View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Vanderbilt Electronic Thesis and Dissertation Archive The New York Stock Exchange and the Transformation of Retirement in America By Paula Kathleen Gajewski Dissertation Submitted to the Faculty of the Graduate School of Vanderbilt University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY in History May, 2016 Nashville, Tennessee Approved: David L. Carlton, Ph.D. Peter L. Rousseau, Ph.D. Thomas Alan Schwartz, Ph.D. Daniel H. Usner, Jr., Ph.D. Copyright © 2016 by Paula Kathleen Gajewski All Rights Reserved For my mother. Judith Martin Gajewski, 1944 – 2009. iii ACKNOWLEDGEMENTS I would like to acknowledge the support, both financial and otherwise, of the following: Vanderbilt University Department of History Vanderbilt University Graduate School of Arts and Sciences The Business History Conference and the Newcomen Dissertation Colloquium The Gilder Lehrman Institute of American History The New-York Historical Society Summerschool on Finance, Institutions, and History at Università Ca' Foscari, Venice, Italy The Special Collections and University Archives, Rutgers University Libraries, particularly archivist Larry Weimer The New York Stock Exchange Archives, particularly archivist Janet Linde Also: Jane Anderson, Richard Blackett, Marjorie Denise Brown, David Carlton, Donna Grundberg, Brenda Hummel, Natalie Inman, Deanna Matheuszik and Leo, Rowena Olegario, Mark Rose, Peter Rousseau, Tom Schwartz, Janice Traflet, Dan Usner, Heidi Welch, and Wilson Wong. And: Georgina Gajewski, Nicholas Gajewski, and Nick & In Suk Gajewski iv TABLE OF CONTENTS Page DEDICATION ............................................................................................................................... iii ACKNOWLEDGEMENTS ........................................................................................................... iv LIST OF FIGURES ....................................................................................................................... vi Chapters Introduction ......................................................................................................................................1 I. The Creation of Retirement .....................................................................................................21 II. Pensions Challenge the Traditions of the New York Stock Exchange ...................................62 The Great Depression and reform .........................................................................................88 III. The New York Stock Exchange Fights Deregulation ............................................................95 Investing by institutions .......................................................................................................100 Negotiated commissions .......................................................................................................114 IV. Congress Achieves Meaningful Pension Reform .................................................................130 V. Implementation and Aftermath .............................................................................................186 From defined benefit to defined contribution .......................................................................214 Conclusions ..................................................................................................................................227 REFERENCES ............................................................................................................................236 v LIST OF FIGURES Figure Page 1. Harrison A. Williams ...............................................................................................................144 2. Jacob Javits ..............................................................................................................................144 vi INTRODUCTION Retirement poses a challenge for a majority of Americans. Social Security payments are not adequate to maintain the standard of living that people enjoyed while working.1 People rely on their retirement funds to make up the difference. These can take a variety of forms, including the 401(k), which is standard in the corporate environment; the pension, most commonly provided to government workers; and personal retirement accounts, such as the Individual Retirement Account (IRA). Besides their function, one thing all of these methods have in common is investment in the stock market.2 The media is quick to remind us that 401(k) accounts fluctuate with the market, but pension plans also depend on the performance of their investments in order to make their seemingly more stable payments.3 Whether someone will have a comfortable retirement, or be able to retire when they wish, depends on the performance of the stock market, something that most Americans consider to be totally outside their control. How did this happen? The short answer is that two tracks of government regulation – that of the private pension industry and that of the securities markets – crossed paths in an unexpected way in the mid- 1970s. Simultaneous changes were happening in the way Wall Street operated, and in the way 1 http://wealthmanagement.com/retirement-planning/traditional-pensions-did-golden-age-ever-exist. March 30, 2015. Mark Miller, Notes on Retirement. Social Security replaces a little more than one third of the median worker’s pre-retirement income, and this is expected to decrease over time, according to the National Academy of Social Insurance. 2 According to a 2009 study by the Employee Benefit Research Institute (EBRI), during the 2008 recession, 401(k) accounts with balances greater than $200,000 lost, on average, more than 25% of their value. https://www.ebri.org/publications/ib/?fa=ibDisp&content_id=4192 The Impact of the Recent Financial Crisis on 401(k) Account Balances, February 2009, EBRI Issue Brief 326 3 See for example the CBS 60 Minutes Special, Retirement Dream Disappear with 401(k)s; 4/17/2009. http://www.cbsnews.com/news/retirement-dreams-disappear-with-401ks 1 that retirement pensions were being financed. The power and size of the institutions that were investing pension funds began to threaten the openness of the nation’s capital markets. The New York Stock Exchange (NYSE), in response, was forced to allow open competition between stockbrokers for the first time in its history. This drew investing back into the Exchange, where it was under the regulation of the Securities and Exchange Commission (SEC). While this was happening, the NYSE began to actively seek out retirement investors, both institutional and individual, in order to recover from the upheaval caused by competition. At the same time, Congress passed the first comprehensive private pension regulation, the Employee Retirement Income Security Act (ERISA), in an attempt to curtail the power of pension institutions and to guarantee the rights of employees with regard to their retirement. Instead of complying with the onerous regulations ERISA imposed, many retirement plan sponsors either terminated their plans or transformed them from a traditional defined benefit structure, in which retirement payments are fixed and guaranteed, to a defined contribution structure, in which only the amounts of the contributions to the fund are fixed, and the payments may vary.4 This change effectively shifted the responsibility of retirement investing from employer to employee. In attempting to protect private pensions, the government inadvertently created a situation in which not only were corporations able to transfer retirement onto the shoulders of individual employees, but also one in which the only way for individuals to bear that responsibility was to depend even more on institutions and Wall Street. 4 James A Wooten, The Employee Retirement Income Security Act of 1974: a political history (Berkeley and Los Angeles: University of California Press, 2004); Steven A. Sass, The Promise of Private Pensions: the first hundred years (Cambridge, MA and London: Harvard University Press, 1997); Dan M. McGill and Donald S. Grubbs, Jr., Fundamentals of Private Pensions (Homewood, Ill. : Published for the Pension Research Council, Wharton School, University of Pennsylvania by Irwin, 1989); William Graebner, A History of Retirement: the meaning and function of an American institution, 1885-1978 (New Haven and London: Yale University Press, 1980); Martin Neil Baily and Jacob Funk Kirkegaard, US Pension Reform: Lessons from Other Countries (Washington, DC: Peterson Institute for International Economics, 2009), 386. 2 To understand the evolution of private pensions it is necessary to understand their changing purpose, which is in fact something that the pension industry has had trouble doing. Private pensions began as a gift from employer to loyal employee. Their intent was the same as that of early public pensions, which was to provide security.5 At the beginning of the twentieth century, there was no such thing as retirement as we think of it today. As the economy transitioned from agriculture into industry, workers faced an earlier obsolescence. The age limit for safely moving steel, for example, was much lower than that for planting crops. The first pensions provided subsistence level amounts, primarily to disabled workers or to survivors of workers killed on the job. The efforts of early reformers, which culminated in the creation of a national plan, Social Security, similarly