became much more independent. In 1880, nearly half of retired men lived with children or other relatives. Today, fewer than 5 percent of retired men live with relatives. Costa (1998) finds that between 1910 and 1940, men who were older, had a change in marital status (typically from married to widowed), or had low income were much more likely to live with family members as a dependent. Rising income appears to explain most of the movement away from coresidence, suggesting that the elderly have always preferred to live by themselves, but they have only recently had the means to do so.

Explaining Trends in the Retirement Decision

One way to understand the rise of retirement is to consider the individual retirement decision. In order to retire permanently from the labor force, one must have enough resources to live on to the end of the expected life span. In retirement, one can live on pension income, accumulated savings, and anticipated contributions from family and friends. Without at least the minimum amount of retirement income necessary to survive, the decision-maker has little choice but to remain in the labor force. If the resource constraint is met, individuals choose to retire once the net benefits of retirement (e.g., leisure time) exceed the net benefits of working (labor income less the costs associated with working). From this model, we can predict that anything that increases the costs associated with working, such as advancing age, an illness, or a disability, will increase the probability of retirement. Similarly, an increase in pension income increases the probability of retirement in two ways. First, an increase in pension income makes it more likely the resource constraint will be satisfied. In addition, higher pension income makes it possible to enjoy more leisure in retirement, thereby increasing the net benefits of retirement.

Health Status

Empirically, age, disability, and pension income have all been shown to increase the probability that an individual is retired. In the context of the individual model, we can use this observation to explain the overall rise of retirement. Disability, for example, has been shown to increase the probability of retirement, both today and especially in the past. However, it is unlikely that the rise of retirement was caused by increases in disability rates — advances in health have made the overall population much healthier. Costa (1998), for example, shows that chronic conditions were much more prevalent for the elderly born in the nineteenth century than for men born in the twentieth century.

The Decline of Agriculture

Older farmers are somewhat more likely to be in the labor force than nonfarmers. Furthermore, the proportion of people employed in agriculture has declined steadily, from 51 percent of the work force in 1880, to 17 percent in 1940, to about 2 percent today (Lebergott, 1964). Therefore, as argued by Durand (1948), the decline in agriculture could explain the rise in retirement. Lee (2002) finds, though, that the decline of agriculture only explains about 20 percent of the total rise of retirement from 1880 to 1940. Since most of the shift away from agricultural work occurred before 1940, the decline of agriculture explains even less of the retirement trend since 1940. Thus, the occupational shift away from farming explains part of the rise of retirement. However, the underlying trend has been a long-term increase in the probability of retirement within all occupations.

Rising Income: The Most Likely Explanation

The most likely explanation for the rise of retirement is the overall increase in income, both from labor market earnings and from pensions. Costa (1995b) has shown that the pension income received by Union Army veterans in the early twentieth century had a strong effect on the probability that the veteran was retired. Over the period from 1890 to 1990, economic growth has led to nearly an eightfold increase in real gross domestic product (GDP) per capita. In 1890, GDP per capita was $3430 (in 1996 dollars), which is comparable to the levels of production in Morocco or Jamaica today. In 1990, real GDP per capita was $26,889. On average, Americans today enjoy a standard of living commensurate with eight times the income of Americans living a century ago. More income has made it possible to save for an extended retirement.

Rising income also explains the closing of differences in retirement behavior by race and region by the 1950s. Early in the century blacks and Southerners earned much lower income than Northern whites, but these groups made substantial gains in earnings by 1950. In the second half of the twentieth century, the increasing availability of pension income has also made retirement more attractive. Expansions in Social Security benefits, Medicare, and growth in employer-provided pensions all serve to increase the income available to people in retirement.

Costa (1998) has found that income is now less important to the decision to retire than it once was. In the past, only the rich could afford to retire. Income is no longer a binding constraint. One reason is that Social Security provides a safety net for those who are unable or unwilling to save for retirement. Another reason is that leisure has become much cheaper over the last century. Television, for example, allows people to enjoy concerts and sporting events at a very low price. Golf courses and swimming pools, once available only to the rich, are now publicly provided. Meanwhile, advances in health have allowed people to enjoy leisure and travel well into old age. All of these factors have made retirement so much more attractive that people of all income levels now choose to leave the labor force in old age.

