/ ^,A ■Qi- Cy ^ A CRITICAL ANALYSIS OF INDUSTRIAL PENSION SYSTEMS jH^^ THE MACMILLAN COMPANY NEW YORK • BOSTON • CHICAGO • DALLAS ATLANTA • SAN FRANCISCO MACMILLAN & CO.. Lmiteb LONDON • BOMBAY • CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, Lnx TOKONTO A CRITICAL ANALYSIS OF INDUSTRIAL PENSION SYSTEMS BY LUTHER CONANT, Jr. THE MACMILLAN COMPANY 1922 All rights reserved FEINTED IN THE UNITED STATES OP AMERICA Copyright, 1922, By the macmillan company Set up and printed. Published September, 1922. Press of J. J. Little & Ives Company New York, U. S. A. Cto U5-a7 PREFATOEY NOTE In offering this volume on industrial pension sys- tems to the public the undersigned desires to explain that the material was gathered in the course of an investigation of the pension problem made for the Bemis Bro. Bag Company, of which Mr. A. F. Bemis is President, and that it is through their courtesy that the information thus assembled is made available for publication. It ohould be understood, however, that ^ the Bemis Bro. Bag Company assumes no responsi- ) bility either for the accuracy of the results or for any f^ opinions, expressed or implied. LUTHEK CONANT, Jb. 248 Boylston Street Boston, Mass. n: r^ 4i Hi Q^^ CONTENTS CHAPTER PAGE I. Purposes of Pension Systems Introductory 1 Broad objects of pension systems 4 Pensions as a means of providing for dependent and superannuated workers 5 Opinions as to the moral obligation of the employer 5 Affirmative opinions 8 Negative opinions 11 Attitude of labor in general toward private pension systems 18 Attitude of organized labor 21 Pensions as a reward for long service .... 24 Pensions as a means of increasing efficiency . . 28 By eliminating the superannuated .... 31 By stimulating the active force 33 Pensions as a means of reducing labor turnover . 37 Pensions as a means of disciplinary control . . 41 Conclusions as to proper purposes of a pension system 45 Types of pension systems , , , 46 II. Non-Contributory Pensions of the "Discretion- ary" Type Are non-contributory pensions gratuities? ... 52 Non-contributory pensions as deferred pay ... 53 Conclusions as to deferred-pay issue .... 64 Argument that a pension is pay conditionally de- ferred 68 Conception of pension systems as a form of tontine insurance indefensible 72 Effect of non-contributory pension systems on thrift 75 Conclusions as to non-contributory systems of the "discretionary" type 78 vii viii CONTENTS CHAPTER PAOB III. Non-Contributory Pension Systems of the "Lim- ited-Contractual" Type Advantages 88 Disadvantages 90 Conclusions as to pensions of this type .... 91 IV. Contributory Pension Systems Deferred-pay issue under such systems .... 97 Contributory pension systems and thrift . . . 101 Progress of the contributory principle . . . . 102 Disadvantages of the contributory system . . . 105 Conclusions as to contributory pension systems . 107 V. Cumulative "Single-Premium" Annuities as a Substitute for Pensions Features of the annuity plan . . . . . . . Ill General arguments in favor of the annuity plan . 113 Arguments against the annuity plan analyzed . . 118 Summary and conclusions 126 VI. Informal Pension Policy vs. a Formal System Advantages 133 Disadvantages 134 Summary and conclusions 142 Vll. Cost op Pension Systems Methods of financing a pension system .... 146 Systems without withdrawal or death benefits . . 150 Systems providing for withdrawal and death benefits 153 Long-continued increase in pension disbursements 156 Actual experience under private pension plans . . 158 B. & O. R. R. Co 158 American Sugar Refining Company .... 163 Otis Elevator Company 164 U. S. Steel Corporation ■ ^ 165 Cost of meeting "accrued liabilities" 172 Costs under an informal pension policy .... 177 Need of actuarial estimates in establishment of a pension system 180 CONTENTS ix CHAPTER PAGE VIII. Cost of a Citmulativb Annuity System Illustrative example 189 Problem of "accrued liabilities" under an annuity system 192 IX. Benefits to be Included in a Pension or Annuity System The retirement benefit 201 The total disability benefit 203 The death benefit 203 The withdrawal equity 206 Sickness benefit inadvisable 208 Provision for widows and children impracticable . 209 Amount of benefit 210 Arbitrary retirement age objectionable .... 214 X. Summary and Conclusions Comparative analysis of various types of retire- ment systems 220 Broader aspects of the pension problem .... 226 Appendices 231-254 Index 255-262 TABLES PAGE 1. Schedule of considerations (for males) at various ages necessary to provide a paid-up annuity of $10 to commence at age sixty-five 120 2. Payments to pensioners and amounts appropriated by the company under Baltimore and Ohio Rail- road Company's non-contributory pension plan 1885-1915 161 3. Ratio of pensioners to membership in Relief Asso- ciation twenty-five years earlier under Baltimore and Ohio Railroad Company's pension plan 1883- 1891 162 4. Pension disbursements of American Sugar Refining Company, 1912-1920 163 5. Pension disbursements of Otis Elevator Company, 1913-1920 165 6. Pension disbursements and number of active cases on the pension roll under United States Steel Cor- poration's pension plan, 1911-1920 166 7. Average age, average service, and average pension under the United States Steel Corporation's pen- sion plan, 1911-1920 167 8. Classification of pension cases under United States Steel Corporation's pension plan, 1911-1920 . . . 168 9. Illustration of cumulative increase in pension outlay under an informal pension policy on various as- sumed bases 178 10. Method of computing cost, for first year, of paid-up annuities for $10 each for a group of 500 male workers, all of whom have completed at least five years of service 189 zi CHARTS PAGE Chart I. Curves showing estimated course of pension ex- penditures over a long period of years, under three different plans 157 Chart II. Curves showing annual expenditures required of the permanent school pension fund of the city of Boston during future years under existing sal- aries and without increase in force 159 A CRITICAL ANALYSIS OF INDUSTRIAL PENSION SYSTEMS CHAPTER I PURPOSES OF PENSION SYSTEMS Introductory "Pensions are more irrevocable than any or- dinary kind of legislation." This statement, while applied by the author ^ to governmental pension systems, is almost equally applicable to private pension schemes. A pension system never should be started by an employer until he has satisfied himself beyond reasonable doubt that it will be continued. An establishment may suffer little because it does not adopt a pension sys- tem. But it may suffer much if it adopts a sys- tem without most careful examination. Many industrial corporations have studied the problem long and carefully without reaching a decision. Some apparently have decided defi- * Geoffrey Drage. "The Problem of the Aged Poor." 1 2 INDUSTRIAL PENSION SYSTEMS nitely against a formal system. Many others, which have adopted plans without such careful study, have been compelled almost immediately to revise them. It has been stated that very few of the industrial pension plans in the United States to-day are so financed that they are likely to remain solvent without refinancing or modifi- cation. "With that staggering fact staring them in the face, it is no wonder that sensible business executives refuse to be stampeded into adoption of pension plans." ^ In the case of many municipal and other pub- lic service pension plans, failure carefully to count the cost has already resulted in bankruptcy of the pension system, either actual or construc- tive. Indeed, it is hardly too much to say that the history of pension schemes has been a record of mistakes or failures. Even the elaborate Carnegie Foundation plan was forced to undergo a radical reorganization only a few years after it was started. The financial aspects of the question, more- over, important as they are, are of subordinate consequence as compared with the broad eco- nomic and social aspects. The problem is an exceedingly complex one. * "Pensions for Industrial Employees." Elmer B. Tolsted in Cotton, November, 1920. PURPOSES OF PENSION SYSTEMS 3 The very nature of a pension is by no means generally understood or, indeed, easily definable. The word "pension" has come to have a very loose significance, and often is applied to pay- ments which in a strict sense are not pensions at all. The various types of pension systems present differences so marked that they cannot be intelligently discussed as a single group. Argu- ments applicable to public service pensions may not hold in the case of private systems. Finally, it is extremely difficult to determine the ultimate effects of such systems, not merely upon the worker's eflBciency and his material well-being, but even upon his character. A system which upon its face is well adapted to meet an imme- diate condition may produce evils far worse than those which it seeks to remedy. A leading British actuary in discussing general old age pensions has said: ^ "The real fact is, that the more one studies such a thorny question as this, the more numerous and the greater are the difficulties which become apparent, and the more it is seen that, if the working classes for whose benefit old age pensions are advocated are not to be injured rather than assisted, the utmost caution and deliberation must be exercised before any irrevocable step be taken," ' George King ; cited by Lee Welling Squier in "Old Age Dependency in the United States," p. 277. 4 INDUSTRIAL PENSION SYSTEMS It is, therefore, almost imperative, before tak- ing up the question how a pension system shall be established, to consider whether it should be established at all. Until a satisfactory answer can be given to the latter question, there is little occasion to discuss the question of method. Broad Objects of Pension Systems Among the more important motdves which lead industrial employers to adopt pension sys- tems are: A desire to provide for the old age of de- pendent, superannuated employees. A desire to reward employees who have ren- dered unusually long service. A desire to increase efficiency, first, by the elim- ination of superannuated or incapacitated work- ers on a humane basis and, second, by stimulating the good will and effort of the active force. A desire to hold the worker to the job, thereby reducing labor turnover. A desire to exercise a disciplinary control over workers in respect to strikes and in other ways. In some pension plans all of these motives are present; in others, only a portion. The broad objects of pension systems, as above enumerated, will now be examined. PURPOSES OF PENSION SYSTEMS 5 Pensions as a means of providing for dependent and superannuated workers A large number, perhaps a large proportion, of industrial workers either can not or do not make adequate provision for their old age. When such workers reach a stage of superannuation the employer is faced with the alternative of throwing them back on society, with the knowl- edge that they will become objects of charity, or of himself making some provision for their remaining years. This practical fact has been an important and probably the controlling con- sideration in the establishment of industrial pen- sion systems of the day. From humanitarian mo- tives the employer is not content summarily to dismiss such superannuated workers after long years of service. Moreover, he often hesitates to do this, on the practical ground that such a policy may have an unfavorable reaction upon the larger body of employees still continuing in the service. Opinions as to the moral obligation of the em- ployer. At the outset it is important to determine whether the employer is really under a moral obligation to make provision for such workers. Clearly, if such a moral obligation exists, it should be met. 6 INDUSTRIAL PENSION SYSTEMS The idea has a strong appeal. The worker has rendered a lifetime of service, yet for one reason or another may not have acquired a competence.. Worn out with years of labor, he is no longer able to secure employment. Is not the employer, therefore, properly to be charged with the respon- sibility of maintaining him in his old age? Some writers on the pension problem insist that there is such an obligation. Some industrial managers, moreover, have accepted this point of view. While the contention has been set forth in various ways, it may be epitomized in the statement that "Industry should not 'scrap' its old and incapacitated workers and throw them back on society in their dependent age." In the opinion of many other students of social problems, however, there is no such obligation. Instead, these critics hold that the responsibility for providing against old age rests primarily upon the individual himself or, at least, that it cannot fairly be placed upon the employer alone. They argue that, while the employer may elect to pro- vide for his superannuated workers when they have completed their service, he is under no moral obligation to do this. Some, furthermore, contend that any attempt to relieve the individual of his responsibility is certain to have a deteriorating influence upon private character, by diminishing PURPOSES OF PENSION SYSTEMS 7 the qualities of self-reliance, thrift, and even self-respect. The general attitude of employers on this point is, perhaps, sufficiently indicated by the fact that the great majority of private pension plans now in operation in industrial establish- ments specifically deny any right on the worker's part to a retirement benefit, and place this on the basis of a gratuity. The argument that the employer is under a moral obligation to provide for the old age of his workers is reflected in the following excerpt from a discussion by Squier in his ''Old Age De- pendency in the United States": ^ "From the standpoint of the whole system of social economy, no employer has a right to en- gage men in an occupation that exhausts the individual's industrial life in ten, twenty, or forty years; and then leave the remnant floating on society at large as a derelict at sea. From the standpoint of public economy, it is argued that every industry should be compelled to bear its own burden of waste, whether of material, ma- chinery, or human life; that it is as equally un- just and improvident for an industry to turn adrift its wornout and aged employees, to be taken up and housed at public expense in almshouses, as it is for the employee himself to stop work and become a tramp or vagrant." * Lee Welling Squier. "Old Age Dependency in the United States," pp. 272-3. 8 INDUSTRIAL PENSION SYSTEMS A similar viewpoint has been expressed by many other writers on the pension problem. In an effort to assemble further opinion upon this question, an inquiry was submitted to a con- siderable number of economists, publicists, and social workers of the country, in the following form: "What is the moral obligation, if any, of the industrial employer towards his employees with respect to support in their old age?" A representative selection of the views thus obtained is presented herewith. Affirmative opinions. An afl&rmative position on this question was taken by John R. Commons, of the University of Wisconsin, as follows: "On the whole, I do not think that wage earn- ers, under existing conditions, can be expected to provide for old age. This is on account of the great uncertainties and insecurity of their work and the fact that they should be expected to support their children and give them an edu- cation, etc. "Considering these matters, I should say that there is a moral obligation on the individual em- ployer consisting in making some provision for his employees in old age, increasing with their length of service, but that there are limits to this obligation in individual cases and that the total obligation is a joint obligation upon Indus- PURPOSES OF PENSION SYSTEMS 9 try and upon the public which cannot be met except by legislation." Frank A. Fetter, of Princeton University: "If the old age of wage-earners is not other- wise provided for, the moral sense of our time surely recognizes that the obligation of the em- ployer has not been fully met in the case of workers who have grown old in his service." Several of those who took the ground that there was a moral obligation to provide for the super- annuation of industrial workers argued that the obligation could not fairly be placed upon the in- dividual employer but, rather, fell upon Industry as a whole. Thus, Franklin H. Giddings, of Co- lumbia University, said: "I cannot see that the individual employer is under any moral obligation to support his em- ployees in their old age by pension or otherwise. But I do think that the industry as a whole should for many reasons, many of them mere ex- pediencies, assume the obligation. By this I mean that the charge which the industry makes upon the public in the prices of goods should in the long run provide for the old age of employees who have been long connected with it and whose service has been faithful." William M. Leiserson, Chairman of the Labor Adjustment Board of the Rochester Clothing In- dustry, likewise, held that "there must be consid- 10 INDUSTRIAL PENSION SYSTEMS erable doubt as to the moral obligation of an in- dividual employer toward his superannuated em- ployees; but there can be no doubt whatever that an industry has a distinct moral obligation not to throw on the scrap-heap men who have devoted their lives to the industry and have worn themselves out in its service." He suggested that the burden of a pension system might be too great for a small employer, but that in such cases an association of small employers in a given industry might distribute the burden in such a way as to make a pension system practicable. He con- tended, however, that "a large employer whose business forms a substantial portion of the in- dustry as a whole owes it to the workers whom he has drawn into the industry and who have dedicated their lives to it, that they shall be taken care of in their old age." Rev. John A. Ryan, D.D., Director of the National Catholic Welfare Council: "It is quite clear to me that industry, as a whole, is morally bound to provide the workers as a whole with sufficient income to meet not only present needs, but all the normal contin- gencies of life, including disability and old age. Whether this provision should aU be made in the form of wages, leaving the employee to in- sure himself against all these contingencies, or whether the current wages should merely meet PURPOSES OF PENSION SYSTEMS 11 current living costs, insurance to be provided by the industry, is a question of method rather than principle. "All this refers to industry as a whole. What the obligation of an individual concern is toward those persons that it has at any given time in its employ, is a more complex and difficult question, inasmuch as many of these employees have spent a greater or less portion of their working life in the employ of other concerns. Therefore, their present employer cannot fairly be required to make the whole provision for their future. The general principle seems to me clear enough, that the employer is under obligation to provide each of his employees during a given period, say, a year, with that amount of insurance for old age which is proportionate to the total amount of such necessary provision. For example, if the total working period of an employee is forty years, then the employer ought to provide one- fortieth of the total necessary old age pension every year." The various statements above given clearly contain a suggestion that the industrial employer or, at least, Industry as a whole, is under a moral obligation to provide for the support of superannuated employees. It should be noted that some of the opinions to this efiFect are qualified. Negative opinions. As opposed to the idea of a moral obligation, but not necessarily in opposi- 12 INDUSTRIAL PENSION SYSTEMS tion to pension systems, the following statements may be cited: Dr. Arthur T. Hadley of Yale University: "The question what form the moral obligation of the employer should take regarding the pen- sion system involves the whole question of the structure of industrial society. "Under the old-fashioned system, where it was supposed to be each man's duty to save as far as he could, the idea prevailed in this country that the possible withholding of wages in order to provide a fund for a pension system was an unwarranted attempt to keep the employee un- der the guardianship of the employer; that the fullest right was done by paying the highest w^ages the market afforded, without any with- holding; and that all disability payments, from whatever cause, should be based on the needs of each particular case, rather than claimed as a right. "As long as most of the employees were am- bitious to become capitalists, and did save money, this worked well. The fact that they fail to feel this ambition or make these savings to-day is, however, an unfortunate fact with which we have to deal; and pension systems are one of the means by which we deal with it. I find it, how- ever, a little hard to speak of the moral obliga- tion to adopt a pension system, when the old system, under which we did not have to pay pensions at all, was better than the new one, when we utilize them to meet an evil which we PURPOSES OF PENSION SYSTEMS 13 cannot deal with otherwise. I think we shall stand on clearer ground if we base our pension systems on expediency rather than on morals.' Henry W. Farnam of Yale University: "I do not hold that the individual employer has a moral obligation to support his employees in their old age. The mere fact that employees change so frequently in industrial establishments and that so few of them work for very many years in one place, would clearly make the obligation, if it existed, one to be borne by a number of dif- ferent employers; it would certainly be unfair to expect the last employer to bear the entire charge. "I look upon social insurance as a practical matter to be adopted in the interest of society as a whole and I therefore believe that the old age pension should be a social obligation to be financed by the worker himself, the employers as a group, and society as a whole through its tax- payers." T. N. Carver