Three-Legged Stool: Meaning, Overview, History

And what does it have to do with retirement?

The “three-legged stool” is an old phrase that many financial planners once used to describe the three most common sources of retirement income: Social Security, employee pensions, and personal savings. It was expected that this trio would together provide a solid financial foundation for the senior years. None of the three was expected to support most retirees on its own.

Times have changed, though, and so has the three-legged stool.

Key Takeaways

  • The “three-legged stool” is an old term for the trio of common sources of retirement income: Social Security, pensions, and personal savings.
  • One leg of the stool, pensions, has been replaced by defined-contribution plans that place the investment burden on the individual.
  • Another leg of the stool, Social Security, is looking rickety, with predictions that the system could run out of reserves as early as 2033.

A New Leg to the Stool

For younger workers in the private sector, the pension leg has mostly been replaced. Instead of a pension—a.k.a. a “defined-benefit plan,” which was funded by a combination of company and employee contributions—workers now have 401(k) and other defined-contribution plans, also known as retirement savings accounts.

Originally, these retirement savings plans were never meant to serve as a pension; they were to be supplementary savings accounts, building up the third leg of the stool. Nevertheless, ever since the 1990s, employers have been systemically saving themselves money and financial responsibility by replacing the guaranteed corporate pension with these tax-advantaged plans. Some companies will match the employee contribution up to a certain percentage, but many do not even offer that degree of assistance.

Traditional pensions, officially known as defined-benefit plans, guarantee a given amount of monthly income in retirement and place the investment and longevity risk on the plan provider. Defined-contribution plans, such as 401(k)s, place the investment and longevity risk on individual employees, asking them to choose their own retirement investments with no guaranteed minimum or maximum benefits.

The State of Social Security

As for Social Security, the 2021 Annual Report of the Social Security Board of Trustees warned that the Social Security Trust Fund could run dry within two decades at the current rate of output: “The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2033... At that time, the fund's reserves will become depleted and continuing tax income will be sufficient to pay 76% of scheduled benefits."

Of course, the emphasis is on the hypothetical; it's still not fully known what the lasting effects of the COVID-19 pandemic will be. The projections also do not account for rising interest rates, increased revenue, or several other factors. Finally, it is unlikely that the U.S. government will let a meltdown happen without stepping in.

Nevertheless, it is a date that still causes concern. Workers in the United States can go online and review their Social Security accounts to see how much in benefits they are slated to receive at early retirement, full retirement, and age 70.

Personal Savings for Retirement Remain Low

That leaves our third leg, personal savings. Savings rates have been extremely low for U.S. workers over the last decade—recessions and stagnant wages have made it tough to put money aside. Nevertheless, with the rest of the stool looking wobbly, individuals will need to start saving a larger portion of their income and continue to utilize tax-advantaged retirement plans such as IRAs and annuities to build their retirement nest eggs.


The percentage of your paycheck that financial advisors recommend regularly investing in a retirement savings account.

Financial advisors recommend earmarking at least one-fifth of your annual earnings for retirement. The earlier you start, the better set up you are to take advantage of compounding investment returns. At the very least, advisors recommend contributing enough to your 401(k) to max out the employer match, if your employer offers one.

The Bottom Line

With pensions being replaced by retirement savings accounts, we're almost down to a two-legged stool—not something you could actually rest on securely. The government has debated possible solutions to Americans' retirement-savings issues, including hybrid pension plans, creating national or state-level retirement savings plans for people who do not have one offered through their work and even opening up the federal Thrift Savings Plan (a defined-contribution plan, currently available to government employees and those in uniformed service) to all Americans. It is also weighing options to prop up Social Security, and ensuring it doesn't run out of funds.

In the meantime, it may help to think of tax-advantaged retirement plans as the stool's second leg and work on building up the third leg with other savings, including investments such as real estate. Or maybe we just need a new metaphor.

Article Sources
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  1. Joint Economic Committee. "Retirement Insecurity," Pages 3-4.

  2. Social Security Administration. "A Summary of the 2021 Annual Reports."

  3. U.S. Office of Personnel Management. "My Annuity Benefits, Thrift Savings Plan."

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