Financing Retirement

Rising income also provided the young with a new strategy for planning for old age and retirement. Ransom and Sutch (1986a,b) and Sundstrom and David (1988) hypothesize that in the nineteenth century men typically used the promise of a bequest as an incentive for children to help their parents in old age. As more opportunities for work off the farm became available, children left home and defaulted on the implicit promise to care for retired parents. Children became an unreliable source of old age support, so parents stopped relying on children — had fewer babies — and began saving (in bank accounts) for retirement.

To support the “babies-to-bank accounts” theory, Sundstrom and David look for evidence of an inheritance-for-old age support bargain between parents and children. They find that many wills, particularly in colonial New England and some ethnic communities in the Midwest, included detailed clauses specifying the care of the surviving parent. When an elderly parent transferred property directly to a child, the contracts were particularly specific, often specifying the amount of food and firewood with which the parent was to be supplied. There is also some evidence that people viewed children and savings as substitute strategies for retirement planning. Haines (1985) uses budget studies from northern industrial workers in 1890 and finds a negative relationship between the number of children and the savings rate. Short (2001) conducts similar studies for southern men that indicate the two strategies were not substitutes until at least 1920. This suggests that the transition from babies to bank accounts occurred later in the South, only as income began to approach northern levels.

Pensions and Government Retirement Programs

Military and Municipal Pensions (1781-1934)

In addition to the rise in labor market income, the availability of pension income greatly increased with the development of Social Security and the expansion of private (employer-provided) pensions. In the U.S., public (government-provided) pensions originated with the military pensions that have been available to disabled veterans and widows since the colonial era. Military pensions became available to a large proportion of Americans after the Civil War, when the federal government provided pensions to Union Army widows and veterans disabled in the war. The Union Army pension program expanded greatly as a result of the Pension Act of 1890. As a result of this law, pensions were available for all veterans age 65 and over who had served more than 90 days and were honorably discharged, regardless of current employment status. In 1900, about 20 percent of all white men age 55 and over received a Union Army pension. The Union Army pension was generous even by today’s standards. Costa (1995b) finds that the average pension replaced about 30 percent of the income of a laborer. At its peak of nearly one million pensioners in 1902, the program consumed about 30 percent of the federal budget.

Each of the formerly Confederate states also provided pensions to its Confederate veterans. Most southern states began paying pensions to veterans disabled in the war and to war widows around 1880. These pensions were gradually liberalized to include most poor or disabled veterans and their widows. Confederate veteran pensions were much less generous than Union Army pensions. By 1910, the average Confederate pension was only about one-third the amount awarded to the average Union veteran.

By the early twentieth century, state and municipal governments also began paying pensions to their employees. Most major cities provided pensions for their firemen and police officers. By 1916, 33 states had passed retirement provisions for teachers. In addition, some states provided limited pensions to poor elderly residents. By 1934, 28 states had established these pension programs (See Craig in this Encyclopedia for more on public pensions).

Private Pensions (1875-1934)

As military and civil service pensions became available to more men, private firms began offering pensions to their employees. The American Express Company developed the first formal pension in 1875. Railroads, among the largest employers in the country, also began providing pensions in the late nineteenth century. Williamson (1992) finds that early pension plans, like that of the Pennsylvania Railroad, were funded entirely by the employer. Thirty years of service were required to qualify for a pension, and retirement was mandatory at age 70. Because of the lengthy service requirement and mandatory retirement provision, firms viewed pensions as a way to reduce labor turnover and as a more humane way to remove older, less productive employees. In addition, the 1926 Revenue Act excluded from current taxation all income earned in pension trusts. This tax advantage provided additional incentive for firms to provide pensions. By 1930, a majority of large firms had adopted pension plans, covering about 20 percent of all industrial workers.

In the early twentieth century, labor unions also provided pensions to their members. By 1928, thirteen unions paid pension benefits. Most of these were craft unions, whose members were typically employed by smaller firms that did not provide pensions.

Most private pensions survived the Great Depression. Exceptions were those plans that were funded under a ‘pay as you go’ system — where benefits were paid out of current earnings, rather than from built-up reserves. Many union pensions were financed under this system, and hence failed in the 1930s. Thanks to strong political allies, the struggling railroad pensions were taken over by the federal government in 1937.