of Harvard University: "I have never heard or read a satisfactory argu- ment to show that the employer was under any moral obligation whatsoever in the matter of in- dustrial pensions. The reasons given have always seemed to me to be singularly inconclusive. I am inclined to think that the only sound reason on which to base a system of industrial pensions is a purely economic one. If the industry is likely to be permanent, or at least to outlast several 14 INDUSTRIAL PENSION SYSTEMS generations of men, the management must decide whether they think it will pay in the long run to pension employees. If it will enable the in- dustry to secure and maintain a superior quality of employees and keep them in a frame of mind which will increase their usefulness and produc- tivity, that would furnish a valid ground for a pension system. That, I believe, is the one sat- isfactory argument in favor of pensions, or re- tiring allowances, for university professors. . . . This has always seemed to me a suflQcient and satisfactory reason for a system of pensions, without bringing in the question of moral ob- ligation." Edward T. Devine, of the Association for Im- proving the Condition of the Poor, New York City, held that while it is desirable that Industry shall bear the burden of accidents and, to a large extent, the hazard of disability among workers, it should not be called upon to assume the bur- den of their support in old age. He contended that the responsibility of Industry in reference to old age lies chiefly in ensuring such conditions of work that employees will not become worn out before they should be, and in paying wages that permit the individual to make a provision against his superannuation. "Individuals who become dependent because of old age are, of course, a re- sponsibility for the community, but should not be a charge on Industry." PURPOSES OF PENSION SYSTEMS 15 Many who oppose the idea that the employer is under a moral obligation to provide for super- annuated employees take the ground that the primary duty and, indeed, the full duty of the employer is to pay adequate wages and that when this is done workers may properly be required to care for themselves in old age. This viewpoint is illustrated in the following statement by W. Z. Ripley, of Harvard University: "My predilection is all for such recognition of the workers' rights in adequate wages as shall force him to meet the problem of old age for himself. I conceive that the coddling process softens both the fiber of the employee and of the employer. It tempts the employer to seek welfare as an alternative for paying full measure of wages, and it leads the employee to lean upon a beneficent despot who shall protect him against the shocks of adversity. Consequently I person- ally reject the conception of moral obligation, but would substitute for it what seems to me a more virile view, that wage relationships should be es- tablished in the light of mutual respect and even apprehension upon a level which will permit the workers to take care of themselves." Miss Julia C. Lathrop, former Chief, Children's Bureau, U. S. Department of Labor: 'Tt appears to me clear that the obligation of the employer ceases when he has paid an ade- quate wage, by which is understood a wage per- 16 INDUSTRIAL PENSION SYSTEMS mitting decent living and a reasonable margin for savings during the period of employment, ex- cept as he may be joined with the employee and the State in a system of retirement or old age insurance." The following statement by W. E. H. Lecky, while dealing with general old age pensions, may fairly be cited in this connection:^ "There is no real ground for the assertion that because an industrious man has failed to earn a sufficiency, he has a moral right to be rewarded for his industry out of the proceeds of a tax levied upon his neighbors, to whom he has rendered no service, or none which has not been paid for in wages." It should be repeated that the above state- ments do not necessarily mean that these writers condemn pension systems. The question at the moment is whether the employer is under a moral obligation to provide for the superannuation of his employees. One may reject the concept of a moral obligation, yet advocate a pension sys- tem on other grounds. Thus John A. Fitch, a well-known writer on labor matters, expressed the opinion that the problem of old age dependency is a "social in- stead of an industrial problem, and that the only 'W. E. H. Lecky. "Old Age Pensions: Collection of Short Papers," p. 103. PURPOSES OF PENSION SYSTEMS 17 proper solution of the question is a government pension." Since, however, this was not likely to come in the immediate future and since, in the meantime, employers are confronted with the problem of superannuation, he held that employ- ers were not only justified, but wise, in establish- ing pension systems. A particular reason for this was that when an employer "gets stability in addition to day's work, he has received a value over and above what be has paid for through the wage." A fair summarization of these divergent views is that, on the whole, pensions are a matter of expediency rather than of moral obligation, and that in so far as an employer feels under com- pulsion to provide for the old age of his workers, this arises from humanitarian con- siderations engendered by association, rather than from the existence of a definite right on the workers' part. It will be noted that several of those who maintain that a moral obligation exists hold that this does not fall solely on the individual employer, but on Industry in general, or upon employers, em- ployees, and the public jointly. If the theory of a moral obligation on the part of the employer holds anywhere, it would seem obvious that it should obtain in the case of the 18 INDUSTRIAL PENSION SYSTEMS Government as employer. Yet most disinterested students of governmental pension systems reject the idea of obligation and base their advocacy of such systems on the practical ground of expe- diency. Thus, one writer on government pension systems has said: "Sentimental arguments are sometimes ad- vanced to prove that the Government owes some special charity to the men who have grown gray in its service. . . . They are no more entitled to public charity and benevolence than men who have grown gray in some private capacity. Pub- lic contributions to a retirement system are to be justified, not on any ground of benevolence or philanthropy, but on the ground that they are payments to improve the character of the ser- vice." 1 Attitude of Labor in general toward private pension systems. Perhaps the most convincing ar- gument on this point is found in the attitude of Labor itself. One of the significant facts of the pension problem is that the demand for pension systems comes from the employer and from the public rather than from the worker. At best, the attitude of Labor toward pensions is one of comparative indifference. It is true that employ- ers who have inaugurated pension systems often ^ Lewis Meriam. "Principles Governing the Retirement of Public Employees," pp. 16 and 17. PURPOSES OF PENSION SYSTEMS 19 have received expressions of appreciation from the recipients of the pension benefits. Replies from a large number of employers as to the at- titude of their workers were secured in the course of this study. Representative statements on this point are given below: "The plan has been well received by the em- ployees, and that it is highly appreciated is evi- denced by the many letters received from grate- ful beneficiaries." "Our opinion of the plan is that it is well re- ceived and appreciated by the employees, par- ticularly those who have been with the company for a number of years and who are approaching the age of retirement." "We know that our employees, particularly those w^ho are no longer young, are very favor- ably impressed with our pension system." "Our pension system is very much appreciated by all classes of workers. They know it is a re- ward for faithful service and all apparently fully appreciate its advantages." "We believe our annuity plan is contributing in making our personnel happy and contented, although you will, of course, realize that this plan is but one feature of our general policy." On their face these statements indicate decided appreciation. But the fact that such apprecia- tion is seldom reflected in a reduced labor turn- 20 INDUSTRIAL PENSION SYSTEMS over/ which would be its most natural expres- sion, robs this evidence of much of its apparent significance. At least it is certain that Labor has conducted no active campaign to secure the inauguration of private pension systems. Instead, the almost universal attitude of Labor may be found in some such slogan as "Give it to us in the pay envelope/' or "Labor wants justice, not pensions." This attitude of Labor towards private pen- sion systems is further illustrated by the following extract from testimony before a British Retire- ment Commission: "We have a number of artisans who, about five years ago, petitioned that they might be put en- tirely upon trades union rate of wages and the option was given to them, either to remain under the terms they were with pensions or to go at once to trade union terms, and these four hundred men elected to have a larger immediate salary and forego aU the rights to pension and sick pay and that kind of thing." ^ This feeling is, moreover, characteristic of sal- aried workers, as well as of wage-earners. This is indicated by the following result of a vote of ^ See p. 37. * Sir J. McDougal, of the London County Council, testifying before the British Royal Commission of Superannuation in the Civil Service, British Parliamentary Papers, 1903, Vol. XXXIII, p. 138. PURPOSES OF PENSION SYSTEMS 21 employees of the State, War, Navy, and Treasury Departments at Washington in 1911: For immediate increase in salaries inde- pendent of any retirement or pension legislation 7,459 For immediate provision for increase in salaries accompanied by straight pen- sions provided wholly by the Gov- ernment 1,465 For immediate provision for increase in salaries accompanied by retirement on annuities provided by compulsory savings by employees 1,067 For immediate provision for retirement on straight pension provided wholly by the department 317 For immediate provision for retirement on annuities provided by compulsory savings by employees 186 10,494 Attitude of Organized Labor. The attitude of Organized Labor toward private pension systems is, at least in many cases, not merely one of in- difference, but of definite hostility. In this con- nection the following statement by Samuel Gompers, president of the American Federation of Labor, obtained in the course of this study, may be noted: 22 INDUSTRIAL PENSION SYSTEMS "Paternalism either in government or in in- dustry is abhorrent. It takes away the initiative of the workers who should themselves prepare for old age or the proverbial 'rainy day.' Where the workers receive an adequate wage, one that will permit them to live as an American should live, they will provide their own pension system, and whatever men do for themselves increases their value as workers. It brings independence and a desire to live as men should live without fear of losing that which will protect them in their old age." 1 The head of a local labor union expressed a similar point of view as follows: "What the workers want is a sufficient wage so that they can pay for their own protection without charity either from employers or any one else. Labor does not believe in industrial welfare work of any kind, because it is done with the direct intention of weakening the power of organized labor. "It is not right that a man should go without the full pay he might receive unless he stays with one company. "The cause of unrest is not the monotony of modern industrial employment, but the helpless- ness of the men in having no say as to how they * Organized Labor, however, has shown no such aversion to governmental pensions. Again, to quote Mr. Gompers: "Until the Government itself establishes an old age pension system, labor will insist that pension systems shall be con- trolled by the workers themselves, without any cormection whatever with the employers." PURPOSES OF PENSION SYSTEMS 23 shall regulate their lives. A man should be free to go from one firm to another without jeopar- dizing his right to protection in his old age. "A pension scheme with a right to withdraw the 'accrued credits' in case of separation from an employer, would meet many, but not all, the objections to pensions in general." While these statements can be taken as rep- resenting the attitude of Organized Labor, the question may fairly be raised whether in its fundamental aspects the psychology of Organized Labor differs essentially from that of Labor in general.^ If provision against superannuation were a definite moral obligation of the employer, it is reasonably certain that Labor would be quick to sense it and to demand its fulfillment. For all these reasons, therefore, it seems clear * As a further indication of the attitude of Organized Labor towards private industrial pension systems, an experience some years ago with a proposal to inaugurate a pension plan for the organized brewery workers of the country may be cited. The plan recommended was of the contributory type, under which employees would contribute only one-half of one per cent of their wages and the employers a sum equivalent to one and a half per cent. After careful consideration by the officials of the brewery workers' unions, the proposition was submitted to a referendum vote by individual unions and sections of the country, a period of one month being allowed for discussion and another month for voting. The result was the rejection of the plan by a vote of 22,936 to 12,888. (E. B. Phelps. "American Brewery-Workers' Surprising Rejection of Their Proffered Workmen's Compensation and Old Age Pen- sions. — A Clean-Cut Case of 'The Consciousness of Kind.' ") 24 INDUSTRIAL PENSION SYSTEMS that the individual employer, while conscious of a certain sense of compunction in the case of workers who have spent a lifetime in his service, is under no compelling moral obligation to pro- vide for their superannuation. The practical problem of dealing with superannuation, how- ever, still remains. Pensions as a reward for long service The conception of pensions as a reward for service, while closely related to that just dis- cussed, is distinguished from it in many respects: It takes no account of the necessities of the worker, but, ostensibly at least, pensions alike all, whether self-supporting or dependent, who have rendered a given length of service to the es- tablishment, or who have fulfilled certain pre- scribed conditions. Furthermore, it does not necessarily require continuance in service until the employee actually is superannuated. Under many plans an employee who commences work at an early age may retire on pension before he can really be termed old, if he has served the re- quired number of years. The idea of "reward of service" is present in most modern pension systems. However, as will be shown in more detail later, the reward often is subject to many conditions. PURPOSES OF PENSION SYSTEMS 25 As a straight reward of service most pension systems are grossly inadequate. The percentage of workers who go on the pension roll usually is only a small fraction of the total force, or even of those remaining with a company for long periods. Oftentimes it is almost negligible. Moreover, such systems easily become highly in- equitable as between individual workers. An employee who happens to have completed, say, twenty or twenty-five years of service may get a pension, the "present value" of which may be thousands of dollars, while another worker, per- haps more efi5cient and more faithful, but who has just failed of completing the required period of service, may get absolutely nothing. If long service is entitled to a reward, then it would seem that a system which pays a large benefit for, say, twenty years' service, but pays nothing for nine- teen years' service, is inherently defective. A further objection often advanced against the "reward-of-service" idea, as actually operative in many pension plans, is that it may put a pre- mium on inefficiency by keeping men in service, the retirement of whom should be the primary purpose of a pension system. For example, a humane executive may be tempted to retain on his force a worker who needs only one or two more years of service to entitle him to a pension. 26 INDUSTRIAL PENSION SYSTEMS even though that worker has become distinctly inefl&cient. Paradoxical as it may be, a pension system may thus defeat what is perhaps its most important aim. On the other hand, a heartless factory executive may dismiss an efficient man approaching the retirement age, in order to save the company the cost of maintaining him later on pension. Still again, it has happened that where the cost of pensions was rapidly mounting, the terms of the plan itself have been changed, with the result that many workers have been deprived of the pension benefit to which they had been looking forward.^ Another objection of a somewhat different sort urged against the "reward-of-service" theory is that it may be interpreted to mean that a worker who has rendered a given number of years of ser- vice is entitled to support, even though still able to work. This theory has resulted, in the case of some public service pension systems, in the pay- ment of liberal pensions to men still in the prime of life, who have at once engaged in other lines of activity where their pensions have given them an important advantage from a competitive standpoint. It seems clear that the expenditure of public funds to pay pensions to men still far ' In this connection, see p. 169. PURPOSES OF PENSION SYSTEMS 27 from the point of superannuation, and who are still able to work, is wholly indefensible. In private industry the practice would likewise be objectionable. As a practical matter, in most private industrial pension systems the service re- quirement is so linked up with a stipulated age that a worker would seldom be able to secure a pension while still in middle life. Some private systems, however, permit retirement after long service, irrespective of age. The idea has sometimes been advanced that a pension system is intended to assure the worker a period of comfortable ease in his declining years. This conception of a pension system has been vigorously condemned by one writer as follows : "Employees must be on their guard against those of their leaders who adopt the view that the purpose of a retirement system is to reward faithful servants with a 'chance to rest,' and that the conditions established . . . should be placed sufficiently low so that 'we may get our pensions while we are still young enough to enjoy them.' That is not only wrong philosophy re- garding the nature of a retirement system; it is a wrong philosophy regarding life." ^ The "reward-of-service" theory tacitly admits that workers rendering unusually long service ' Lewis Meriam. "Principles Governing the Retirement of Public Employees," p. 399. 28 INDUSTRIAL PENSION SYSTEMS have not been fully paid during their active work- ing careers. Under such a theory it is at least incumbent upon the employer to make the as- surance of the payment certain; it would also seem that under this theory the reward should take account of all service of special length and not be dependent upon the fortunate accident that the worker shall complete a service period of extraordinary length. If the "reward-of-service" theory be accepted as a primary reason for establishing a retirement system, there appears to be a far better method of meeting it. This matter is discussed in detail in Chapter V. Certainly this object is not ade- quately met by the ordinary non-contributory^ pension system. Pensions as a means of increasing efficiency We come now to the third conception of pen- sion systems specified on page 4, namely, their use as a means of increasing efficiency, either by humanely getting rid of workers who have be- come superannuated, or by stimulating the inter- est and effort of the active force. This is one of the primary motives which have led to the establishment of pension systems. A pension system, it is urged, tends to relieve the ' See p. 47. PURPOSES OF PENSION SYSTEMS 29 employer of any compunction which he may feel over the dismissal of a worker grown old in his service and now without means, and thus more readily enables him to increase the eflQciency of his working force by weeding out those no longer able to perform their allotted tasks. The "drag" of such workers upon production is well known to all industrial executives. It is extremely wasteful to permit a superannuated worker to continue at a task where his inefficiency means a lower output not only for himself, but for all others associated with him in the operation. In some cases, notably in work of a "line" character, it is imperative that such a worker shall not be retained, at least in the particular position. Many establishments have endeavored to meet this difficulty by finding other tasks of a lighter or less exacting character, to which such older workers are assigned. But the opportunities of this sort often are far too few to take care of the increasing number of superannuated work- ers. The employer has, therefore, resorted to the expedient of a pension system in order to enable him to dismiss such workers without raising any question of injustice or of adverse reaction on the other employees. This broad underlying phase of the pension movement is suggested by the following state- 30 INDUSTRIAL PENSION SYSTEMS merit from the Massachusetts Commission on Old Age Pensions, Annuities, and Insurance.