STRAIGHT-PENSION PLANS VERSUS CONTRIBUTORY PLANS.

The Commission on Economy and Efficiency has given consideration to the various plans that have been proposed for the retirement of superannuated employees, and finds that they may be divided into two groups:

First, noncontributory plans-commonly referred to as straight pensions-proposing the payment of annuities to the superannuated employees out of the Federal Treasury; and,

Second, contributory plans proposing the deduction of stated. sums-more or less adequate for the purpose in view-from the salaries of all employees out of which to pay annuities to retiring employees.

OBJECTIONS TO STRAIGHT-PENSION PLANS.

The first group of plans-those proposing the payment of annuities out of the Federal Treasury-are found on analysis to be so costly and so demoralizing to the service as to make them incompatible with any general scheme for economy and efficiency in the public service.

The cost of a civil pension in every country where it has been tried for any considerable length of time is admittedly very great. However modest the pension roll in the beginning, it is bound inevitably to grow in length and increase in costliness as time goes on. This is due to the fact that, under any system which legalizes a draft on the Public Treasury, there is a constant tendency to extend its benefits to new classes of public servants and to the dependents of deceased employees. Under an elective Government, where those who control the pension must depend on popular favor for their power, there is a constant tendency also to lower the retirement age in order to serve some political interest by creating a vacancy. Indeed, a pension system may easily become, in the hands of unscrupulous politicians, a means of removing political opponents to make places for political adherents. This situation may even develop in a country where there is a strong sentiment in favor of promotion on merit, for a certain number of offices are likely always to be in the appointive class and therefore not filled by promotion from below. If the incumbents of these offices can be removed without serious opposition on their part by retiring them in the prime of life on life pensions, the ministers of a hostile party are very likely to be strongly tempted, as was the case 20 years ago in Canada, to eliminate them. thus at the expense of the public. This can be accomplished only at immense expense to the people, since the cost of a life annuity at the younger ages is so much greater than at the older ages.

COSTLINESS OF STRAIGHT-PENSION PLAN.

A system of pensions paid from the Public Treasury usually starts with a simple provision that employees who have served a given number of years shall, on reaching a certain age, be retired on an allowance. This allowance is customarily on the average salary received by the employee during the last three or five years of service. In the beginning, the system is attractive to the employee because the pension appears to be an addition to his compensation. The system once established, the pension is, in the very nature of things, regarded by the employee as something to which he has a right. Before long the families of employees who die a short time before being placed on pension, or soon after retirement, begin to complain that the loss of the pension on the death of the employee, who perhaps has served the Government long and faithfully, is a hardship to which they should not be subjected, and a movement is then set on foot to continue the pension to the widows and orphans of such employees. This extension of the pension benefits to the families of deceased employees increases the expenditures for pensions at an enormous rate, and finally the expenditures for pensions are regarded by the Government as a part of the expenditures for salaries, being spoken of, for instance, in England as "the ineffective vote" in contrast to "the effective vote" or salary list. Salaries are naturally fixed thereafter with respect to the value of the prospective pension, and persons considering the advisability of entering the public service. must, in the very nature of things, consider the pension in deciding whether they will accept Government employment. With new entrants, the prospective pension is even a greater and more direct consideration for the service rendered than it is with the old incumbents, showing that it comes inevitably to be regarded as part of the compensation of the office. The result is that the pension tends to keep the current pay inadequate. In England, for instance, pensionable employees receive less compensation than nonpensionable employees. Furthermore, until the benefits are extended to the widows and orphans, the pension system works an injustice against the families of those who die in the service, since it prevents them from receiving the deferred portion of the employees' pay. Viewed in its proper light, therefore, the civil pension must be regarded as a pure tontine in which all persons lose except those who succeed in three things: Living to a certain age, remaining in the service until that age, and living beyond that age long enough to get back the value of their theoretical contributions.

EXPERIENCE OF ENGLAND WITH STRAIGHT-PENSION SYSTEM.

In this connection, the experience of England is especially noteworthy and illuminating. A free and universal pension system for

the benefit of civil servants was established in 1859. The system was popular at first, but soon came to be regarded with dislike by the civil servants. They ceased to consider it as a pure gratuity and came to think of it as a benefit paid for by themselves out of reductions in salary, since nonpensionable employees were shown to be better paid than pensionable. Since statistics showed also that not more than one out of seven entrants into the service remained to pensionable age, they saw that their pensions were subject to large chances of forfeiture by death or resignation and that their families were then worse off than would have been the case had there been no pension system. Approximately 70,000 of the 100,000 individuals in the service in 1902 organized themselves into a committee called the deferred-pay committee, in order to agitate for a change in the pension system. Their claim that pensions were deferred pay was sustained by the royal commission appointed to inquire into the matter, and the employees then demanded that, on separation from the service, the value of part of their theoretical contributions, should, in justice to their families, be returned to them either in the form of insurance or in cash. The pension system was accordingly modified as follows: The pensions have been reduced from one-sixtieth to one-eightieth of salary for each year of service, but in addition to his pension the employee is given a cash sum equal to one-thirtieth of his salary for each year of service, with a maximum of a year and a half's pay, and the families of those who die after five years of service receive a lump sum equal to one year's salary.

England's experience in granting pensions to its civil employees is fully discussed in a recent report entitled "Civil Service Retirement in England and New Zealand," published as Senate Document No. 290, Sixty-first Congress, second session. The conclusions reached in that report are as follows:

The important point to note is that the commission conceded that something was deducted from the employee's pay for the purpose of pensioning him at the end of his period of service. The English pension is therefore not a free and absolute system of gratuities at all, but a system of theoretical contributions from the employees' salaries, more or less adequate to pay the benefits given. Whatever it may have been in the beginning, that is what it has become through the policy-a policy sure to develop under a system of gratuities, human nature being what it is-of taking the pension into consideration in fixing salaries.

