(3) This sum allows for annuities to persons of retiring age who might remain in the service after reaching that age in accordance with the provision contained in section 4 of the proposed bill. BECAUSE CALCULATION MAKES NO ALLOWANCE FOR RESIGNATION. The cost of annuities for past services could be discounted by the probability of living, since tables of mortality, which show this, are available, but it could not be discounted by the probability of resigning, since there are no available data on which a table of resignations could be constructed. A very great margin of safety is, therefore, undoubtedly secured by ignoring resignations in making the estimates of possible cost. Generally speaking, the rate of resignation is usually held to be, roughly, equal to the mortality. Mr. Miles M. Dawson, the wellknown actuary, states, indeed that it is much greater. In an article on the value and cost of service pensions, he says: There is another view of the cost which in practice has, perhaps, more significance to the employer than even the foregoing, and that is: To what percentage addition to the entire pay roll is it equivalent? This involves calculations based upon rates of withdrawal and dismissal from the service, and these rates would differ so widely in different employments that it would be useless to undertake to estimate this cost. It is, however, a matter of common observation that in most employments withdrawals and dismissals greatly outnumber the deaths.1 While it can not be shown with any definiteness how much this maximum cost must be discounted to allow for the resignations, it can be shown that they will probably be numerous enough to prevent the amount of the annual appropriation ever reaching anything like the maximum sums shown in Table XXVIII. This table shows that the possible appropriation increases gradually from $1,121,795, becoming a little over $2,000,000 six years after the adoption of the plan, a little over $3,000,000 in 20 years, and reaching its maximum of $3,495,463 in 28 years, after which it falls off, gradually at first and very rapidly at the last, until in 78 years it has entirely disappeared. But these figures are based on 170,228 individuals, and assume that not one of the employees now in the service entitled to an annuity for back services will resign before reaching the age of retirement, and that all employees included in the calculation have received their present salaries from the date of their original appointments. It is certain, of course, that many will resign, and that many employees have received lower salaries in the past than they are receiving at present. It is therefore equally certain that the sum required must be considerably less than the maximum given. 1 See "Value and cost of service pensions," by Miles M. Dawson, The Railway Age, Sept. 2, 1904. The important question, then, with reference to the cost of putting the plan into operation throughout the classified service, is this: What effect will the establishment of the plan have on the rate of resignations in the service? It will undoubtedly have a tendency to discourage resignations. This effect will be most marked among the employees who have reached advanced ages, but it will be less and less pronounced the farther away the employee is from the age of retirement. It will be least noticeable, owing to the remoteness of the benefit offered, on those who have been in the service the shortest time, and that really means almost half the service, since census reports show that 48.2 per cent of those now in the executive civil service have worked for the Government less than five years.1 It follows, therefore, that if allowance is to be made for resignations only, the sum of $1,121,795, estimated as the maximum cost the first year, if 170,228 employees are included in the plan, would be about the true sum required for that year, because few employees 70 years of age and over would be likely to resign just before they became entitled to retirement allowances, but with each additional year the increasing excessiveness of the estimated annual appropriation becomes more apparent, the number of resignations for which no allowance has been made increasing with remoteness from the age of retirement. BECAUSE CALCULATION IS BASED ON PRESENT SALARIES INSTEAD OF AVERAGE SALARIES. Census Bulletin No. 94 shows that the average compensation of employees in the executive civil service is lowest in the younger ages and highest in the older ages. The average compensation of employees from 20 to 24 years of age is $785, while for those from 70 to 74 years of age the average compensation is $1,125. In the District of Columbia the average compensation ranges from $781 for employees from 20 to 24 years of age, to $1,263 for employees 70 to 74 years of age. The calculations of cost for annuities for back services have been made on the basis of present salaries, and as the salaries for employees increase, in the great majority of cases, with age, the present salaries of those under consideration are higher than their average salaries and therefore the estimate of cost is greater by reason of that fact than the actual cost would be. BECAUSE CALCULATION MAKES NO ALLOWANCE FOR RETENTION OF PERSONS IN THE SERVICE AFTER THE AGE OF RETIREMENT. There would undoubtedly be numerous employees whose interest in their work and whose efficiency would make desirable their continuance in office after reaching the age of retirement in accordance 1 See Census Bulletin 94, p. 27. with the provision contained in section 4 of the proposed bill. Others who had entered the service late in life would remain a few years beyond the age of retirement in order to increase the amount of their annuities. The retention of every such individual would reduce the total payment of annuities for back services. From the foregoing it will be seen that the calculated cost of annuities for back services is in excess of reality by the amount of annuities saved through resignation of persons before reaching the age of retirement, plus the difference between the amount of annuities based on final salaries and the amount of annuities provided for the bill based on aggregate salary, plus the amount of annuities saved through retention of persons in the service after the age of retirement. CALCULATION INCLUDES PAYMENT ON BACK SERVICES TO ALL PRESENT EMPLOYEES. It is true, of course, that those in the service who are now at the age of retirement represent the residue of a service that was much smaller at the time of their entrance into it than is the case now on their leaving it. It may be suggested that, since the service is larger now than it was when those now at the age of 70 entered it, the number who will be eligible for retirement in 28 years—the year of estimated maximum cost-will be correspondingly large and the annuities payable for back services accordingly greater. It should be remembered, however, that to offset this is the fact that those who reach the retirement age 28 years hence will have been providing for their own annuities by 28 years of savings and the Government, instead of having to pay annuities for the full period of service, as will be necessary the first year of the plan, will only provide for annuities on the difference between the full period and 28 years. COST OF PUTTING PLAN INTO OPERATION UNDER GILLETT BILL. Calculations as to the cost of putting into operation the Gillett bill (H. R. 22013), favorably reported by the Committee on Reform in the Civil Service, House of Representatives, have also been made by the author. Like the calculations on the cost of the Perkins bill, they were carried through 78 years, or to the year when, according to the mortality table used, all in the service at the time of the passage of the bill, would be dead. They show that the cost of putting into effect throughout the service the Gillett bill (which is similar in all essential respects to the Perkins bill but limits the amount which the Government will contribute for any one individual for services rendered prior to the adoption of the bill to a sum which, with the annuity provided by the individual's own contributions, will not exceed $600 a year), would be $87,055,280. COMPARISON OF COST OF PERKINS AND GILLETT BILLS. The cost of putting into effect the Perkins bill (S. 1944) throughout the classified service being $130,581,273, and the cost of putting into effect the Gillett bill (H. R. 22013) throughout the service being $87,055,280, in the course of the next 78 years, it follows that the difference in cost between the two bills would be $43,525,993, as shown by the following table: 1 TABLE XXXI.-Showing total and comparative cost to the Government of establishing plan for retiring employees under terms of Perkins bill (S. 1944) and Gillett bill (H. R. 22013). 1 For cost of pension paid wholly from the Public Treasury see pages 48-52. |