^ "The problem of dealing with the aged em- ployee is an urgent one in the modern business world. ... To carry them on the payroll at their regular employment means waste and disor- ganization of the working force; to turn them adrift is not humane. In the past, large employ- ers of labor have tried to meet this difficulty in piecemeal fashion by retiring aged employees on pension in certain cases, or giving them light work, each case being provided for separately, on its own merits; now they are beginning to deal with the problem in a systematic fashion, by adopting a uniform method of retirement with pension." Of all the purposes which have led to the es- tablishment of industrial pension systems this is, perhaps, most easily justified. In the case of the public service, it is the one paramount justifica- tion for inaugurating a pension system. As one writer has said: "Every reason for establishing a retirement system thus far advanced can be summarized un- der the single broad heading of the improvement of the public service and, in fact, that is the only * Report of the Massachusetts Commission on Old Age Pen- sions, Annuities, and Insurance, 1910, pp. 136-137. It should be noted that two state commissions in Massa- chusetts have investigated the pension problem. The second was known as the Massachusetts Commission on Pensions, and its report was issued in 1914. PURPOSES OF PENSION SYSTEMS 31 reason why the Government should establish one in its own interests." ^ Without a retirement system, it is urged, the public official is tempted to continue workers who in private establishments would be dis- missed. A special reason for this is that ordi- narily a government executive is under no such pressure to "show results" as is the manager of an industrial plant. It is, indeed, notorious that the government service includes many who are incapacitated and superannuated, and whose sal- aries are in reality little more than pensions, while, in addition, the Government is incurring a heavy overhead expense on their account. Yet, as a matter of fact, there is grave danger that certain types of pension systems may not result in thus increasing efficiency through the removal of the superannuated. A report of the United States Commission on Economy and Ef- ficiency, submitted to the President of the United States in 1910, indeed, maintained that a non- contributory " pension system in the case of gov- ernment service operated to retain poor em- ployees rather than to keep up the standard of -efficiency. It argued that "in case the inef- * Lewis Meriam. "Principles Governing the Retirement of Public Employees," p. 16. ^'See p. 47. 32 INDUSTRIAL PENSION SYSTEMS ficient employee is working under a pension sys- tem whereby he is entitled, on reaching a certain age, to retire on a competence, the head of the office will be all the more reluctant to dismiss him before he reaches that age." The Commission held that a pension system "has exactly the opposite effect where the private corporation is the employer," since the adminis- trative head of the office is in self-defense "obliged to hold up every subordinate to the high- est standard of efficiency and to stifle any feel- ing of humanity or sympathy which might other- wise tempt him to show leniency." Without attempting to analyze this point in detail, it may be concluded as almost axiomatic that a private employer will have less compunc- tion about dismissing superannuated workers if he knows that their remaining years are provided for by some retirement system than he will have if he knows that they are likely to become objects of charity. The failure of many pension systems to accomplish the removal of superannuated workers effectively often is due to the fact that the system is of a defective type or contains defective pro- visions, or to faulty administration, rather than to an inherent vice in the principle of the retire- ment benefit itself. It may be concluded, therefore, that the prob- PURPOSES OF PENSION SYSTEMS 33 lem of maintaining efficiency by the removal of workers no longer able to perform their tasks should be facilitated by the inauguration of a proper retirement system. As noted later, this alone may not be a sufficient justification for such a system. Pensions as a means of increasing efficiency of the active force. In distinction from increasing efficiency through elimination of the superannu- ated, it is often claimed that pension systems increase the efficiency of the active force. As al- ready pointed out, the very fact that superan- nuated workers are thus provided for may exert a favorable influence upon the active members of the force and increase their good will, and thus perhaps their efficiency as well. Again, to the extent that a pension system relieves the worker during the stress period of life of anxiety over his declining years, he is, it is urged, in better condition, mentally and physically, to perform his daily tasks. The same view is found in the following state- ment in the Report of the Massachusetts Com- mission for 1910: "The economic gain from the pension system is twofold: it eliminates the waste and demorali- zation attendant upon the continued employment of old men who have outlived their usefulness; 34 INDUSTRIAL PENSION SYSTEMS and it helps to promote industry, contentment, and loyalty on the part of the working force. The pension system aids in solving the difl&cult problem of stimulating the employees of a large corporation to the highest eflSciency." ^ This argument, while plausible, is open to seri- ous question. In sharp contrast with the view of the first Pension Conamission of Massachusetts just cited, it may be noted that the second Com- mission on Pensions of that state discredited the idea that a pension system was an incentive to eflBciency of the active working force and, instead, concluded as follows: ''The Commission finds that only by the re- tirement of the superannuated does a pension sys- tem improve the efficiency of the public service." ~ Replies received from numerous employers to an inquiry on this point during the course of this study suggest that the inauguration of pen- sion systems was sometimes followed by an in- crease in efficiency, but they by no means present convincing evidence of this as a general rule. A representative selection of these views fol- lows: "We feel that our pension plan is largely in- strumental in increasing efficiency." * Massachusetts Commission on Old Age Pensions, Annuities, and Insurance, 1910 Report, p. 138. ^ Not italicized in original. PURPOSES OF PENSION SYSTEMS 35 "We feel that the pension helps efficiency of service, but it is very difficult to give anything definite in regard to the effect of the pension only." "We know of nothing which we are doing which has a greater effect on the morale of the organi- zation than our pension system." "We find that our older employees consider their pension rights in the nature of an insur- ance, which, no doubt, has some influence in . . . securing their efficiency." "Operating alongside of our Employees' Sav- ing and Profit Sharing System, our Employees' Benefit Association, and more recently, in con- junction with our Industrial Council Plan of em- ployee representation, it is safe to say that the broad effect of the Pension Plan is distinctly beneficial." "We do not feel that we can expect it [the pension system] to produce any very noticeable results in the way of . . . efficiency." "We do not believe that the inauguration of the pension fund has had any effect on . . . ef- ficiency." That pension systems do not materially in- crease efficiency of the active force was the con- clusion reached by the Industrial Bureau of the Merchants' Association of New York, based upon a study of private pension systems made in 1919.^ '"Industrial Pensions." Merchants' Association of New York, 1920, p. 30. 36 INDUSTRIAL PENSION SYSTEMS Analyzing the replies of fifty-nine employers with respect to the effect on efficiency, the report in question said: "These replies show that the claim that pension systems bring about increased efficiency by in- creasing appreciation and loyalty of employees and by eliminating their worries is without much foundation. Nearly twenty per cent of the em- ployers questioned are certain no increased ef- ficiency results, while as many more believe that probably such is the case. Furthermore, very few of the nineteen employers (less than one- third of those replying) who believe that in- creased efficiency has resulted appear to base such belief on facts and some admit that, while they feel sure the increased efficiency is present, there are no tangible evidences of it. "This failure to produce increased efficiency can be traced to the fact that, in general, pension systems appeal only to employees who have grown old in their present employment. These employees usually constitute a relatively unim- portant part of the entire working force and their habits of efficiency, like all other habits, have be- come more or less fixed," In any event, the effect of a pension system on the efficiency of the active force wiU depend largely upon the terms of the plan, partly upon its certainty from the viewpoint of the employee, partly upon the character of the employee, and very largely upon his age. That it will not be PURPOSES OF PENSION SYSTEMS 37 an important factor in the case of the younger workers is practically certain. Pensions as a Means of Reducing Labor Turnover A hope that pension systems will reduce the enormous labor turnover so characteristic of mod- ern industry undoubtedly has been one chief reason for their establishment. Yet on this point it is possible to say with assurance that such sys- tems are disappointing. The testimony of nearly all employers who have introduced pension sys- tems is that the effect upon labor turnover in the case of workers under middle age is small, and often negligible. For workers nearing the retire- ment age the prospect of a pension apparently is a decided incentive to continuance in the service. But the very fact that workers have remained in a given establishment until such age is of itself evidence that they would be likely to continue if there were no pension system. There is the further practical consideration that the worker past middle age has sufficient inducement to con- tinue merely because of the difficulty involved in finding a new position. The reluctance of Indus- try to employ men over fifty years of age, or even somewhat under that age, is proverbial. Statements on this point were obtained from a considerable number of employers. While at di «i ^^tl 38 INDUSTRIAL PENSION SYSTEMS first sight they appear to show a reduction in labor turnover, careful analysis indicates that this was, in nearly all cases, confined to older work- ers. An oflficial of one large industrial company stated: "I believe that the restraining influence on labor turnover of the pension system is practic- ally negligible in the case of workers less than fifty years of age." Other representative statements on this point are given below: "We believe that this policy, in connection with our death benefit system and safety and welfare work ... is something of an incentive in holding their loyalty." "As to the further results of the system, we feel that with those employees who remain with the company for a number of years, looking for- ward to the possibility of a pension has consider- able influence in reducing the turnover, but with more recent employees it has very little of any such effect." "After a man reaches the age of fifty or so and has been with us for a considerable time, we have no doubt that the pension plan tends to tie him to us. The pension plan, however, has little in- fluence upon the real problem of labor turn- over." "The labor turnover at our mine operations is such that we have felt that the matter of pen- PURPOSES OF PENSION SYSTEMS 39 sions is given very little consideration by our men, except possibly the employees who hold the more important positions." "We do not believe that group insurance with- out pension or endowment features, or a pension plan which does not provide for a death benefit in some way, will accomplish very much in the long run, but we are convinced by our experience that a plan under which reasonable death, dis- ability, and pension benefits are provided, will do a great deal to increase the . . . continuity of service." These statements more or less accurately reflect the general consensus of opinion on this subject.^ It may safely be asserted, therefore, that the employer who inaugurates a pension system pri- marily for the purpose of reducing labor turnover ordinarily will be disappointed. Certainly the prospect of such a result is not sufficient warrant for assuming the burden and expense of a pension system. Furthermore, some disinterested students of the labor problem hold that a considerable labor *The Report of the Industrial Bureau of the Merchants' Association of New York, previously cited, said on this point: "As might be expected from the fact that pension systems do not in general create appreciation, loyalty, and efficiency, neither do they develop materially permanence of employment except with the older employees. In this connection it occurs to one that labor turnover is ordinarily very small among middle-aged employees who have worked for a number of years for their present employer." 40 INDUSTRIAL PENSION SYSTEMS turnover is by no means undesirable, but even that it is essential in order to enable workers to find their proper niche in industry. The use of pension systems to interfere with the mobility of labor has often been condemned as an attempt to "chain the worker to his job." Organized Labor has repeatedly objected to private pension systems on this ground, and on the further ground that they have been insti- tuted in order to prevent or hinder unionization. Thus Samuel Gompers, in a statement secured during the course of this study, said: "Labor does not believe in pensions given by the employer. Old age pensions were established by a number of railroad companies, not for the benefit of their employees primarily, but for the influence they might have on discouraging or- ganization. . . . "Where an employer establishes a pension sys- tem, it can be traced to the hope that it will prevent the organization of the employees into trade unions. There is no case on record where the employees are union men that pensions are paid. It is only in non-union plants or indus- tries that the pension system can be found. . . . "Another idea behind the payment of pensions is to prevent the enormous turnover in non-union shops where the wages and working conditions are undesirable. The employers believe that the hope of receiving a pension some time in the dis- PURPOSES OF PENSION SYSTEMS 41 tant future will influence the workers to accept low wages and disagreeable conditions of em- ployment. . . . "Only the autocrats in industry, the employers who fix the wages, hours of employment, and working conditions of the workers, believe in profit sharing as well as pensions. Until the Government itself establishes an old age pension system, labor will insist that pension systems shall be controlled by the workers themselves without any connection whatever with the em- ployers. . . . No system should be devised that will tie men to their jobs, and the object of the pensions when established in non-union shops is to compel them to accept whatever wages and conditions of employment are forced upon them. . . . "Labor therefore refuses to place in the hands of employers a weapon that can take away from workers at the last moment any benefit that de- pends upon their servility." While exception could easily be taken to many of the contentions in this statement, it may be regarded as an illustration of the position of a large section of Organized Labor towards private pension systems. Pensions as a Means of Disciplinary Control In many cases, one motive in establishing pension systems has been a desire to control and discipline workers. This is particularly true with 42 INDUSTRIAL PENSION SYSTEMS respect to strikes. Many employers have argued that an employee who may lose his pension if he goes on strike, joins a union, or engages in other activities displeasing to the management, wiU carefully count the cost. This purpose of pensions has been stated by one writer as follows: "The pension attaches the employees to the service and thus decreases the liability to strike. . . . "When employees realize that unsatisfactory conduct may at any time lose them not only their present position, a loss which in such a labor market as ours might be easily made good, but that it entails further the loss of a very valuable asset — the employee's right to a pension — the in- centive to good conduct is greatly increased." ^ This view is clearly reflected in some of the pension plans now in actual operation. For in- stance, such provisions as the following are not uncommon in "discretionary" plans: "A pension may be withheld or terminated in case of misconduct on the part of the beneficiary or for other cause sufficient in the judgment of the Board to warrant such action." "Discontinuance of regular work without per- mission for any other reason than sickness or ac- * F. A. Vanderlip. "Insurance for Workingmen." North American Review, December, 1915. PURPOSES OF PENSION SYSTEMS 43 cident, may at the discretion of the Committee be deemed sufficient cause for the forfeiture of all benefits accruing under this plan." Here, again, practical experience indicates that any such expectations from a pension system are doomed to disappointment. Strikes have fre- quently occurred in establishments where pension systems are in force. The experience of railroad companies, several of which have long-established pension systems, is an illuminating example of their ineffectiveness in avoiding labor troubles. Even if a pension system succeeds in prevent- ing men from going on strike, the fact that they have been deterred from doing so under virtual compulsion may engender an amount of ill feel- ing which will more than nullify any beneficial effects of the system. The use of a pension system for disciplinary purposes is, indeed, essentially its use as a club. The pension promise is in effect distorted into a threat. If one purpose of a pension system is to increase good will — and it is difficult to see how this purpose can be absent — certainly this result cannot be hoped for where the system is per- verted into an engine of repression, oppression, or discipline. Much of the hostility on the part of Labor toward private industrial pension systems appar- 44 INDUSTRIAL PENSION SYSTEMS ently can be traced to the belief, or fear, that they are likely to be used for such disciplinary pur- poses. Squier, in his book already quoted/ says on this point: ''That which the more thoughtful of the wage- earners themselves urge against a pension plan is that it restricts, even to the point of preven- tion, the mobility of labor. . . . "Another objection more frequently urged by the laboring class against this system is that the employee becomes a sort of chattel property of the employer. The latter is free to discharge him, cut down his wages, or to shift him from an agreeable to an undesirable line of work. He must submit without resistance." One prominent writer who has criticized the use of pension systems for disciplinary purposes, has characterized "discretionary" systems ^ as "the new peonage." In this connection he said: "A pension system with such features must either prove a delusive protection or operate as a bribe to induce the wage-earner to submit to a new form of subjection to the corporation. . . . "Employers seek to justify provisions in the pension systems like those quoted above by the fact that the pension fund is contributed wholly * "Old Age Dependency in the United States," pp. 278-280. " See p. 47. PURPOSES OF PENSION SYSTEMS 45 by the employer. But this fact furnishes no jus- tification. The employer should not be per- mitted, even at his own expense, to establish a pension system which tends to rob the working- man of his little remaining industrial liberty." ^ Conclusions as to Proper Purposes of a Pension —- — ■ System To epitomize the preceding discussion it may be concluded that a private employer is under no compelling moral obligation to provide for the support of his superannuated employees in their old age. Nor can a pension system primarily be regarded as a method of rewarding faithful ser- vice, although this purpose may be present. It may further be concluded that the prospect of reducing labor turnover, or of exercising disci- plinary control over workers, does not promise results of sufficient importance to warrant the ex- pense of a pension system, while the latter pur- pose is in many respects inherently objectionable. It follows, therefore, that the one controlling justification of a pension system from the em- ployer's standpoint is that it will increase ef- ficiency, primarily through elimination of super- annuated and incapacitated workers, and possi- bly by building up a larger amount of good will and interest among the active force. Although ^ Louis D. Brandeis. "Business a Profession," pp. 75-76. 46 INDUSTRIAL PENSION SYSTEMS some of the other purposes discussed are im- portant, they are incidental to the primary ob- ject of increasing efficiency. While in many cases it is doubtful whether such efficiency is attained, this failure may be due to imperfections in the plan or to errors in admin- istration. A sound retirement system should fa- cilitate the problem of dismissing superannuated and dependent workers. There may also be some increase in the efficiency of the active force, but the evidence on this point is by no means con- vincing. To the extent that a pension system does ac- tually increase efficiency, it merits most careful consideration. Increase in efficiency, however, is not in itself a complete justification of a pension system. Not only must a pension system be effective, but it must be inherently sound and equitable, and must not produce consequences injurious to the worker or to society as a whole. In order to determine the facts on these important points, it is essential to take up the discussion by distmctive types of pension systems. Types of Pension Systems Before proceeding to this analysis it will be convenient to define briefly the principal types PURPOSES OF PENSION SYSTEMS 47 of private pension systems. These are three in number, as follows: 1. The non-contributory "discretionary" sys- tem; 2. The non-contributory "limited-contractual" system ; ^ 3. The contributory system. In pension systems of the first type the cost is, at least ostensibly,- borne by the employer, the employee making no direct contribution. The employer, moreover, has complete discretion, not only as to the general provisions of the plan and the amount of the benefit, but also as to the continuance of the system, or even the continu- ance of a pension which has once been entered upon. Such "discretionary" systems specifically deny the existence of any contractual right on the worker's part and, as a result, provide for no benefit to a worker quitting the service or dismissed before reaching the retirement age. They may, or may not, include a death bene- fit. In pensions of the second type the contribu- tions are likewise made exclusively by the em- ployer who, again, retains practically complete discretion except that, once a pension has been *This designation is not in common use, but has been adopted as a convenient one for the purpose of this report. 