Consider next the second class of plans under this group, namely, those proposing a uniform deduction of a given per cent from all salaries for the purpose of creating a general fund out of which to pay uniform annuities to all employees on retirement. This is still more unfair to the long-service men, as we shall see. Suppose it is desired to retire all employees receiving $1,200 salary on three-quarters pay, or $900 a year. The price charged by many of the insurance companies for a life annuity of $900 a year, beginning at age 70, first payment in one year, is $6,678. To accumulate $6,678 during a service of fifty years requires a monthly deduction from a monthly salary of $100 of but $3.57 if the deductions are improved by 4 per cent compound interest. That is all the man beginning at age 20 would have to set aside each month. But, on the other hand, to accumulate $6,678 during the ten years of service of a man who entered the service at 60, or who was already 60 years of age when the plan was put into operation, would require a deduction from a monthly salary of $100 a month of $45.37, or 45.37 per cent an impossible deduction under any circumstance. To make this plan practical it is therefore necessary to decide upon a per cent to be deducted from all salaries which shall be sufficiently large to accumulate not merely annuities for those entering the service at an early age, but also to provide the amounts that the older men lack to retire themselves on the same annuity. It thus appears that this plan puts even a greater penalty than does the first on entrance into the service at an early age. (Appendix C, Table V.)

These illustrations are sufficient, I think, to show how impossible it is to devise an equitable plan as between all employees of various ages, based upon a uniform deduction of a given per cent from all salaries, either to pay annuities based upon length of service or to pay uniform annuities to all employees upon retirement at a given age.

Aside from the inequitable phase of all of these plans, there arises the very difficult and perplexing actuarial problem of what annuity could safely be paid where the fund is created by a uniform deduction of a given per cent from all salaries, or what per cent of salaries would be required to create the fund when more or less uniform annuities are paid. In many instances the uncertainty of these complex problems is further complicated by relying for a portion of the fund upon forfeiture of interest or principal, or both, by those who resign or die prior to reaching the retirement age, and if the establishment of the fund has any influence upon resignations, as it is intended to have, the very foundation of this estimate is entirely undermined. Besides, these plans usually put a premium on entering the service at advanced ages, since the total contributions by persons so entering are much less in proportion to the annuities they receive by reason of their shorter period of service, whereas the interests of the service demand that the reverse should obtain.

Since any error of judgment as to what might be accomplished in the way of annuities by a uniform deduction of a given per cent from all salaries would undoubtedly mean a call upon Congress for assistance, and possibly lead to the establishment of a civil pension, it seemed probable that any plan that contemplated the commingling of assets and that was dependent upon uncertain elements, such as length of service, resignations, salary increase, deaths, forfeitures, and the like, could not meet with favor on final analysis.

1

After considering all these facts, I came to the conclusion that any plan for the retirement of superannuated civil-service employees for which the approval of employees themselves and the public alike is desired must meet the following conditions:

(1) The funds necessary for the payment of the annuities must be furnished by the employees themselves without expense to the Government other than possibly the payment by the Government of a reasonable rate of interest on the money held by it and the payment of salaries to the clerical force required to keep the accounts and distribute the funds.

(2) Each employee must set aside the amount necessary to create his own annuity, without regard to the deposits of others, so that each employee may receive full return on the money set aside by him.

(3) The annuities to be paid employees on retirement must be graduated according to length of service and amount of salary, and in such manner that the monthly deposits required from employees for the creation of such annuities shall be in no case excessive.

(4) The annuities, if any, for services rendered prior to the adoption of the plan should be paid by the Government, rather than by any form of tax upon the younger employees.

(It was for this last reason I decided that the plan should be divided into two parts: That the first part, which is really the plan proper since the operation of the second part will ultimately cease with the death or separation from the service of all the present employees should provide annuities for employees rendering service from now on, and the second part should provide annuities for employees who rendered service prior to the adoption of the plan. This sharp division was made primarily in the interest of the long-service employee and incidentally the public service also-so that every employee would receive the full benefit of his savings and every employee receive the same annuity as if his deposits had begun with his entrance into the service. Let us consider at present only the first part of the plan.)