Social Security (1935-1991)

The Social Security system was designed in 1935 to extend pension benefits to those not covered by a private pension plan. The Social Security Act consisted of two programs, Old Age Assistance (OAA) and Old Age Insurance (OAI). The OAA program provided federal matching funds to subsidize state old age pension programs. The availability of federal funds quickly motivated many states to develop a pension program or to increase benefits. By 1950, 22 percent of the population age 65 and over received OAA benefits. The OAA program peaked at this point, though, as the newly liberalized OAI program began to dominate Social Security. The OAI program is administered by the federal government, and financed by payroll taxes. Retirees (and later, survivors, dependents of retirees, and the disabled) who have paid into the system are eligible to receive benefits. The program remained small until 1950, when coverage was extended to include farm and domestic workers, and average benefits were increased by 77 percent. In 1965, the Social Security Act was amended to include Medicare, which provides health insurance to the elderly. The Social Security program continued to expand in the late 1960s and early 1970s — benefits increased 13 percent in 1968, another 15 percent in 1969, and 20 percent in 1972.

In the late 1970s and early 1980s Congress was finally forced to slow the growth of Social Security benefits, as the struggling economy introduced the possibility that the program would not be able to pay beneficiaries. In 1977, the formula for determining benefits was adjusted downward. Reforms in 1983 included the delay of a cost-of-living adjustment, the taxation of up to half of benefits, and payroll tax increases.

Today, Social Security benefits are the main source of retirement income for most retirees. Poterba, Venti, and Wise (1994) find that Social Security wealth was three times as large as all the other financial assets of those age 65-69 in 1991. The role of Social Security benefits in the budgets of elderly households varies greatly. In elderly households with less than $10,000 in income in 1990, 75 percent of income came from Social Security. Higher income households gain larger shares of income from earnings, asset income, and private pensions. In households with $30,000 to $50,000 in income, less than 30 percent was derived from Social Security.

The Growth of Private Pensions (1935-2000)

Even in the shadow of the Social Security system, employer-provided pensions continued to grow. The Wage and Salary Act of 1942 froze wages in an attempt to contain wartime inflation. In order to attract employees in a tight labor market, firms increasingly offered generous pensions. Providing pensions had the additional benefit that the firm’s contributions were tax deductible. Therefore, pensions provided firms with a convenient tax shelter from high wartime tax rates. From 1940 to 1960, the number of people covered by private pensions increased from 3.7 million to 23 million, or to nearly 30 percent of the labor force.

In the 1960s and 1970s, the federal government acted to regulate private pensions, and to provide tax incentives (like those for employer-provided pensions) for those without access to private pensions to save for retirement. Since 1962, the self-employed have been able to establish ‘Keogh plans’ — tax deferred accounts for retirement savings. In 1974, the Employment Retirement Income Security Act (ERISA) regulated private pensions to ensure their solvency. Under this law, firms are required to follow funding requirements and to insure against unexpected events that could cause insolvency. To further level the playing field, ERISA provided those not covered by a private pension with the option of saving in a tax-deductible Individual Retirement Account (IRA). The option of saving in a tax-advantaged IRA was extended to everyone in 1981.

Over the last thirty years, the type of pension plan that firms offer employees has shifted from ‘defined benefit’ to ‘defined contribution’ plans. Defined benefit plans, like Social Security, specify the amount of benefits the retiree will receive. Defined contribution plans, on the other hand, specify only how much the employer will contribute to the plan. Actual benefits then depend on the performance of the pension investments. The switch from defined benefit to defined contribution plans therefore shifts the risk of poor investment performance from the employer to the employee. The employee stands to benefit, though, because the high long-run average returns on stock market investments may lead to a larger retirement nest egg. Recently, 401(k) plans have become a popular type of pension plan, particularly in the service industries. These plans typically involve voluntary employee contributions that are tax deductible to the employee, employer matching of these contributions, and more choice as far as how the pension is invested.

Summary and Conclusions

The retirement pattern we see today, typically involving decades of self-financed leisure, developed gradually over the last century. Economic historians have shown that rising labor market and pension income largely explain the dramatic rise of retirement. Rather than being pushed out of the labor force because of increasing obsolescence, older men have increasingly chosen to use their rising income to finance an earlier exit from the labor force. In addition to rising income, the decline of agriculture, advances in health, and the declining cost of leisure have contributed to the popularity of retirement. Rising income has also provided the young with a new strategy for planning for old age and retirement. Instead of being dependent on children in retirement, men today save for their own, more independent, retirement.


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Citation: Short, Joanna. “Economic History of Retirement in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. September 30, 2002. URL