'See p. 53. 48 INDUSTRIAL PENSION SYSTEMS entered upon, the employee acquires, to some ex- tent at least, a vested right in its continuance. However, while recognizing a right to the pension itself, systems of this type do not recognize a right to a withdrawal equity by workers separated from the service before reaching the retirement age. Even the right to the pension often is lim- ited.i In contributory systems the cost is divided be- tween the employer and the employee, either equally, or on some other basis. A more im- portant matter is that ordinarily the employee acquires a definite right to the pension,^ and he also ordinarily has a right to the return of his own contributions (either with, or without, in- terest) in case of his death or separation from the service prior to the retirement age. Such systems usually provide a death benefit. A contributory system really includes two ele- ments: one, the contribution of the employee, which represents savings against old age; the other, the contribution of the employer, which is in the nature of a pension proper. ^Thus, payment is sometimes limited by the adequacy of an amount set aside as a pension fund, and usually the bene- ficiary does not have a legal claim as against the employer. ^ Some contributory systems contain "discretionarj'^" pro- visions. The right to abandon the plan on return of the employees' contribution usually is reserved. PURPOSES OF PENSION SYSTEMS 49 Contributory pension systems, while common in the public service, and fairly frequent among banking institutions, are very seldom used by in- dustrial establishments. CHAPTER II non-contributory pension systems of the "discretionary" type The great majority of private industrial pen- sion systems now in operation are of the non- contributory "discretionary" type: that is, no part of the cost is borne by direct contribution from the employee, while the employer has com- plete discretion, both with respect to the general features of the plan, and as to the granting, or even the continuance, of the pension in specific instances. Such systems flatly deny the existence of a contractual right. This type of pension system is based, whether consciously or unconsciously, on the assumption that a pension is a gratuity and, as such, may properly be awarded by the employer at his will. Most discretionary plans, in fact, state that the payments are gratuitous gifts. Clauses like the following are common: "The allowances are voluntary gifts from the company and constitute no contract and confer no legal rights upon any employee. The con- tinuance of the retirement allowance depends upon the earnings of the company and the allow- 50 "DISCRETIONARY" TYPE 51 ances may at any time be reduced, suspended, or discontinued on that, or any other account, at the option of the Board of Directors." ^ "This plan was adopted by the Company, to reward long and faithful service. It is a purely voluntary provision made by the Company for the benefit of its employees, and constitutes no contract, and confers no right of action." ^ "Neither the creation of this Fund nor any pro- vision or action in reference or relating thereto or the distribution or application thereof or any thing done under or because of or in relation to such Fund, shall be construed as constituting or effecting a contract, expressed or implied, or giving any employee, beneficiary, or other per- son, any legal rights, or right of action at law or in equity, either before or after pension granted, nor giving any employee the right to be retained in the service, and all employees remain subject to discharge to the same extent as if this Fund had not been created, the creation of such Fund and all provisions made in reference or relating thereto, being purely voluntary on the part of the Company for the benefit of employees who shall have rendered it long and faithful service." ^ It is imperative at the outset to determine whether this conception of non-contributory pen- sions as voluntary gifts is sound. * From plan of the Newport News Shipbuilding Corpora- tion. ' From Pension and Relief Plan of the Standard Oil Com- pany of Kentucky. ' From Pension Board Regulations of the Pension and Relief Fund of Otis Elevator Company. 52 INDUSTRIAL PENSION SYSTEMS Are Non-Contributory Pensions Gratuities? Originally, pensions were mere gratuities. Thus, to quote from one writer: "The history of the pension as a reward for public service goes back to the Roman Empire. At that period and for many centuries thereafter the pension existed as the gift of a sovereign to a subject for distinguished military service. As time went on the sovereign used his prerogative to reward distinguished achievement in other fields of endeavor, in literature, in art, in philan- thropy, but the pension always remained the free gift of a sovereign or of a government to an in- dividual." 1 "The word pension in the exact sense applies to a payment made to an individual, without his cooperation." ^ In a strict sense a pension per se is primarily a gratuity. Distinction should, however, be made between pensions as voluntary or arbitrary pay- ments by an employer as a charity, and pensions paid under definite systems, where the prospect of a benefit is formally held before the worker as an inducement to, or reward for, continued service. As stated in the article just quoted: ^ Carnegie Foundation for the Advancement of Teaching, Bulletin No. 9. "A Comprehensive Plan of Insurance and Annuities for College Teachers," p. 6. 'Ibid., p. 5. "DISCRETIONARY" TYPE 53 "The personal pension is an ancient institu- tion. The pension system is distinctly modern." Pensions provided under formal systems, in- stead of being mere gratuities on the part of the employer, actually may come to a large extent out of the worker's own wage. Many, if not most, students of the pension problem hold that non-contributory pensions are essentially "de- ferred pay" and that, as such, they have a ten- dency to reduce the current rate of wages. In fact, some writers hold that there is no such thing as a "free" pension, but that in the long run the cost of non-contributory pension systems is borne by the worker himself. This issue is a vital one. If a pension is a mere gift dispensed by the employer as a charity, then the latter may be considered free to do as he pleases, just as in the case of any other charity. If, however, a pension is essentially a part of, or inevitably involved in, the wage payment, and merely deferred until a distant date, the situa- tion obviously is quite different and the worker as obviously has rights which cannot justly be ignored. Non-Contributory Systems as Deferred Pay The contention that non-contributory systems are essentially deferred pay and, furthermore, 54 INDUSTRIAL PENSION SYSTEMS that they tend to reduce the rate of wages, is well brought out in the following statements selected from leading discussions of the pension problem. Illinois Pension Laws Commission:^ "Whether the contribution to a pension fund be taken wholly from the employee's wages or salary, or be paid wholly by the employer, or be derived in part from each, these contributions are in all three cases to be regarded as in reality a deduction from wages or salary. It is the opin- ion of students of the pension problem that the existence of a pension system in connection with any position of employment is taken into account by both parties to the contract of employment, and that, broadly speaking, wages and salaries actually paid are in due course reduced below what they otherwise would be by the amount of the total contributions from both the employer and employee to a pension fund. The employee will thus pay for his pension by deductions from his wages or salary, whether he is conscious of it or not." The commission, indeed, went so far as to say that: "It is quite possible that, with a sound fund in existence, the reduction in wages and salaries may in time materially exceed the amount of the total contributions, owing to the advan- tages of such a fund to the emplo3^ee under pres- ent economic conditions. This consideration * Report of Illinois Pension Laws Commission, 1916, p. 282. "DISCRETIONARY" TYPE 55 further emphasizes the advantage to the em- ployer of having such a fund established." The Massachusetts Commission on Pensions accepted the deferred pay principle, holding that "non-contributory pensions inevitably come to be considered as deferred pay, and tend to result in holding down rates of remuneration." ^ A similar position was taken by the Pennsylvania Commis- sion on Old Age Pensions,^ by the Wisconsin Pension Laws Commission, by the United States Commission on Economy and Efficiency,^ and by various other official commissions appointed to study the pension problem. The theory of pensions as deferred pay has been very generally accepted by writers on the subject. Thus, one critic has said: "The real incidence of the cost of a retirement system in the case of employees who enter the service after the establishment of the system is placed by economic forces on the employee. The benefits offered by the system become part of his compensation for the services rendered." * ^ Massachusetts Commission on Pensions, 1914 Report, p. 12. (See footnote, p. 30.) 'Report of the Pennsylvania Commission on Old Age Pen- sions, March, 1919, pp. 114-115. * Report of the Commission on Economy and Efficiency Relative to Retirement from the Classified Civil Service of Superannuated Flmploycps, pp. 1719. "Lewis Meriam. "Principles Governing the Retirement of Public Employees," p. 388. 56 INDUSTRIAL PENSION SYSTEMS W. E. H. Lecky: "All experience shows that where a pension is attached to a particular employment, the rate of wages in it is greatly below what would other- wise have been the market rate." ^ Henry S. Pritchett, of the Carnegie Founda- tion for the Advancement of Teaching: "Salaries are undoubtedly lowered in the course of time by a free pension system, but not to such an extent as to prevent the pension roll from be- coming an enormous burden." ^ "The notion that in the free pension the bene- ficiary gets something for nothing is an illusion. There is no free pension where the questions of wages and pension are involved together. In the course of a limited number of years such pensions will be adjusted to the salary or wage scale. Under such conditions all salaries will be affected, while only a minority will get pen- sions." ^ The deferred pay principle does not necessarily involve a depression of current money wages in order to make that principle operative. If the pension is a substantial inducement for the worker to remain in the service rather than to go elsewhere, then the worker has an equity in the ^"Old Age Pensions, A Collection of Short Papers": p. HI. ' Carnegie Foundation for the Advancement of Teaching, Bulletin No. 9, p. 8. 'Carnegie Foundation, 13th Annual Report, p. 21. "DISCRETIONARY" TYPE 57 benefit, even though his current money wages have not been depressed. In this case it becomes a part of the consideration for which service is rendered. As one writer has said: "A pension is as much a part of an employee's real wages as are conditions of labor, guarantee of steady employment, board and lodging (where these are included), medical attention, half pay in case of sickness, and other features not included in the actual money wages received. "In order to get a full understanding of old- age and service pensions, they should be consid- ered as a part of the real wages of a workman. There is a tendency to speak of these wages as being paid by the company, or, in cases where the employee contributes a portion, as being paid partly by the employer and partly by the em- ployee. In a certain sense, of course, this may be correct, but it leads to confusion. A pension system considered as part of the real wages of an employee is really paid by the employee, not per- haps in money, but in the foregoing of an increase in wages which he might obtain except for the establishment of a pension system." ^ That a pension is essentially in the nature of deferred pay was repeatedly asserted by the Sub- Committee of the Executive Committee of King Edward's Hospital Fund for London, which made an unusually exhaustive study of the pension * Albert de Roode. "Pensions as Wages." American Eco- nomic Review, March, 1913. 58 INDUSTRIAL PENSION SYSTEMS problem extending over a period of several years. The opinion of the committee is perhaps the more significant because of the popular feeling that money subscribed to a hospital for the sake of the poor should not be used for the granting of pensions. The committee rejected this idea and emphatically endorsed the contention that pensions are in the nature of deferred pay.^ Furthermore, testimony by Sir Francis Mowatt before the Courtney Commission of Great Britain showed conclusively that salaries were lower in certain branches of the Civil Service where pen- sions were paid, than in others where no pen- sions were paid. Extracts from his testimony follow.^ "Now in fixing the scale of pay of your dif- ferent servants, you necessarily have some regard to the advantage secured by that annuity? "Yes. . . . I do not think I can go nearer than this — that of late years when we have moved men from the non-pensionable part of the Ser- vice to the pensionable part of the Service we have usually reduced their pay by something un- der ten per cent. But I must explain to the Com- mission that that does not mean a permanent reduction of ten per cent throughout their service, 'Report of Sub-Committee of the Executive Committee of King Edward's Hospital Fund: "Pensions for Hospital Officers and Staffs," p. 5. "^ "Pensions for Hospital Officers and Staffs," pp. 48-49. "DISCRETIONARY" TYPE 59 but only this — that so long as they are in the particular class to which they are transferred that deduction is continued. . . . "My own definition of deferred pay, which perhaps you will allow me to give again with ref- erence to this, is really this, that there is no doubt that a part of a Civil Servant's remuneration is deferred pay in this sense, that it is remuneration which is deferred from his immediate salary, and applied towards granting him a pension. In that sense, and within the conditions of the Ser- vice which he joins, that is a deferment from his actual remuneration; if there were no pension he would no doubt get some more pay." As further evidence of the effect of a pension system upon wages, it may be noted that a rail- way employee, testifying before the British Board of Trade Committee on Superannuation Funds, stated that "men are deterred from leaving the service on account of their prospective pensions," that is, "if there had been no pensions to look forward to, of course the salaries would need to be higher." This witness also stated that many of his acquaintances "refused to leave the service although they have been offered a larger salary, because of the prospective pensions." ^ Testimony to the same general effect was given by a government employee before the British * British Parliamentary Papers, 1911, Vol. XXIX, Part 1, p. 93. Quoted by Meriam, p. 20. 60 INDUSTRIAL PENSION SYSTEMS Royal Commission on Superannuation and Civil Service. This witness contended that "there is a gi'eat deal of Phariseeism" in the argument that a pension system was based upon the fact that government authorities did "not like to see their servants practically in the gutter in old age." He further stated: "So far as a company may be said to contribute to such a fund, I most unhesi- tatingly assert that it is simply a portion of the man's wages paid year by year for a specific pur- pose: it is simply paid in another way." ^ In further support of the contention that the non-contributory pension is essentially deferred pay, the action of the civil servants under the British Crown toward a pension system which had been maintained for a long period of years is often cited : While the British Civil Service plan did not require contributions, 70,000 out of 100,000 employees contended that the pensions were deferred pay, and expressed a preference for a contributory system. Their contention as to the deferred pay issue was sustained by the com- mission appointed to study the matter.^ The contention of these various students of the problem that "free" pensions are essentially de- ' British Parliamentary Papers, 1903, Vol. XXXIII, p. 84. Quoted by Meriam, p. 20. ^ The Carnegie Foundation for the Advancement of Teach- ing. Bulletin No. 9, 1916, p. 35. "DISCRETIONARY" TYPE 61 ferred pay was endorsed by numerous pension authorities and economists interviewed in the course of the current investigation. As opposed to these opinions in support of the deferred-pay principle, it is often held by industrial employers that pension systems have no effect on the current rate of wages. Some em- ployers point to the fact that they do not hold out the prospect of a pension to the worker when he seeks employment, but, indeed, that they forbid their employment executives to refer to the ex- istence of a pension plan. This reaUy has little significance. In a great many cases the prospec- tive employee will know whether or not the company maintains a pension system. Moreover, in private industry it is a matter of relatively small consequence whether the employee con- siders the pension in making his original wage bargain. He will know of the plan almost imme- diately after he enters the service, and its appeal will have more weight with him in the event of contemplated separation from the service than when he originally seeks employment. As a mat- ter of fact, there is an inconsistency in regarding new workers as within the scope of a pension plan. Until an employee has passed through the initial period of heavy labor turnover he should not be looked upon as a prospective pensioner. 62 INDUSTRIAL PENSION SYSTEMS Other employers having pension plans point to the fact that they pay the prevailing rate of wages. Thus, the executive of one large com- pany having a non-contributory plan stated: "As far as the practice of this Company is con- cerned, a pension has nothing of the nature of deferred pay. We pay wages equal at least to the prevailing rate, and in some cases more. A pen- sion cannot in my judgment partake of the nature of deferred pay unless similar pension systems are universally adopted in industry." A writer on labor questions, in this connection, has said : "Regardless of pension plans it is obvious that the wage rate will have to approximate the rate prevailing in the community." ^ If pension systems were in practically universal operation the argument that they are not in the nature of "deferred pay" would have considerable weight. Under the working of competition, how- ever, the establishment paying pensions must meet the prices named by those who are not under this expense. Under such conditions it will be difi&cult, if not impossible, to pass the cost of a pension system on to the consumer. The cost must, therefore, come out of wages or out of profits. The employer naturally will try to avoid * John A. Fitch. The Survey. "DISCRETIONARY" TYPE 63 a sacrifice of his profits, and in view of the dis- cussion and evidence just presented, it seems rea- sonably certain that he will, consciously or un- consciously, endeavor to recoup the cost out of the wage. In this connection the following statement by Dr. A. T. Hadley, of Yale University, may be noted : "The payments to the insurance funds must chiefly, if not wholly, come out of wages. Even though they be nominally levied on the employer, he is compelled by competition with other em- ployers not subject to this levy, to reduce in cor- responding degree the wages he pays.'" ' " 1 A theory of pensions has been advanced to the effect that the employer's contribution to a pen- sion scheme is, at least in part, similar to a charge for depreciation or insurance, and that "in so far as such a payment by the employer is for insur- ance against that waste and inefficiency in his establishment which would result from retaining superannuated employees and for protection against that discontent which would result from discharging the superannuated without providing for them financially, it is a part of the business expense." - 'A. T. Hadley. "Economics," pp. 60-61. * Louis D. Brandcis. "Business a Profession," pp. 67-60. 64 INDUSTRIAL PENSION SYSTEMS If this theory of pensions be accepted, it might be argued that the employer's contribution, at least in part, is charged into the selling cost of the goods and is, therefore, secured from the consumer rather than out of the wages of the worker.