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Having adopted these principles as essential to an equitable plan of retirement, the practical question presents itself of what annuity may be thought reasonable for a person who has given his entire working life-from the age of 20 to 70 years-to the Government service. It seemed to me that such a person should be retired on at least threequarters pay," or 75 per cent of his salary. If this is a reasonable assumption, a convenient basis for computing annuities for periods of service longer or shorter than fifty years may be established by dividing 75 per cent by fifty years of service. This gives 1.5 per cent for each year of service as the basis for computing annuities for all other periods of service. For example, the annuity for forty years of service that is, for a person entering the service at age 30 and retiring at age 70-would be determined by multiplying 40 by 1.5, which would give us 60 per cent of salary. For a person entering the service at age 40, and having thirty years to serve before reaching the retirement age, the annuity would be computed by multiplying 30 by 1.5, which would give us 45 per cent of salary. And so on down, so that a person entering the service at 60 years of age, and having ten years to serve, would provide an annuity for himself equal to 1.5 per cent of his pay for each of his ten years of service, or 15 per

cent. This provision has the advantage of giving the largest annuity in proportion to salary to the employee serving the longest period.

The second practical question is to determine what per cent of salaries at various ages of entrance into the service would have to be set aside by each individual in order to provide himself with an annuity equal to 1.5 per cent of his salary for each year of service. To illustrate: If a person enters the service at the age of 20 years and retires at 70 years of age, he will have been in the service fifty years. To make the illustration simple, let us assume that he received a salary of $1,200 per annum straight through. One and one-half per cent of this annual salary is $18. By multiplying this amount, $18, by 50, his number of years of service, we have $900, or the amount of the annuity we wish to provide for on arrival of the employee at the age of retirement.

The price charged a male by many of the insurance companies for $100 annuity at the age of 70 years is $742. Therefore, on this basis the cost of an annuity of $900 beginning at age 70 would be 9 times $742, or $6,678. This last-named figure is accordingly the amount that the employee would be required to accumulate during his fifty years of service to purchase this annuity. Now, the next step in our calculation is to ascertain the amount the employee would be required to lay aside monthly in order to accumulate $6,678 during his fifty years of service. By referring to an interest table we find that a deposit of $1 a month improved by 4 per cent interest, compounded annually, in fifty years amounts to $1,871.48. Therefore it would require a deduction from this employee's pay of as many dollars a month as $1,871.48 is contained in $6,678, or $3.57 a month. Three dollars and fifty-seven cents being the deduction from a salary of $100, it also represents the per cent to be deducted from all other salaries of persons entering the service at 20 years of age where the retirement age is to be 70 years. This process of obtaining the required deduction from the employee's pay seems rather complicated, but in actual practice the operation is very simple, and may be further simplified by reducing the deductions from various salaries at all ages to a set of tables. The figures on this slip of paper are all that are necessary to determine the amount.

Mr. DOUGLAS. How do you get the divisor?

Mr. BROWN. The divisor, $1,871, is the amount of $1 per month compounded at 4 per cent per annum for fifty years. If you divide $6,678, the necessary amount to purchase the annuity, by $1,781, you get the monthly deduction.

Mr. DOUGLAS. What is the average length of service in the Departments?

Mr. BROWN. I have not any idea. That would be very difficult to tell.

Mr. DOUGLAS. I presume very few of the employees remain fifty years?

Mr. BROWN. That is almost the maximum. I might be able to ascertain the average length of service by making a study of the records of the Civil Service Commission, but so far I have not done that.

Mr. EDWARDS. The deduction amounts to $3.57 cents a month? Mr. BROWN. Yes, sir; that is the deduction that would be made from the salary of a person entering the service at 20 years of age at a

salary of $100 per month. The deduction, of course, increases as the age of entering the service increases. The deduction from a salary of a person entering the service at a given age remains the same and only increases as his salary increases.

The CHAIRMAN. Suppose a man had only twenty years' service; give us an illustration of that.

Mr. BROWN. If a man entered the service at 50 years of age and retired at 70 years of age, he would be required to provide for himself an annuity of 30 per cent of his salary, that is, 1 per cent of his salary for each of the twenty years, and the cost of that would be determined in the same way as the illustration I have just given. In this instance, if the employee's salary was $1,200 per annum, the annuity to be provided would be determined by multiplying 11⁄2 per cent of $1,200, or $18, by 20, his years of service between the ages of 50 and 70. This gives us $360, which is the amount of the annuity to be provided for. As in the former instance, the cost of an annuity of $100, beginning at age of 70, is $742. By multiplying $742 by 3.6, the number of hundred dollars of annuity, we determine the amount to be accumulated during the employee's twenty years' of service, or $2,671. This figure, divided by the amount to which a deposit of $1 per month will accumulate in twenty years if compounded annually at 4 per cent, or $365, gives us the monthly deduction from his salary, which is $7.32.