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The question whether the present improved system is absolutely equitable as between individuals is difficult of satisfactory answer. It has been shown that it is more equitable than the old system; but it can not be shown whether the amounts received by the employee in the form of pension, insurance, and cash-surrender values correspond with the amounts contributed by him, since it has not been ascertained what percentage of salary is withheld as a contribution. The Courtney commission maintained that the theoretically contributed sum is no more, in the aggregate, than the amount required for pensions, but this does not prove that the sum contributed by any individual may not be more or less than what he should equitably contribute. A deduction of a given percentage of salary may be entirely adequate to furnish given

benefits for a young man, while a deduction of the same percentage of salary will be quite inadequate to provide the same benefits for an old man. The failure of the Courtney commission to gratify the request of the employees for a full investigation into the subject so that the amounts actually withheld might be definitely determined makes any redistribution of benefits merely a guess rather than an exact calculation. In the absence of the necessary data it is therefore impossible to answer the question: Is the present system absolutely equitable as between individuals?

While it is to be assumed that the calculations made by the actuaries are unimpeachable, it is to be noted that those calculations were limited in scope and undertaken merely to ascertain what benefits could be given by reducing the pension one-quarter. The problem of the actuaries was to distribute equitably a definite sum. They were not asked to go further back and devise a contributory scheme that would be just as between the state and the individual or equitable as between different classes of individuals. The amended system is held to be merely a scheme of redistribution, but it should not be forgotten that only one-quarter of the amount to be distributed has been subject to actuarial calculation. Whether the other three-quarters have been equitably distributed can not be stated.

One thing, however, can be definitely stated regarding the present system in comparison with a system where the contributions are actually instead of only theoretically paid, and where they are funded and invested at interest. It is less economical. Under the existing system, the necessary sum is appropriated each year out of the Treasury for the payment of pensions. This sum amounts to from 16 to 20 per cent, in the various departments, of the sums paid for salaries. Under a contributory system, the necessary sum would be accumulated gradually from many contributions invested at interest. By reason of the fact that with the help of compound interest at the rate of 3 per cent per annum, the sum of a given contribution per annum will double itself in the course of a service of 42 years, and at 34 per cent in 36 years, and at 4 per cent in 31 years, it follows that the total contributions of an employee who serves 40 years need be less than half the amount required by direct appropriation from the Treasury to give the same pension. The question naturally suggests itself then: Why would it not be a wiser distribution of funds, if the British Government in appropriating a sum for the maintenance of civil establishments (including an amount for salaries and another amount for pensions) should increase the salaries by the amount of the sum spent for pensions, but require employees to pay out of their salaries a contribution sufficient to meet the cost of pensions? The net result of thus preferring a scheme of actual contributions to one of theoretical contributions would be a general increase in salaries without increasing the appropriations for either salaries or pensions, thus effecting a saving of money to the employees that, under present conditions, is lost. (See Civil Service Retirement in Great Britain and New Zealand, S. Doc. No. 290, 61st Cong., 2d sess., pp. 183-185.)

In view of this experience, the commission can not recommend any system of retirement allowances to be granted as a reward for services inadequately paid for at the time the service is rendered, for it believes that the civil employees should receive proper and adequate compensation for their services at the time the services are rendered.

DEMORALIZING EFFECT OF STRAIGHT-PENSION SYSTEM ON GOVERNMENT SERVICE.

Besides burdening the Government with an enormous expense for personal services, which, in the nature of the contract, can not be distributed among the employees in proportion to the value of the

services rendered, a straight pension is objectionable because it promotes inefficiency. The argument is advanced by those who favor the straight pension that the pension should be regarded not as part payment for services rendered but as a reward for continuity of service. This is in fact a distinction without a difference, since a reward must, in the nature of things, be a compensation for some service rendered. Whatever the theory advanced, the Government is unable in practice to prevent the employee from taking the value of the pension into consideration, whether his service be of long or short duration. The promise of the reward is considered by the employee as a part of his contract of employment. As soon as the Government establishes this system of rewards for continuity of service, it must immediately devise ways and means of honorably terminating the contract with employees whom it is desirable to remove. This means that it is necessary to establish a scale of surrender values which must be given employees dismissed from the service to compensate them for the loss of the pension which they have partly earned. This again results in an enormous increase in the expense of running the Government offices, but there is no escape for the Government that has once adopted a straight pension unless it abandons its standard of efficiency. The two horns of the dilemma which it thus creates for itself are either retention in office of all the inefficients who are under the age of retirement or the increase of the pension charge by the amount paid to all those removed before pensionable age. There is no escape through the contention that the pension is to be awarded only in case of faithful or efficient service, since whether the service rendered has been of a quality that would entitle the employee to a pension is always debatable. Certainly without a system of "gratuities" or "compensation for loss of office" in addition to the pension system the dismissal of the inefficient becomes difficult, if not almost impossible, since it is hard for the superior officer to cause his subordinate not only loss of position, especially if he is without resources and has a family dependent on him, but also loss of the pension which he has partly earned and which he counts as an asset of office as much as he does his salary. The result of this reluctance in such cases must be a breaking down of the moral tone of the whole service.

Nor is this the whole catalogue of evils sure to spring from adopting the theory that a pension is a reward for continuity of service. Not only is the Government forced to protect itself against the retention of the incompetent by granting them a compensation for loss of office, but it is logically obliged then to grant a gratuity to those who voluntarily retire from the service before reaching pensionable age. To do otherwise would be to put a premium on inefficiency.