^ Conclusions as to Deferred-Pay Issue Notwithstanding the formidable array of opinion that a pension is essentially deferred pay, in the sense that it depresses the current rate of wages, this principle appears to be subject to im- portant limitations in its practical application. In order that the deferred-pay principle shall actually be operative, it is imperative that pay- ment of the pension shall be reasonably assured. Several of the statements above quoted, to the effect that a pension tends to depress the rate of wages, have reference to governmental pension systems. In the government service, as already emphasized, there is ordinarily no question as to the financial responsibility of the employer, or its continuance as an employer. Moreover, many ^ It is possible that some of the difference of opinion on this point is due to the fact that many pension systems have been put into effect by great corporations, frequently by those com- monly designated as trusts, and that such employers may find it easier to pass the cost of a pension system along to the consumer in the form of increased prices of products than would a smaller establishment. It is doubtful, however, whether the cost of a pension system is, as a matter of fact, entirely charged into the price of the product. "DISCRETIONARY" TYPE 65 employees ent€r the government service with the intention of making it a lifework and, generally speaking, feel a relatively high degree of security in their positions. Where such conditions obtain it seems inevi- table that the tendency of a non-contributory pension system will be to depress the rate of wages. In the case of employees in the British Civil Service, moreover, the evidence that this was the actual effect is convincing. The testi- mony (see p. 39) is specific that the current com- pensation of employees in certain pensionable classes was appreciably lower than that of other workers of the same grade in non-pensionable positions. Where, however, the pension promise is sur- rounded by many conditions, or where the re- sponsibility of the employer or his continuance in business is uncertain, or where the turnover of labor is exceptionally high, it seems doubtful whether a pension system has a significant effect on the rate of wages; this is especially true in the case of workers under middle age. In other words, if the expectation of receiving a pension is extremely vague, then it would seem almost axiomatic that the effect on current wages will be correspondingly modified. If this view be accepted, it follows that the 66 INDUSTRIAL PENSION SYSTEMS actual effect of a pension system in depressing the current rate of pay would ordinarily be much less marked in the case of employees in a private industrial establishment than in the case of pub- lic service employees such, for instance, as mem- bers of the police or fire department forces, teachers, or even clerical workers. The amount of the pension benefit has an im- portant bearing on this question. Even if the worker counts with considerable confidence on the receipt of a pension, it will not be a material influence with respect to current compensation unless it is of substantial amount. On the other hand, the promise of a large pension may exert a very appreciable influence. As the worker's period of service lengthens and as he approaches the retirement age, it seems obvious that the prospect of a pension will have an increasing appeal and wull exert a more certain effect upon the current rate of pay. At the same time, also, it seems inevitable that the employer wiU take this attitude of the workers into con- sideration in determining wages. He may not reduce wages because of the prospective pension benefit, but he may very naturally hesitate to increase the wages of his older workers in view of the prospect that in the near future he wiU be "DISCRETIONARY" TYPE 67 paying them a pension, although they will no longer be rendering him service. The conclusion seems warranted, therefore, that the theory of deferred pay holds whenever and wherever the pension benefit is counted upon with reasonable certainty by the worker. The actual effect upon the current rate of wages will depend on the amomit of tlie benefit and on the condi- tions surrounding its payment. As a corollary it follows that in such cases a worker actually has a right to a pension, at least to the extent that the principle of deferred pay has actually been operative.^ If he suffers a reduc- tion in wages, or foregoes an increase in wageS; because of his confidence that the promised pen- sion actually will be received, he cannot justly be denied that benefit if he has rendered the service. The non-contributory system of the "discre- tionary" type flatly denies any such contractual right on the part of the worker. It seems incon- trovertible that this denial of a contractual right is a serious if, indeed, not a fatal defect of such systems. The comparative uniformity with which spe- ^ It may be noted that the deferred-pay principle does not apply to back service rendered before the introduction of a pension system. For a discussion of this point, see p. 176. 68 INDUSTRIAL PENSION SYSTEMS cific waivers of contractual liability are included in pension plans of the discretionary type suggests that their authors are fearful that such a liability might otherwise be claimed. It has been held by a New York court that an employee dismissed from service has no right to any accrued share of a pension under a system where employees have not contributed to the fund.^ The Court said : "Under the regulations established, it seems to me that none of the employees has a vested in- terest in any part of this fund, even though credited upon his pass book, until the gift is com- pleted by actual payment." - So far as known this question has not arisen with respect to the continuance of a pension once entered upon. Argument That a Pension Is Pay "Conditionally" Dej erred Accepting the principle of deferred pay as sound within a more or less limited field, there ^McNevin v. Solvay Process Co., 32 App. Div. 610; affirmed 166 N. Y. 530. ' It may be noted that one wTiter, in commenting upon this case, has said: "It might be well to suggest, however, that lack of consid- eration has always given the equity side of the courts oppor- tunity to step in. It is not improbable that if the rnatter were ever brought into the courts elsewhere, this particular "DISCRETIONARY" TYPE 69 remains the collateral question whether the pen- sion is pay unconditionally deferred, so that the worker has at all times an "accrued vested right," or whether it is deferred subject to conditions which vitally affect the worker's equities therein. That the right of the worker to a pension as deferred pay is a conditional right was asserted by the so-called Courtney Commission of Great Britain, appointed in 1902, which held in sub- stance that "a deferred pension is remuneration for services as much as an immediate money payment; but it is, in part at least, remuneration for continuity of service contingently payable on the continuity being maintained during a defined period and not accruing from year to year as an indefeasible in- terest." 1 This distinction is one of great practical impor- tance. It obviously has a vital bearing on the right of the worker to a withdrawal equity in the event of his separation from the service. This contention that the worker's right to a pension as deferred pay accrues only upon the completion of a stipulated period of service is, part of the plan might be set aside on this ground, as well as on the ground of being against public policy." (Albert de Roode. "Pensions as Wages." American Economic Review, March, 1913.) "Tensions for Hospital Officers and Staffs," p. 47. 70 INDUSTRIAL PENSION SYSTEMS however, by no means universally accepted. Thus the Sub-Coinmittee of the Executive Com- mittee of King Edward's Hospital Fund for Lon- don, in discussing this point, declared itself "in favor of the principle that every year of hospital service, whenever and wherever given, should be regarded as pensionable with rights vesting ac- cordingly." While this statement was made with special reference to the hospital services then under con- sideration, it seems worthy of notice in connection with discussions of private pension systems. In the article already cited,^ de Roode likewise held that the right of the w^orker to a pension accrues from year to year, subject, however, to the condition that the right might begin to accrue only after some stipulated, but relatively brief, period of service. In this connection, he said : "Considering pensions as a part of wages, the contributions made each year to the pension fund by the Government should be considered, subject to one exception, as deferred wages, payable to the employee upon separation from the service, or to his heirs in case of death. The exception to this general principle should be in the case of the early years of service. A pension is not a mere increase in wages; it is an inducement to con- tinued service. Many persons enter government * "Pensions as Wages." American Economic Review, March, 1913. "DISCRETIONARY" TYPE 71 service as a temporary occupation. The right of the employee, therefore, to the accrued value of his pension should not commence until he has passed what might be called the temporary stage. Roughly speaking, this would be five or six years, and the accrued value of the pension returned to him upon separation would commence with the beginning of what might be called the more per- manent service." ^ If the theory be accepted that a non-contribu- tory pension is pay "conditionally" deferred over practically the entire working life of the em- ployee, it obviously is but a short step from the use of a pension as a promise, or inducement, to its use as a club or threat to compel workers to remain in the service. Some of the objections to a policy of compulsion have already been noted. At least if pressure is to be brought upon workers to continue in the service, it would seem that some far less cumbersome method could be devised than the inauguration of a pension system, with its heavy and uncertain financial burden. One effect of such an interpretation, as already pointed out, is to produce great inequity as be- tween workers. The worker who is fortunate ' It will be noted that this statement had special reference to employees in the public service. However, deRoode held that "pensions for public employees should be considered from the same fundamental basis as pensions for private em- ployees, and they should no less be considered as part of wages." 72 INDUSTRIAL PENSION SYSTEMS enough to continue in the service until the retire- ment age may receive a very large benefit; the much larger number who fall short of the retire- ment age may, and usually do, get nothing. Objection to such interpretation of pensions has been taken by one writer ^ on the ground that, just as a life contract between a private employer and an employee would not be sustained in the courts, as being against public policy, likewise a contract would be objectionable, any part of the consideration for which was conditional upon life service to the retirement age. While the objec- tion in question had reference to pensions in the public service, again it seems applicable to private pension systems. Conception of Pension Systems as a Form of Tontine Insurance Indefensible One further suggestion relative to the deferred- pay theory remains to be considered, namely, that while a pension may be regarded as deferred pay, it is deferred pay to be invested in a tontine in- surance scheme under which, admittedly, many will contribute but only a few benefit. It has been argued by some that so long as the facts are fairly placed before the worker there is no ground ^ Lewis Meriam. "Principles Governing the Retirement of Public Employees," pp. 420-421. "DISCRETIONARY" TYPE 73 for criticism if he chooses to take his chances in such a scheme. One answer to this is that tontine insurance is very generally condemned and, in some states of this country, is flatly forbidden by law. A point of more importance is that employees as a rule do not "choose" to enter upon pension plans. Non-contributory plans clearly are at the employer's option. In most contributory plans, moreover, participation is compulsory, at least for new employees. Practically, therefore, there is no "choice" in either case. The conception of pension systems as a form of mutual insurance on the tontine plan has been very generally condemned by most students of pension problems. Thus, the Massachusetts Pen- sion Commission, in its 1914 report, said on this point: "That a pension is a deferred wage implies that the employee has earned a certain wage^^part of which is retained by the employer to be paid him on retirement at a stated age. But what be- comes, under such a theory, of the defeiTed wages earned by the employee who leaves the service or dies? He forfeits that part of his wages which has not been paid because deferred, and the forfeited wages become part of a fund from which are paid the pensions of those who survive to the pension- able age. This is in fact a tontine system, which is to-day condemned by the best insurance laws. 74 INDUSTRIAL PENSION SYSTEMS "Looking the question squarely in the face, would the employees assent to a pension upon the theory of deferred wages, and consent that part of their wages be held back for the benefit of those who survive to the pensionable age? Upon such a theory the employee, in order to recover his wages, would have to 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 his contributions." It should be noted that while this might seem to be an argument against the validity of the deferred-pay theory, in reality it does not dis- credit that theory, but rather discredits pension systems which do not recognize that theory by definitely assuring some compensating benefit in return for the pay thus deferred. The New Jersey Bureau of State Research, in discussing this phase of the problem, said : "The 'tontine' or forfeiture feature was very early introduced, in a somewhat modified form, in the pension funds in France and Great Britain, and from there was copied into the pension funds in the United States. A movement to rid our pension funds of this feature is already on foot. The first steps along this line were taken by Massachusetts, New York City, Pennsylvania, and Connecticut, which have in their new systems supplanted the tontine features by sound insur- ance and savings features." ^ * "Teachers' Retirement Systems in New Jersey, Their Fallacies and Evolution." Report prepared by Paul Studen- sky, 1918, p. 64. "DISCRETIONARY" TYPE 75 While this statement had reference to a con- tributory system, the objection to the tontine principle is applicable to a non-contributory sys- tem in so far as the deferred-pay theory is op- erative. Effect of Non-Contributory Pension Systems on Thrift An objection frequently urged against non- contributory pension systems is that they neces- sarily tend to discourage habits of thrift. If some one, whether the State or the individual employer, assures a group of individuals that their old age will be provided for, and if that assurance is relied upon, the beneficiaries will, it is argued, have less incentive to provide for themselves. On this point the Massachusetts Commission on Old Age Pensions, Annuities, and Insurance said: ^ "A non-contributory pension system would weaken the motive to individual saving, and would react unfavorably on character, by lessen- ing the sense of personal responsibility and inde- pendence. . . . "The process of social betterment clearly mani- fest in the advance of wages, the increase of sav- ing, and the decline of pauperism, will continue, unless the forces that have been bringing it about are undermined by unwise social legislation. . . . 'Report, 1910, pp. 301, 308, 309. 76 INDUSTRIAL PENSION SYSTEMS By establishing a pension system for the benefit of the few who may perhaps need such aid, the State would strike a blow at the resources of thrift, individual responsibility, and family in- tegrity, which have enabled the great majority of the population to maintain themselves in self- supporting independence. In the impatient effort to help things forward at a faster pace, we should, by attempting an experiment with non-contribu- tory pensions, immediately retard and ultimately reverse the process of social betterment." A similar opinion, with respect to general old age pensions, was expressed by W. E, H. Lecky, as follows: "It proposes to teach the whole working popu- lation to look to the State, and not to themselyes, for the provision for their old age and for the old age of those who might be dependent on them, and thus to destroy the most powerful of all mo- tives to thrift, the very mainspring of productive and self-sacrificing industry. . . . "Can it be seriously believed that the addition of many millions a year to the state funds directly employed in the relief of poverty will, in the long run, tend to diminish pauperism or to encourage self-reliance and thrift?" ^ Still another opinion to the same effect may be cited : ' W. E. H. Lecky, article in Forum, Feb., 1900. pp. 694, 695. Quoted from Report of Massachusetts Commission on Old Age Pensions, Annuities and Insurance, 1910, p. 309. "DISCRETIONARY" TYPE 77 "The establishment of such a system would constitute a definite abandonment of the hope that any large proportion of the poor will ever be able to provide for their old age, by the improve- ment of wages and increases in their sense of re- sponsibility." ^ While several of these criticisms are directed at government old age pensions, nevertheless they seem applicable, at least to a considerable extent, to private pension plans of the non-contributory type. Here again, however, the actual effect of a non-contributory system will largely depend upon the certainty of the pension promise from the standpoint of the worker. Where the State pays a free pension the recipient will count with almost complete assurance upon it and, in such cases, it seems almost axiomatic that he will have correspondingly less incentive to provide for him- self. In many private schemes, as already shown, the worker has no such positive assurance as under a state pension. If he counts with only a vague hope on ever receiving a benefit, it may fairly be questioned how far the existence of a pension system will lead him to abandon habits of thrift. The view is, however, held by some pension critics that one of the greatest handicaps to thrift ^"Old Age Pensions: A Collection of Short Papers," p. 12. Quoted from Report of Massachusetts Commission on Old Age Pensions, Annuities and Insurance, 1910, p. 309. 78 INDUSTRIAL PENSION SYSTEMS is the difficulty of getting a start, and that this requires so much sacrifice that the worker, espe- cially if he encounters sickness, accident, or other misfortune, is easily discouraged. These critics hold that the prospect of even a very moderate pension may prove an incentive to saving, rather than otherwise.^ In considering this argument the fact of every- day experience should not be overlooked, that thrift is often found among those who appear to have the greatest burdens to carry, while extrava- gance as frequently occurs among those with the fewest responsibilities and apparently the best opportunities for saving. The argument that lack of thrift is partly due to difficulties in getting a start may have some force, but on the whole the conclusion seems justi- fied that a non-contributory pension system, either in public or private employment, has a tendency to discourage, rather than to stimulate, individual thrift. Conclusions as to Non-Contributory Systems of the "Discretionary" Type The preceding discussion shows that there is a conflict of opinion as to whether, and particularly ^This point of view is clearly reflected in a discussion of the British Pension Act of 1908 by Henry R. Seager. (Article in Charities and Commons, October 3, 1908.) "DISCRETIONARY" TYPE 79 as to how far, a non-contributory pension system savors of the nature of deferred pay, and still further disagreement and confusion as to how far that system directly affects the current rate of wages. It appears, however, that the following facts are fairly well established: 1. That, where its receipt is considered by the worker as definitely assured, a non-contributory pension is essentially deferred pay and, further- more, actually depresses the current rate of wages. 2. That, where the receipt of the pension is involved in great uncertainty, or where the amount is very small, its effect on the current rate of wages will be much less marked, and possibly negligible. 3. That the theory that a pension is pay "con- ditionally" deferred over a long period of years is sharply disputed by some of the best authori- ties. 4. That the use of a non-contributory pension as a sort of tontine insurance is very generally condemned. 5. That a non-contributory pension system tends to discourage individual thrift. 6. That, to justify itself, a pension system should carry assurance that pensions will be re- ceived, in which case the theory of deferred pay becomes operative. 7. That, in such cases, considerations of jus- tice demand that the amount of pay deferred be 80 INDUSTRIAL PENSION SYSTEMS regarded as rightfully belonging to the worker and be returned to him under equitable terms, or to his heirs if he dies before receiving it. This would not prevent requirement of a brief period of serv- ice before the worker's right should be regarded as vested. 