Mr. DOUGLAS. As I understand it, this is a suggestion that the Government or the employee shall voluntarily deduct this amount each month from his salary?

Mr. BROWN. It should be a compulsory deduction.

Mr. DOUGLAS. You deduct from his salary each month such a sum as will purchase for him an annuity at the end of a given period of service?

Mr. BROWN. Yes, sir.

Mr. EDWARDS. The services are in three groups, as I understand it? Mr. BROWN. Yes, sir.

The CHAIRMAN. Will you please read the bill which you have suggested?

Mr. BROWN. Yes, sir.

That beginning with the first day of July next following the passage of this act there shall be deducted and withheld from the monthly salary, pay, or compensation of every officer or employee of the United States to whom this act applies an amount that will be sufficient, with interest thereon at four per centum per annum, compounded annually, to purchase from the United States, under the provisions of this act, an annuity for every such employee on arrival at the age of retirement as hereinafter provided equal to one and onehalf per centum of his annual salary, pay, or compensation for every full year of service or major fraction thereof between the date of the passage of this act and the arrival of the employee at the age of retirement.

The CHAIRMAN. What is the age of retirement?

Mr. BROWN. Three ages of retirement are contemplated-60, 65, and 70 years of age. A man engaged in one of the more strenuous occupations, such as the railway mail service, would require an earlier retirement age than a person employed as a clerk. It would seem that a man actively engaged in the railway mail service up to 60 years of age would be ready to retire. The age of 65 would apply to employees such as letter carriers, and 70 years of age to clerks.

Mr. EDWARDS. It is compulsory at those ages, under this bill, for them to retire?

Mr. BROWN. Yes, sir; It is compulsory, but there is a provision in the bill that the employee may be retained in the service after that time if he is mentally and physically qualified to perform his duties.

The deductions hereby provided for shall be based on such annuity table as the Secretary of the Treasury may direct, and interest at the rate of four per centum per annum, compounded annually, and shall be varied to correspond to any change in the salary of the employee.

The CHAIRMAN. What do you mean by that last sentence?

Mr. BROWN. At each increase in salary the deduction from the employee's pay would be correspondingly increased. The increased deduction would be based on the amount of the increase in salary and the term of years remaining before attaining the age of retirement. The amount thus obtained would be added to the deduction that was being made under the old salary. For example, let us take an employee receiving a salary of $1,200. At age 35 this employee was promoted to $1,400. The amount of increase in his salary is $200, or $16.66 per month. The deduction from salaries of persons entering the service at 35 is 5.2 per cent. Therefore 5.2 per cent of $16.66, or 87 cents, would be the amount to be added to whatever monthly deduction was being made before his promotion.

The CHAIRMAN. Is the annuity to be based upon the salary he receives at the time of retirement?

Mr. BROWN. No, sir; the annuity would be based on the salary actually received by him from time to time during his entire service. Mr. EDWARDS. As I understand, the amount of deduction from his salary is based upon the salary he is getting each year?

Mr. BROWN. That is correct.

The CHAIRMAN. The amount deducted from each man's salary goes into a general fund and he gets back exactly what he contributes? Mr. BROWN. Yes, sir; he gets back exactly what he contributes with interest at 4 per cent compounded annually.

The CHAIRMAN. He does not get anything from anyone else? Theoretically each man provides an annuity for himself?

Mr. BROWN. Yes, sir. His annuity is not dependent upon contributions from any other person.

Mr. DOUGLAS. I do not see why the deductions should increase with the increase of his salary. On this basis $3.57 would produce $6,678 at the end of fifty years. If that is the sum that is necessary to provide him an annuity of $900, why, because his salary is increased, should the deduction be increased?

Mr. BROWN. You want the annuity on retirement to be equal to 1 per cent of his salary for each year that he has been in the service. If he entered the service at 20 years of age at a salary of $1,200 per annum, the amount deducted from his salary would be the amount you stated, $3.57, and the deduction would continue at that amount as long as his salary remained at $1,200, because a monthly deduction of $3.57 between the ages of 20 and 70, if improved by 4 per cent compound interest, will amount to $6,678, which is the price of an annuity of $900 per annum beginning at age 70, and $900 is equal to 1 per cent of his salary for each of his fifty years of service. Now, if at the age of 35 his salary were increased to $2,000, the monthly deduction from his salary would have to be increased in order that