It seems that one of the constants of human existence is the misperception of today’s generations that they are the first to ever face a certain situation. And that even applies to the challenges pension funds face, as a recent paper shows.

Pension plans, like economies themselves, experience booms and busts, observes Mark Higgins in A Pirate Looks at Forty-One: Lessons from the Rise and Fall of America’s First Funded Pension Plan. In this SSRN paper, he notes that by the end of 2021, many public pension schemes were in a stronger position than many had anticipated, and that their coverage levels, like their private sector counterparts, had risen sharply. But history teaches that boom times are often followed by lean times, Higgins points out.

Not only that, Higgins says, the experience of the first funded pension plan in US history is instructive in that regard — and serves as a stark warning.

The plan

The first funded pension plan in the United States, says Higgins, was the US Navy pension plan. It grew out of the formation of a formal Navy. In the early days of independence, the United States not only had a small standing navy, but also relied on the activity of privateers who hired it. But that posed the risk of an uprising, so the government devised a price system as an incentive to enlist in the navy. This pricing system funded the Navy’s retirement plan.

Congress established a committee to oversee the Navy’s retirement plan, Higgins reports; the Ministers of War, the Navy, and the Treasury drafted it. He notes that similar to today’s similar bodies, this first committee had members with different levels of experience in managing investments; Furthermore, they had limited time to devote to these endeavors, and the turnover of individuals in these roles hampered the development of much of the institutional knowledge.

Funds from the plan could be used only for the benefit of Navy personnel and their families, and initially the only investments Congress permitted were investments in government bonds, Higgins notes. Prize money started flowing in 1800, and then the plan bought government bonds, which yielded around 7%. By 1808 the plan had $200,000 and the interest income covered benefits the disbursed plan. The plan expanded its investments to include stocks and then buying bank stocks, Higgins says; By 1818 the plan had raised $700,000.

In 1813, during the War of 1812, Congress extended entitlement to benefits to widows and orphans of marines, and in 1817 increased those benefit levels. However, in the early 1820s these increases were rescinded. However, Congress expanded the benefits again in early 1837, just before the Great Depression that followed that year. Among the events that occurred during this depression was the failure of banks holding large amounts of the plan’s investments. And the expansion of benefits required the liquidation of assets; By 1841 they were all gone and the plan became pay-as-you-go.


Higgins argues that the Navy’s experience is instructive and that the lessons learned are just as relevant now. These, he says, include:

1. Be wary of political interference in operating a pension plan and managing its investments.
2. If you’re thinking about expanding benefits, think about the long-term implications.
3. Manage the risk that arises from the reversal of asset class returns.
4. Remain skeptical when entering unfamiliar markets.

Higgins suggests that trustees of contemporary plans can avoid such mistakes by considering the impact they had on that first pension plan.


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