8. That, as a corollary, the "discretionary" type of private pension systems now generally in effect is objectionable, or at least falls far short of a reasonably ideal system. In effect, a non-contributory system of the "dis- cretionary" type says to the worker: // you remain with this company throughout your productive lifetime, // you do not die before the retirement age,^ // you are not discharged, or laid off for an ex- tended period, // you are not refused a benefit as a matter of discipline, // the company continues in business, and // the company does not decide to abandon this plan, you wiU receive a pension at the age of , sub- ject to the contingency of its discontinuance or reduction, after it has been entered upon. The question immediately arises: What is the justification of a formal pension system sur- *Some systems of this type provide a death benefit. "DISCRETIONARY" TYPE 81 rounded by so many conditions, waivers, and reservations? It should be emphasized that the objection to the "discretionary" feature is not the employer's right to abandon or modify the scheme, but the right to make such changes retroactive by deny- ing any contractual right on the worker's part in the pension benefit. Because of the hazards under which business is conducted and the uncer- tainties involved in the financial phases of pen- sion systems themselves, it is imperative that the right to abandon a pension plan be reserved by the employer, although that right should be ex- ercised only after most serious consideration. But to escape all obligations to those who have for years rendered service with the prospect of a pen- sion in view, is a very different matter. In this connection the following comment by the Special Committee on Industrial Pensions of the New York Merchants' Association is worthy of special emphasis: "The corporation is quite right in providing that it reserves the right to alter the rules, or to free itself entirely from the pension obligation. It should be possible always to utilize experience, even to the extent of abandoning the entire un- dertaking. But such reservations should always be prospective only, they should never take effect retroactively. To provide, as is often done, that 82 INDUSTRIAL PENSION SYSTEMS the corporation may wind up the pension plan at any time without fulfilling the promises already made, and then to expect employees to look forward with confidence and order their lives upon the strength of these promises, is certainly inconsistent. When the economic aspect of pen- sions is considered, such retroactive power of revocation can hardly be considered as moral. . . . "The employees are entitled to a pension sys- tem which has set up an actuarial balance over the years in which any one of them can expect to be affected. If the employee is required to con- tribute to the pension system, this is only honest. Even if the pensions are apparently the free gift of the corporation, and the economic possibility of this for a considerable period is doubtful, the employee is entitled to look forward with assur- ance to the pension promise. A pension prom- ise that is not certain involves an uncertain morality." If it could be demonstrated that the deferred- pay theory did not hold, the various objections to "discretionary" systems on the ground of in- equity might be answered by the argument that, in so far as any portion of the workers receive a benefit, such a system is better than none. But if in order to pay benefits to a trifling percentage of the force the current wages of a large propor- tion are reduced, this argument cannot be sus- tained. The conclusion seems forced, therefore, that "DISCRETIONARY" TYPE 83 even though a pension system be financed wholly by the employer, the worker has rights under it which cannot be denied. This, in turn, leads to the conclusion that systems of the "discretionary" type cannot be justified or, at least, that they do not make a reasonable approach to a practically attainable ideal. The argument most frequently advanced in favor of non-contributory pension plans of the "discretionary" type is that of simplicity and ex- pediency. One of the chief advantages, in the opinion of many employers, is that complete control lies in the hands of the employer. Many industrial employers who have carefully con- sidered both types and some who are impressed by certain advantages of the contributory system have, nevertheless, concluded that the practical advantages of the non-contributory type of pen- sion plan are controlling. The following statement by one employer fairly expresses the attitude of many on this point: "We discussed very thoroughly the matter of a contributory or non-contributory pension and, due to the complexity of any contributory plan, we decided to adopt the non-contributory plan. . . . Certainly the non-contributory system is far simpler and easier of administration." In view of the deferred-pay principle already 84 INDUSTRIAL PENSION SYSTEMS discussed, however, and of the great inequality which a "discretionary" system produces as be- tween workers who complete a stipulated period of service and the larger number who fall short of doing this, yet spend the greater part of their active lives in the employ of a given establish- ment, the conclusion seems unavoidable that the issue of expediency is not a suflBcient justification of non-contributory systems of the "discretionary" type. In thus condemning the fundamental principles involved in "discretionary" pension systems, it should be recognized that such systems in actual practice often may be free from some of the abuses by which they are easily subverted. Much depends upon the spirit in which the plan is actu-i ally administered. In many cases the actual in- terpretation of the plan is far more liberal than its letter. Employees who just fail of reaching the retirement age sometimes are permitted to participate in the pension benefit, at least to some extent. In general, however, no benefit is paid under a "discretionary" plan to a worker volun- tarily quitting the service, or to one who is dis- charged. In any case the worker cannot insist upon consideration as a matter of right. It may be noted in passing, moreover, that any disposi- tion toward greater liberality than the rules pre- "DISCRETIONARY" TYPE 85 scribe carries with it the danger of impairing the jSnancial stability of the scheme. Furthermore, while in some cases the interpre- tation of the plan is more liberal than the plan itself, in other cases plans have been arbitrarily changed in such way as greatly to limit the pen- sion benefits.^ In spite of the grave objections raised against them, "discretionary" pension systems are in many cases to be regarded as a sincere attempt to solve one of the most complex problems in mod- em industrial economics. That they have not solved it completely or satisfactorily is no occa- sion for wholesale denunciation of their authors. Nevertheless, in view of the numerous objections to such systems, and particularly their failure to place the pension benefit on a definite contractual basis, their ready liability to abuse, their inade- quacy as a means of meeting the superannuation problem, their great danger of financial shipwreck, it is clearly incumbent upon an employer about to inaugurate a retirement system to endeavor in every practical way to devise some method which will more nearly approach an ideal plan. In this connection, the following comment is pertinent: ' In this connection see p. 167. 86 INDUSTRIAL PENSION SYSTEMS "It may be concluded that the efforts which industrial corporations are making for the relief of old age dependency, in view of their paucity and variety, do not give satisfactory ground of hope that the ultimate solution of the problem can be reached in this way. At best their efforts are a makeshift; and their chief value is that of a guideboard along the roadway of the ultimate happy destiny of the army of American toilers." ^ *Lee Welling Squier. "Old Age Dependency in the United States," p. 108. CHAPTER III non-contributory pension systems of the "limited- contractual" type Under non-contributory pension systems des- ignated in this discussion as of the "limited- contractual" type, the right to receive a benefit where the worker has fulfilled the conditions of the plan and has entered upon the pension roll is definitely recognized, and a pension once granted ordinarily cannot be discontinued — at least without provision for meeting any rights accrued by reason of the service rendered. Ordinarily, however, no right is recognized in plans of this type until the worker has actually gone upon the pension roll. In practically all other respects, such so-called "limited-contrac- tual" systems as actually operative at the present time are similar to plans of a "discretionary" character. They often reserve a wide measure of discretion to the employer as, for instance, the right to discontinue a pension in case of "gross misconduct" or even in case of acts "prejudicial to the interests of the Company." 87 88 INDUSTRIAL PENSION SYSTEMS Typical provisions in pension plans of this sort are as follows: "When once an annuity has accrued and been granted as a regular allowance, it will be con- tinued for the life of the annuitant, subject, how- ever, to the provisions of this Plan, as it is in effect at the time such annuity is granted." ^ "The Company reserves its right and privilege to discharge at any time any officer, agent, or employee as the interests of the Company may in its judgment require, without incurring any liability because of any pension not actually awarded; and also reserves its right to amend, alter, or repeal at any time these Regulations or any of them as regards aU persons who might otherwise become entitled to claim thereafter an award of pension thereunder, but not so as to affect the right of any person to whom a Service Pension shall have been awarded, to receive all payments of the same promptly and in full." ^ In one plan of this type provision was made, in case the scheme was abandoned, to transfer the Pension Fund to a trustee, or to purchase annui- ties from an insurance company, for all persons to whom pensions had been awarded, in amounts equal to such pensions. These illustrative clauses show that the con- tractual obligation often is of a very limited char- acter. Moreover, where companies establish dis- * Standard Oil Company of New Jersey Plan. ' Westinghouse Electric & Manufacturing Company Plan. "LIMITED-CONTRACTUAL" TYPE 89 tinct funds segregated from the general funds of the corporation, it is sometimes provided that theJ pensioner shall have no claim on the company itself, in case the fund is exhausted. While the creation of a fund may really be an additional safeguard for the pensioner, such a stipulation' obviously involves a limitation of the company's contractual liability. The contractual type of non-contributory pen-^ sion system is not common. The recognition of a definite financial obligation is a burden which many establishments are unwilling or feel unable to assume. Of eighty-seven non-contributory systems in industrial establishments examined in the course of this investigation, only twenty- seven w^ere of the contractual type. Complete acceptance of the contractual prin- ciple would require that a payment should be made to employees quitting the service, or dis- charged, before reaching the retirement age, such payments to represent the net accrued value of contributions up to that time. Such a payment is often referred to as a "withdrawal benefit" or "return of contributions," but may better be described as a "withdrawal equity," since it is supposed to cover a right accrued because of service rendered, and since in reality it is in lieu of an expected benefit. The inclusion of such a 90 INDUSTRIAL PENSION SYSTEMS provision adds very considerably to the cost of a pension plan. In addition, there is a general unwillingness on the part of employers to pay such "withdrawal equities" to workers who are separated from the service, prior to their super- annuation, either by their own volition, or by, dismissal. A further argument sometimes ad- vanced against such a withdrawal equity is that it may actually place an incentive before the em- ployee to quit the service in order to get the accumulated value of his equity.^ This, it is argued, not only tends to injure the morale of the service, but is likely to lead to the foolish dissi- pation of the proceeds by the recipient. While these objections are entitled to consid- eration, nevertheless, to the extent that the principle of deferred pay is actually operative, it is difficult to escape the conclusion that where a formal pension system is in effect, workers who have completed a substantial period of service are entitled to such a w^ithdrawal equity, even though contributions have been made in part, or entirely, by the employer. *Such an objection, it may be noted, was raised by the National Civil Service Reform League, as follows: "Any retirement scheme which provides for refunds is very objec- tionable, because it puts a cash premium upon resignation and offers a great temptation to leave the service to those still young and capable enough to get outside employment." Nat'l Civil Service Reform League. "Superannuation in the Civil Service," N. Y., 1906. "LIMITED-CONTRACTUAL" TYPE 91 Comparatively few pension authorities go so far as to insist upon this in the case of non- contributory schemes and even under contribu- tory plans it is not customary for a worker who becomes separated from the service before reach- ing the retirement age to receive any part of the employer's contribution.^ Unless provision is made for at least some withdrawal equity in the case of separation, for workers who have rendered a considerable length of service, the non-contributory system of the "limited contractual" type is open to the serious objection that it does nothing for the considerable number of workers who, though spending a large portion of their productive lifetime with a given establishment, do not continue until the retire- ment age. In so far as the deferred-pay principle is operative, a non-contributory pension system of the "limited contractual" type thus involves the tontine feature, by which many lose and only a few win. It is paternalistic; it can easily be abused for disciplinary purposes; it tends in gen- eral to discourage habits of thrift. Furthermore, unless the worker is made to feel that the pension, or the withdrawal benefit, has been earned by him as part of his compensation, he is in effect * In this connection see p. 207. 92 INDUSTRIAL PENSION SYSTEMS accepting it as a form of bounty from his em.- ployer. For all these reasons, non-contributory systems of the ''limited-contractual" type, though pos- sessing marked advantages over an ordinary "dis- cretionary" system, nevertheless fall far short of fulfilling the requirements of a satisfactory pen- sion plan. While such a provision for withdrawal equities would remove one of the most serious objections to such a system, it seems reasonably certain that an employer who is disposed to accept the prin- ciple of deferred pay to the extent of providing withdrawal equities through surrender of his own contributions can accomplish better results, ap- parently at less cost, and surely with less uncer- tainty, by some other method as, for instance, a system of paid-up annuities discussed in Chap- ter V. CHAPTER IV CONTRIBUTORY PENSION SYSTEMS Under a contributory system, as already ex- plained, part of the cost is directly borne by the employee, usually through systematic deductions from his pay envelope. In some private systems of this type the employee bears one-half the cost. In many public service pension systems his share is smaller. A more vital feature of contributory systems is that they recognize a definite right on the part of the workers, not only to a retirement benefit, but also to a withdrawal equity of some sort. Usually; moreover, a death benefit is provided.^ *In all contributory systems, experience has shown that eventually the contributors will demand four things: first, that if a contributor is dismissed or resigns voluntarily before the pensionable age, he shall be paid the amount of his total contributions, with interest; second, that if a contributor be- comes disabled before the pensionable age, he shall receive either a full or a proportionate pension; third, that if he dies before retirement, his estate shall receive the amount of his total contribution, with interest, or even the amount of both his and his employer's contribution, with interest; fourth, that if he retires upon a pension, but dies before the total amount of his pension receipts equals the amount of his total contri- bution, with interest, his estate shall receive the balance. (Carnegie Foundation for the Advancement of Teaching. Seventh Annual Report of the President, p. 61.) 93 94 INDUSTRIAL PENSION SYSTEMS Wherever there is reasonable ground for the belief that a contributory system will work, there are other arguments in its favor as against a non- contributory system. A contributory system is far less paternalistic; moreover, it tends to em- phasize the value of thrift and presumably to encourage habits of thrift. It may also tend to reduce the financial burden of the employer, but this cannot be laid down as certain, since the fact that employees contribute may lead them to de- mand a more liberal plan than the employer would adopt if he financed it alone. Most disinterested students of pension prob- lems have been strongly in favor of the contribu- tory principle, at least in the public service. Representative statements by some of these writers follow. Henry S. Pritchett, of the Carnegie Founda- tion: "Both the logic of facts and the logic of events point conclusively in the direction of contributory pension systems. . . . Such a contributory plan has all the advantages that are lacking in straight pension systems. It encourages thrift; it ensures ultimate payment of obligations by contract; it affords protection to the employee and his family; it provides a pension which the employee can feel is not only earned by long service but is his own by purchase; and, finally^ it brings the employer CONTRIBUTORY PENSION SYSTEMS 95 and employee into mutual relations and gives each a more personal interest and confidence in the other. Where the number of employees is large enough, such a plan, after it has been launched on a sound actuarial basis, may be oper- ated by individual firms; where the number is small, arrangements may be made with insurance companies that are undertaking group insur- ance of the character described in increasing num- bers." 1 Lee Welling Squier: "It is urged that, in this country especially, every man is the 'architect of his own fortune'; that the provision against want at any period in life is an individual obligation; . . . that any hope of old age relief from want which is not based upon individual thrift, economy, and fore- sight decreases efiiciency, independence, and man- liness; that it is an imposition on the general body of our industrial, thrifty population and an unnecessary and unwarranted addition to the already heavy burdens of the taxpayers to permit the shiftless, lazy, and improvident to expect and rely on protection against want which they them- selves have not secured by their own prescience and determination." - Paul Studensky, New Jersey Bureau of State Research, a well-known writer on pension prob- lems: * *The Carnegie Foundation for the Advancement of Teach- ing: Eleventh Annual Report of the President, pp. 118-119. ^"Old Age Dependency in the United States," p. 262. '"The Pension Problem and the Philosophy of Contribu- tions," pp. 17-18. 96 INDUSTRIAL PENSION SYSTEMS 1. "It is a compromise between the foregoing two extreme systems. ('Wholly contributory' and non-contributory systems.) ^ 2. "It harmoniously combines with social in- surance and with its principle that every worker must participate in the cost of his protection. 3. "It is a joint undertaking which involves mutual benefits and a two-fold purpose: on the one hand, insuring the employees and their de- pendents against want in old age, disability, death, and — to some extent — resignation and dis- missal; on the other hand, facilitating the elim- ination of the inefficient from the service and promoting an esprit de corps. 4. "It tends to give both sides an equal voice in management. 5. "It promotes a clear distinction between pensions and wages, each side knowing what it pays; it is not intended either to reduce or in- crease the wages, does not depress the wage, and does not become a 'deferred pay.' 6. "It makes possible the establishment of a financially sound system, the cost of which amounts to ten or eleven per cent or even more, by dividing the cost and requiring the employees to pay five or six per cent, as is being done all over the world.^ 7. "Concurrently with its adoption for both present employees and new entrants, the old ^The designation "wholly contributory" in this case meant a system financed entirelj^ by contributions from employees. ^This estimate of cost is applicable to public service rather than to private industry. CONTRIBUTORY PENSION SYSTEMS 97 'vested rights' and privileges are being swept away. 8. "It is a system which progresses in har- mony with social evolution, while the other sys- tems are dying, and it expresses the growing mutual responsibilities which make for a greater democracy and a happier community." Deferred-Pay Issue under Contributory Pension Plans One important argument advanced in favor of the contributory plan is that it meets, at least in part, the issue of deferred pay. In the case of contributory pension systems, the amounts con- tributed by the employee obviously are, in a technical sense, deferred pay, since they are taken out of his current wage to be returned in one form or another at a later date. It by no means fol- lows, however, that the employee's contributions are deferred pay in the sense that they reduce the current rate of compensation. As deductions from his current pay they do, of course, reduce the amount of wages which he receives at the time. But there seems no reason to assume that they could reduce the rate of wages. Instead, under a contributory system the contributions of the employee are, essentially, savings invested in the purchase of an annuity. As one writer has said : 98 INDUSTRIAL PENSION SYSTEMS "The employees' contributions could no more be viewed as a reduction of their wage than could any savings which they add to their bank ac- counts. ... Of course, the contribution slightly limits one's immediate use of the wage, but it does so in order to insure the employee some satisfac- tion of his wants in the future. "It is, therefore, not a reduction of the wage, but a redistribution of it between immediate and future wants." ^ It has, indeed, been contended that a contribu- tory system tends to raise the current rate of wages, on the ground that workers agreeing to make regular contributions would endeavor to secure an increase in their rate of compensation sufficient to offset these. Whether, under a contributory system, the con- tribution of the employer tends to reduce the rate of wages equally as in the case of a non-contribu- tory system, cannot be definitely established. It would be easy to argue that the effect would be the same in one case as in the other. Some students of pension problems, however, instead of regarding the employer's contribution under a contributory system as taken out of the worker's wage, look upon it as an established payment in return for which he receives definite advantages ^Paul Studensky. "The Pension Problem and the Phi- losophy of Contributions," p. 14. CONTRIBUTORY PENSION SYSTEMS 99 in the form of better service, or in facilitating the removal of inefficient workers. On this point the writer just quoted has said: "So long as the employee remains in the em- ployer's service the two help the realization of each other's purpose, for if the government by adding a 'pension' to his 'annuity' thereby doubles his protection, the employee, on the other hand, by adding his 'annuity' to the employer's 'pen- sion' thereby doubles the facilities of the govern- ment in eliminating the inefficient and improving the service in general. A mutual relationship of tremendous social consequence is thus established between the two." ^ It might seem that this argument would be equally applicable to non-contributory systems. This view overlooks the important fact that the ordinary non-contributory system recognizes no contractual right. If the employer is not willing to put the pension on a definite contractual basis, he cannot reasonably expect, as a direct result of a pension system, that cooperation from the worker which is essential to increased efficiency of service. As a rule contributory systems provide for the return of the employee's contribution in the event of his separation from the service prior to reach- *Paul Studensky. "The Pension Problem and the Phi- losophy of Contributions," p. 14. 100 INDUSTRIAL PENSION SYSTEMS ing the retirement age. Few, if any, private pen- sion plans provide for return of the employer's contribution in such cases. It is the opinion of some leading students of the pension problem, however, that the employee separated from the service prior to reaching the retirement age should receive the net amount of not only his own, but of the employer's contribution as well.^ It may be noted that one of the leading actu- aries of Great Britain, James J. M'Lauchlan, in outlining what he termed a "model fund," pro- vided for the return of the employer's contribu- tion in the event of the death of an employee, but not in the event of his withdrawal from the service. His model fund included the following benefits: ^ (1) "A pension on retirement at any time after reaching age sixty ; (2) "A pension of a reduced amount corre- sponding to length of membership, on retirement in impaired health before reaching age sixty, these pensions to be at a uniform rate per cent per annum, on the average salary received during the whole period of membership ; * Meriam is one of the few writers who have advocated such return of the employer's contribution in the case of contribu- tory systems. See his "Principles Governing the Retirement of Public Employees," pp. 419-420. ^ James J. M'Lauchlan. "The Fundamental Principles of Pension Funds": Transactions of the Faculty of Actuaries, Vol. IV, No. 41. CONTRIBUTORY PENSION SYSTEMS 101 (3) "A return of the employee's own contribu- tions without interest, on withdrawal from the Fund in consequence of leaving the company's service; (4) "A return of his own contributions and the corresponding contributions of the company with- out interest, in the event of death before becom- ing entitled to a pension." Contributory Pension Systems and Thrift An objection often raised against non-contribu- tory pensions, as already shown, is their failure to stimulate individual thrift. In this respect a contributory system has a decided advantage. In so far as the employee's contribution is concerned, this is essentially a saving and nothing else. Moreover, it is a systematic saving. In addition to the amounts actually set aside, such systematic contributions may encourage the worker to fur- ther saving outside of the pension plan. The effect of a contributory pension system on thrift has been described in a report of the Car- negie Foundation as follows: "Thrift is a habit, a mental attitude, that grows with the opportunities for its exercise and the experience of its benefits. The argument that it would be wiser to increase wages and leave to the individual the provision of his own protection is valid for those who already possess the habit of thrift, but breaks down for the large majority 102 INDUSTRIAL PENSION SYSTEMS in not providing help for those who may need it most, including the man who suffers early disa- bility. A contributory plan offers exactly the desirable opportunity for developing this habit, and has the further value of promoting a sense of cooperation and mutual responsibility. It fur- nishes the possibility of saving and investment that is not open in the ordinary commercial chan- nels for men on small fixed incomes." ^ It is furthermore the opinion of many students of pension problems that the contributory prin- ciple gives a pension system a far greater appeal, on the ground that those things are most cher- ished which involve personal sacrifice or interest. This view is held not only by academic students, but by business executives, several of whom after trying one kind of so-called welfare work after another have stated that they are satisfied that little practical benefit is derived from the mere handing out of gratuities. Progress of the Contributory Principle Outside of the field of private industry the con- tributory principle has steadily gained prestige. Most state commissions which have studied the pension problem have favored the contributory; * Clyde Furst and I. L. Kandel. "Pensions for Public School Teachers": The Carnegie Foundation for the Advancement of Teaching. Bulletin No. 12, p. 7. CONTRIBUTORY PENSION SYSTEMS 103 plan. The First ^ Massachusetts Commission on Pensions emphatically condemned the non- contributory system for state employees, and with equal emphasis recommended the adoption of a contributory system, which it regarded as essen- tially a form of assisted savings. The Illinois Pension Laws Commission also endorsed the con- tributory principle, as did the Wisconsin Com- mission. The Pennsylvania Commission on Old Age Pensions, it is true, took a position in favor of the non-contributory system, but one member of that Commission was an earnest advocate of general old age pensions, and there is a strong suggestion in the report that the opposition to a contributory system was partly a reflection of a fear that this might tend to prejudice the adop- tion of a general free old age pension. The pension system introduced by the United States Government in 1920 is of the contributory type, as are many of those in operation in vari- ous state and municipal services. The contribu- tory system is likewise generally favored in public service in foreign countries. One writer has commented upon this drift toward the contributory system, as follows: ^ 'See footnote p. 30. ^Paul Stiidensky. "The Pension Problem and the Phk losophy of Contributions," p. 13. 104 INDUSTRIAL PENSION SYSTEMS "A careful examination of the pension move- ment abroad and in this country shows that the arguments against non-contributory benefits are constantly gaining in weight and that the gov- ernment, the employees, and the public at large are looking with increasing disfavor upon non- contributory systems. The tendency of the entire movement leads towards its gradual abandon- ment." In the case of public service pension systems, the contributory principle is making such prog- ress that it promises to become practically exclu- sive in this field. The contributory system tends to meet the objection of the taxpayer that public service employees otherwise are constituted into an especially privileged class. A further practical consideration is that the direct cost to the State or the municipality is reduced. In private industry the contributory principle has made slower progress, although there is some evidence that here, too, it is gaining in favor. ^ As yet, however, contributory systems in pri- vate industry are not general. They are fairly common in the case of banking institutions which ^ Thus William R. Willcox, Chairman of the Pension Depart- ment of the National Civic Federation, stated on this point: "We have verified information in which it had been repre- sented to us that the recent tendencj^ of private enterprises throughout the world, after a wide period of experience, has been to turn from the straight to the contributory system, the tax on the industry under the former having become onerous." (Address at the Sixteenth Annual Meeting of the National Civic Federation, Washington, D. C, January, 1916.) CONTRIBUTORY PENSION SYSTEMS 105 have formal pension systems, but not among manufacturing establishments. Of ninety-three plans listed in the Appendix only six are of the contributory type. Broadly speaking, it appears that a contributory plan is best adapted to em- ployees of a high order of intelligence, who receive relatively good pay and who appreciate the advantage of providing against old age, and who look upon the system as a form of old age endowment insurance. Disadvantages of the Contributory System Despite the strong a priori arguments in favor of a contributory system, it is, in the case of pri- vate industry, confronted with numerous practical objections. For some industrial establishments these objections may be fatal to the success of the plan. In the first place, experience has demonstrated that a contributory system, in order to be suc- cessful, usually must be compulsory. The natu- ral inclination of members to let payments lapse is so great that their good will and self-interest cannot be depended upon to keep the plan finan- cially solvent. Payments must be regularly kept up, for it is only by the compounding of pay- ments in early years that the pension obligations of later years can be met. 106 INDUSTRIAL PENSION SYSTEMS Again, where labor turnover is high, the admin- istrative burden of maintaining a compulsory system is a serious consideration for employers. Again, with certain classes or racial types of workers the task of inaugurating a compulsory system is so great as to discourage the employer. The introduction of a compulsory system ordi- narily will be difficult where women constitute an important proportion of the working force, since comparatively few of these expect to continue in the service until they have reached old age. Still again, there may be legal obstacles in the way. Thus, the laws of some states do not permit of enforced deductions from the employee's wages, in order to meet contributions to the fund. Under the contributory system there is likely to be a demand for joint management of the scheme by employer and employee. "A contributory pension system maintained by joint cooperation of an industrial organization and its employees assumes at once a contractual relation. In such a case common justice requires that contributing employees shall have a hand in the management, and that all contributions to persons leaving the service be returned with fair interest added. Corporations have been slow to accept these conditions, not only on account of the uncertain financial load involved in the con- tributory pensions, but also on account of the CONTRIBUTORY PENSION SYSTEMS 107 hesitation of most organizations to limit their own independence of action." ^ Many employers regard this as objectionable. Others, however, feel that the cooperation of employees is a decided advantage, and even essential. An official of a large company which has a contributory system in successful operation stated that the satisfactory results were largely due to the fact that the employees directly par- ticipated in the administration of the scheme. The contributory system, as already shown, places definite contractual obligations upon the employer. This is not an objection, if the bene- fits are fair. However, under a contributory system, especially if the employer bears a large part of the cost, there is danger that the workers will insist on more liberal benefits as time goes on. Conclusions as to Contributory Pension Systems From this brief analysis of contributory pension systems it may fairly be asserted : 1. That under a contributory system the worker's contribution clearly cannot be regarded as deferred pay in the sense of depressing the current rate of wages and, furthermore, that the employer's contribution may not have the same * Carnegie Foundation for the Advancement of Teaching. Seventh Annual Report of the President, p. 59. 108 INDUSTRIAL PENSION SYSTEMS tendency to depress the rate of wages as it does in the case of a "discretionary" system. Indeed, the contributory system may tend to force an increase in money wages sufficient to offset the worker's contribution. 2. That a contributory system, if on a sound actuarial basis, with provision for the return of contributions in the event of death, resignation, or dismissal, is largely free from the objections lying against the tontine principle. 3. That a contributory pension system is com- ing to be regarded as virtually a joint savings scheme, under which the employee benefits through systematic provision for old age, while the employer benefits through greater oppor- tunity to retire superannuated workers, and in other ways to improve the efficiency of his work- ing force. 4. That the system provides a direct incentive to thrift, and that the mere fact that the worker shares in the expense tends to increase his inter- est in the plan, while at the same time reducing the element of paternalism. 5. That the contributory system nevertheless has numerous practical disadvantages. To in- sure its own solvency it ordinarily must be com- pulsory. As such, it is likely to be unfavorably regarded by the worker, although not necessarily so. 6. That where the rate of labor turnover is heavy, such a system involves a greatly increased administrative burden, while the frequent return CONTRIBUTORY PENSION SYSTEMS 109 of contributions to withdrawing members may- impair the financial stability of the plan. 7. That it places the employer under definite financial obligations of a contractual sort, which necessitate a careful administrative supervision and heavy and continuing actuarial expense. 8. That it practically requires participation of the workers in its administration : this is regarded by some employers as undesirable and as likely to lead to undue pressure for increased benefits. 9. That, notwithstanding these disadvantages, the contributory system, because of its recogni- tion of contractual rights, the fact that in a large measure it meets the issue of deferred pay, and that it tends to place part of the responsibility for providing against superannuation upon the individual, is distinctly superior to an ordinary "discretionary" system wherever it can be made practically operative. With certain classes of workers and under some conditions, however, the practical difficulties inherent in the contributory plan in the case of industrial establishments may be insuperable. CHAPTER V CUMULATIVE "SINGLE PREMIUM" ANNUITIES AS A SUBSTITUTE FOR PENSIONS In contrast with the various types of pension systems discussed in preceding pages, attention may now be called to a system of cumulative "single premium" annuities of small amount, issu- able year by year as a form of service bonus. Such a scheme is a comparatively new develop- ment in the field of retirement systems. So far as knowTi, it has as yet been put into actual operation among wage earners in only a single instance,^ and the insurance companies interested are still working on the details of their contracts.^ The plan, however, meet-s so many objections raised against pension systems that it seems worthy of most careful consideration by em- ployers who are interested in the problem of re- tiring superannuated or incapacitated employees. * William Edwin Rudge, Inc., New York City, has recently installed such a system. "The Metropolitan Life Insurance Company and the Equitable Life Assurance Society of the U. S. appear to have given chief attention to such an annuity system. 110 "SINGLE PREMIUM" ANNUITIES 111 Features of the Annuity Plan In brief, the plan for such a single premium service-annuity is as follows: Every worker who has completed a limited period of sen- ice with an establishment (say three to five years, roughly covering the period of initial heavy labor turnover) would, for each addi- tional year, receive a paid-up annuity policy assuring him an income of, say, $10 per year, beginning at age sixty-five.^ As the length of service extended, the accumu- lation of such policies would gradually build up an income which at the retirement age would take the place of a pension. Thus, a worker who re- ceived a $10 policy each year for thirty years would be assured an income of $300 per year on retirement; those remaining for a shorter period would have a pro rata amount. There would be no conditions attached to the issuance of a policy other than the completion of an additional year of service.^ The policy *The amount of the annuity and the age limit could, of course, be varied as desired. Furthermore, provision could be made for commencing annuities in advance of the stipulated age, or postponing them beyond it, with a corresponding change in the installments of the annuity. However, if the age limit is lowered, the installments of the annuity will decline in much more rapid ratio, so that it is impracticable to anticipate the retirement age more than a very few years. (See p. 216.) ' If desired, annuities could, of course, be issued to cover lesg than a full year's service. 112 INDUSTRIAL PENSION SYSTEMS when once turned over to the worker would be absolutely his property and could not be for- feited. The annuity policies would be written by a strong insurance company, so that ultimate pay- ment would not depend on the financial condi- tion of the employer. While, for his protection, the employer could reserve the right to discontinue the arrangement at the close of any year, this would not affect any pohcies already issued. Such a plan, however, should never be inaugurated unless the employer has satisfied himself, so far as possible, of his ability and willingness to continue it for an in- definite period. Such an annuity scheme, while accomplishing many things that pensions are designed to accom- plish, is sharply differentiated from the ordinary pension system. In the first place, the payment is on a contractual basis from year to year. The fundamental basis of such a cumulative annuity is that continuity of service is worth special recognition and that the employer, therefore, is justified in paying for such service as a business proposition. The prhnary object of such an annuity system would be to maintain efiSciency by providing an equitable method of dismissing superannuated "SINGLE PREMIUM" ANNUITIES 113 and incapacitated employees. Provision against superannuation, although a vital feature of the plan, is collateral to this object and to the prin- ciple of rewarding special length of service. A chief justification of such a system, from the employer's standpoint, is that workers who con- tinue beyond a given limited term save him the expense of labor turnover and also, perhaps, be- come increasingly efl&cient. At the same time such a system automatically meets the problem of superannuation, approximately pro rata with the length of service rendered by the worker. In the case of workers who had spent practically their entire lifetime in the employ of a single establishment, the total annuity at retirement would be the equivalent of a liberal pension. General Arguments in Favor of the Annuity Plan Among the advantages urged in favor of such an annuity system are the following: 1. It is a business proposition. The employer pays for what he gets: The worker receives com- pensation for the service actually rendered. 2. It eliminates the objectionable "discretion- ary" feature of many pension systems, since the annuity policy once handed the worker is his be- yond recall. It, therefore, cannot be used for disciplinary purposes. 3. It does not interfere with mobility of labor. The worker is as free to seek another position as 114 INDUSTRIAL PENSION SYSTEMS though the extra compensation were paid in cash. If he were separated from the service before the end of any given year, he would receive no policy for that year/ but this would not affect policies issued for service already rendered. However, precisely because this service annuity is thus paid without reservations, it should bring a response from the worker far greater than would ordinarily be secured under a pension system where the pen- sion promise is involved in many uncertainties and, moreover, may easily be distorted into a threat. 4. While sharply differentiated from a pen- sion, the annuity may provide as effectively as a pension for the old age of the worker. 5. The system is practically relieved of any element of charity. Payment would not depend upon the necessities of the worker, but would be made year by year to all who had rendered an additional year's service. 6. It is equitable as between individuals. Those workers who remain with the company throughout their productive lifetime would re- ceive the largest return. Those who elected, or who were forced, to leave the service, would secure recognition in proportion to the number of years of "annuity service" actually rendered. 7. It facilitates removal of inefficient workers approaching superannuation more effectively than does a pension system. As previously *That is, on the plan here under discussion. It would, as already noted, be possible to draw the plan so that credit would be given for a part of a year's service. "SINGLE PREMIUM" ANNUITIES 115 pointed out, under the ordinary pension system a humane executive often is tempted to continue workers still some distance from the retirement age, even though they have become ineflBcient, since otherwise they might completely forfeit their pension benefit. If, however, such a worker has received a service annuity policy for each year of service rendered, his superior obviously need have less compunction about dismissing him when he is no longer able to do his work efficiently. 8. The system protects the worker against forfeiture of pension benefits in the event of dis- missal. The policies already earned are actually in the worker's possession. Under ordinary pen- sion systems, as previously explained, an unfair executive may dismiss workers nearing the retire- ment age in order to reduce the burden on the pension fund. Not only is this practice unjust, but it is almost certain to nullify much of the good that a pension system might otherwise ac- complish. The annuity system, therefore, while facilitating the dismissal of workers no longer efficient, puts less temptation before the manage- ment to dismiss them on financial grounds than does an ordinary pension system. It might, how- ever, be found desirable to discontinue the pur- chase of such policies after some stated age because of their increasing cost.^ 9. Since the annuity policy would be written by a strong insurance company, the worker is completely relieved of any anxiety as to the re- sponsibility of the employer or his continuance * For a further discussion of this point, see pp. 123 and 124. 116 INDUSTRIAL PENSION SYSTEMS in business. The establishment might fail, merge with another concern, or liquidate, but none of these events would affect the value of the annuity policies already issued. 10. The system squarely and effectively meets the issue of deferred pay. While it is desirable that such annuity should be regarded as a form of service bonus, it is possible that on a non-con- tributory basis, such a system, because of its com- parative certainty, would tend even more than a pension system to assume the nature of de- ferred pay. The annuity system, however, has the great merit that, to the extent that pay is so deferred, its eventual return to the worker is guaranteed year by year.^ 11. Tangible evidence of the benefit is brought annually to the attention of the worker, thus tend- ing to increase his interest and confidence in the plan. In this respect the annuity system has a great advantage over most pension systems. 12. Such an annuity system tends directly to encourage thrift. This is particularly true if it is on a contributory basis. 13. The system can be made contributory without compulsion. Defections from the plan *To assure return to estates of members dying before retire- ment, the system should provide a death benefit, either in the policy or bj^ some collateral arrangement. It should be noted that if such an annuity system were on a contributory basis, the workers contributing would almost certainly demand a death benefit provision. In the opinion of some, as noted on page 204, this could best be handled by a separate arrangement like group insurance. It is the opinion of some authorities, however, that such an annuity system on a contributory basis would require a death benefit provision in the annuity contract itself. "SINGLE PREMIUM" ANNUITIES 117 by any one individual do not affect the value of the annuities of others. It, therefore, has a marked advantage in this respect over the ordi- nary contributory pension plan, which might be wrecked by any considerable number of with- drawals and which, for this reason, usually has to be on a compulsory basis. Moreover, it could easily be arranged that workers who so desired could purchase additional annuity policies on their own account, in any year or years that they were financially able to do this. 14. From the employer's standpoint the an- nuity system has the great advantage that the cost can be figured much more accurately than the cost of a pension system, and that no further contractual liabilities are inciu-red. Each year's arrangement is a closed and completed transac- tion. While a discontinuance of the plan is to be avoided, if possible, nevertheless if it is un- avoidable the employer winding up the plan has no long distance liabilities confronting him. 15. In time of emergency the annuities could be omitted for a year or two without wrecking the system. Moreover, it might be possible to make them up in some exceptionally good year or years. 16. There is practically no actuarial expense other than that included in the cost of the an- nuity policies. Moreover, the administrative burden is very materially reduced, since the great bulk of the work would be conducted by the in- surance company underwriting the plan. It is apparent, therefore, that as compared with 118 INDUSTRIAL PENSION SYSTEMS the ordinary pension system such a system of cumulative service annuities has a strong ap- peal. Against the advantages thus claimed for the system, however, are some disadvantages. Arguments against the Annuity Plan Analyzed One objection certain to be raised by some em- ployers is that it is not good business to purchase annuities for men who will leave their employ before reaching superannuation. This is a prac- tical consideration. Out of a group of, say, one hundred members of even the "stabilized" por- tion of the working force, a considerable number will, for one reason and another, leave long be- fore they become superannuated. The employer justly raises the question whether there is any real advantage to him in purchasing annuities for such men. At first sight the payments represent a needless outgo. If, however, the cost of the deferred annuity is considered as extra compensa- tion earned by continued service, this objection loses its force, since the employer is not injured any more than he would be had he paid the cost of this annuity in the form of a cash bonus. If, on the other hand, the deferred annuity actually comes out of the worker's wage, the employer, as a matter of equity, should be as ready to pay "SINGLE PREMIUM" ANNUITIES 119 this portion of the wage as any other. The worker, it is true, might be disposed to object to such an annuity if he felt that it did depress his current cash wage. If, however, the plan were properly presented to him, he might willingly ac- cept such postponement of a part of his wage, in view of the definite assurance that he would even- tually get it back, and of the feeling that he was making provision for his superannuation without any element of charity. It would seem that the wisdom of introducing such a plan on a non-con- tributory basis is largely dependent upon the ac- ceptance of this principle by the worker. In other words, the annuity should be recognized by both employer and employee as a special wage, and placed on a contractual basis from year to year. Another objection likely to be raised against the annuity plan here discussed is that the cost of each successive annuity policy for any indi- vidual worker steadily increases with his age, and that, in the case of workers nearing the retire- ment age, the cost becomes very high. Thus, whereas one type of paid-up annuity policy pro- viding for an annuity of $10 commencing at age sixty-five would cost only $10.51 for a worker at age twenty, the cost of such a policy at age sixty 120 INDUSTRIAL PENSION SYSTEMS would be approximately $69.^ On the surface, therefore, the annuity plan contemplates an in- creased annual payment for those workers whom it is relatively least desirable to retain, namely, those approaching old age. Against this objection it may be urged that the" high cost of annuities at these later ages is appar- * The cost depends, of course, on many thing:s, especially the nature of the benefits included. The following schedule pre- pared by a large life insurance company illustrates the way in which the cost of successive policies increases with the age of the worker. The costs here given are for a retirement benefit only and do not include a death benefit, or a disability benefit. Table 1. Schedule of Considerations (for males) at various ages necessary to provide a paid-up annuity of $10 per annum to commence at age 65. Age Age Age Near- Considera- Near- Considera- Near- Considera- est Birth- tion est Birth- tion est Birth- tion day day day 15 $8.52 32 $17.55 49 $37.94 16 8.88 33 18.32 50 3955 17 9.26 34 19.14 51 41.89 18 9.66 35 19.99 52 44.07 19 10.08 36 20.89 53 46.41 20 10.51 37 21.83 54 48.91 21 10.97 38 22.81 55 51.60 22 11.44 39 23.85 56 54.51 23 11.94 40 24.94 57 57.64 24 12.46 41 26.09 58 61.05 25 13.00 42 27.30 59 64.74 26 13.56 43 28.58 60 68.78 27 14.15 44 29.92 61 7320 28 14.77 45 31.35 62 78.06 29 15.42 46 32.85 63 83.42 30 16.10 47 34.45 64 89.37 31 16.80 48 36.14 65 95.53 "SINGLE PREMIUM" ANNUITIES 121 ent rather than real, since the company will have had the use of the money, and presumably at a higher rate of profit than the rate of accumulation at which annuities are figured. For example, the sum of $16.10, which represents the cost of such a policy for a male worker under one plan at age thirty, would amount to, roughly, $52.50 in thirty years if compounded at four per cent. The cost of such an annuity policy at age sixty, would, as just shown, be about $69, Assuming, however, that the company had been able to earn an aver- age profit of ten per cent on $16.10 over a thirty- year period, the accumulated amount would be about $280, or several times the cost of a $10 annuity for a worker at age sixty. Even if the company earned only six per cent on such a sum, the accumulated value over a thirty-year period would be approximately $92,50. Viewed from this standpoint, annuities purchased for workers at advanced ages actually cost the company less than those purchased at much lower rates when these workers were young. As a practical matter, however, this argument probably should be disregarded as an employer is likely to be more impressed by the immediate high cost of annuities for such older workers than 122 INDUSTRIAL PENSION SYSTEMS by the fact that he has had the use of the money over a long period of years. ^ A feature of such a cumulative annuity system is that the total income, on retirement, of workers who do not enter the company's service until well along in life may be comparatively smaU, and less than the allowances paid under some pension sys- tems. Against this, however, is the fact that the annuity plan confers benefits on a much larger number of workers, and that the total amount of the annunity runs approximately pro rata with the years of service rendered. Because the sys- tem reaches a larger number of workers, the cost may, and presumably will, be greater than the cost of an ordinary "discretionary" pension system, where the benefit will be paid merely to the few who continue until the retirement age. In some cases as, for instance, especially valu- able workers who have served only a few years, ' The purchase of such annuities might be discontinued when the worker had reached a given age, say fifty-five years. Such a provision could be justified both on the ground of the imme- diate cost of such annuities beyond that age, and also on the ground that there is no particular value in continuity of service beyond such an age which would warrant additional compensation. While, however, the cost of individual annuities purchased prior to age fifty-five would be less than if purchased at a later age, this method might require the withdrawal of a larger total amount of funds from the company's treasury each year, since, in order to provide the worker with an income of a substantial amount on retirement, the individual policies should be for a larger amount than where the purchases were continued up to the retirement age. "SINGLE PREMIUM" ANNUITIES 123 it is possible that an employer will feel disposed to pay a somewhat larger annuity on retirement than the terms of the plan strictly demand. To the extent that this is done, the payment loses part of its contractual character and assumes the nature of a gratuity. This practice would, of course, increase the cost of the system. How- ever, there is no reason why such an annuity plan should cost more than a pension plan which pro- vides corresponding benefits. Indeed, as shown later, it may cost less.^ An advantage of the annuity system, already noted, is that it is possible to operate it on a contributory basis without making the contribu- tory feature compulsory. Since each year's pur- chase is a completed transaction in itself, defec- tions from the plan, while reducing the aggre- gate benefit of the individual withdrawing, would not prejudice the benefits of those who continue. It has been urged, however, that the contributory principle would be greatly hampered, if, indeed, not defeated, because of the rapidity with which the cost of individual annuities increases as the age of the worker advances. For instance, a worker at age thirty might find no difficulty in meeting one-half the expense of an annuity cost- ing at that age, say, $16, but might be quite un- 'See p. 191. 124 INDUSTRIAL PENSION SYSTEMS able to meet one-half the cost of a similar annuity at age sixty when the rate would be, say, $69. There seems to be little doubt that for workers approaching the retirement age this steady and rapid increase in cost often would be too heavy a burden and would place a strong temptation before them to withdraw from the scheme. One method of meeting this difficulty is to pro- vide that the worker shall not be required to con- tribute at any time more than some fixed sum, or, say, one-half the cost of the first annuity pur- chased in the series; that is, all of the increase in cost from the time the worker came into the plan would be borne by the employer, in addition to an amount representing one-half of the cost of the first annuity.^ Such a provision could easily be justified on the ground that, as the worker's period of service lengthens, he saves the employer an increasing amount because of reduced labor turnover, and that it is only equitable that the employer should recognize this by bearing a larger share of the cost of the annuity policy.- ^This would mean that if the first annuity, say at age forty, cost $25, the employer would pay $12.50, while for a similar annuity costing $69 at age sixty, he would pay $56.50, the employee's share remaining unchanged throughout the period at $12";50. " Or, if as suggested above, the purchase of annuities were discontinued at age fifty-five, this would reduce the immediate cost to the worker, since prior to that age the cost of annuities is less. Under such an arrangement the drain on the worker "SINGLE PREMIUM" ANNUITIES 125 The further objection sometimes has been raised against such an annuity system that its cost would tend to increase, because workers would be in- duced to remain in the service longer than would otherwise be the case. This in reality is no ob- jection at aU, because continuity of service, so long as the worker is efficient, is precisely what the employer desires. If the plan results in in- creasing the length of service, he can afford to pay, at least up to some age limit. It should be emphasized that the objection sometimes raised against a withdrawal equity in the case of a pension system, on the ground that workers will quit the service in order to secure the benefit and spend it for some needless luxury, can readily be avoided in an annuity system by the insertion of a provision in the policies to the effect that they cannot be surrendered for cash. Such a provision seems highly desirable from the standpoint of the worker's real interest. Indeed, such a deferred annuity policy ordinarily would not carry a cash surrender provision. Still another objection has been made against the annuity system that many workers, owing to change of employment, would receive only a very few annuity policies, and would be careless in would come in the prime of life, which ordinarily is the best time for him to make provision against old age. 126 INDUSTRIAL PENSION SYSTEMS keeping track of these, so that the "lost policy" problem would be a source of considerable diffi- culty. There can be no doubt that this objection has some force. This should, however, be re- duced in proportion as such a system was in general operation: that is to say, while a worker who received only two or three policies might not be careful to preserve them if he never expected to receive any more, he would have a distinct incentive to take care of them if he expected to receive others like them from the next establish- ment in which he was employed. Summary and Conclusions All these, however, are matters of detail which do not have a vital bearing upon the merits of the plan. In view of the fact that such a system provides with certainty for payments; that it affords something like equal justice to all workers pro rata with service rendered; that its cost per individual worker also tends to run somewhere nearly pro rata with length of service; that it squarely meets the issue of deferred pay; that it has no strings, reservations, or implied threats; furthermore, that it can be made contributory on a voluntary basis, it would appear that such a method of meeting the retirement problem has many attractive features. At least it would seem "SINGLE PREMIUM" ANNUITIES 127 that the system should be most carefully studied by all employers who are disposed to introduce some systematic method of dealing with the prob- lem of retirement. Such an annuity system would have an increas-' ing appeal in proportion as its adoption became general among industrial establishments. Under a general adoption of the system benefits would not be terminated by change of employment. In- stead, each year of service wherever rendered (ex- cept for the trial or waiting period) would be re- warded with an annuity policy. Therefore, with such a system in general operation, the great body of industrial wage-earners would be making some systematic provision against old age, whereas the ordinary pension system provides, broadly speak- ing, for only a handful. Consequently, such a sys- tem, if in general use, should go a long way toward solving the problem of old age dependency among industrial workers. Furthermore, each employer would feel under no obligation to do more than his pro rata share. Perhaps the most important question is the ef- fect of such a cumulative annuity system upon the morale of the worker himself. If the annuity policies should be regarded by the recipients as mere gratuities, there is grave reason to fear that the system might accomplish more harm than 128 INDUSTRIAL PENSION SYSTEMS good. In the long run, no class can accept a gra- tuity from another class without accentuating class distinctions. Unless, therefore, this annuity plan can be shown to be less objectionable on this score than the ordinary pension system, its adoption would be a matter of very doubtful wisdom. If, however, the worker is made to feel that the annuity policies received each year have been earned by him by his continued service, and are not a gift, there would seem to be no reason why the system should undermine his self-respect. It seems entirely practicable to place the system on such a plane. Even on the non-contributory plan such an annuity policy should not constitute a gratuity, for it is on a contractual basis. If it actually represents compensation, in addition to the "going" rate of wages, to cover a special qual- ity of service — continuity — it is essentially a special wage. If, on the other hand, because of the deferred-pay principle, it operates to depress the current wage, it clearly is not a gratuity. Any diflBculty on this score would largely be removed if the worker could be induced to con- tribute, if not half, at least a portion, of the cost of each year's annuity, or to purchase additional annuities from his own funds. The employer could justify the requirement of a contribution on "SINGLE PREMIUM" ANNUITIES 129 the ground that it is a primary duty of the em- ployee to provide for his own old age. On the other hand, the employer could justify his own contribution to such a plan as a matter of busi- ness, on the ground that workers who thus con- tinued in his employ saved him expense, because of the consequent reduction in labor turnover, and that the system enables him to meet the problem of superannuation, while, by giving the worker assurance of support in old a^e, it may teAd to in- crease his contentment and efficiency. Final judgment as to the wisdom of inaugurat- ing such an annuity system will depend, to a large extent, on the broad question whether it is not better to throw responsibility for support in old age entirely upon the worker, even though, as a matter of fact, he frequently will have to resort to public charity. Some employers, moreover, are of the opinion that it is desirable to limit the con- tractual relationship between employer and em- ployee, so far as possible, to the single question of wages, and that the inclusion of collateral issues increases the likelihood of friction. From the standpoint of Labor, as clearly shown, it has frequently been urged that what the worker wants is a maximum wage rather than collateral benefits, such as insurance or pensions. If all workers actually were provident, it would be dif- 130 INDUSTRIAL PENSION SYSTEMS ficult to challenge this attitude. The practical difficulty, already emphasized, is that, regardless of the wages paid, a considerable number of work- ers will arrive at old age in a condition of de- pendency, so that the employer is still confronted with the superannuation problem. In many cases, therefore, it becomes a question of deciding be- tween some formal retirement system or an in- formal policy. The advantages and disadvantages of an informal policy are discussed in the follow- ing chapter. CHAPTER VI AN INFORMAL PENSION POLICY VERSUS A FORMAL SYSTEM Many employers who keenly feel the problem of providing for the superannuation of their work- ers and who desire to do something to meet it have preferred to take any action in a wholly in- formal way, varying the amount of the payment in individual instances according to circumstances. In many cases this practice has come about naturally, without much consideration of the mer- its of a formal system. In other cases, however, decision to rely on an informal policy has been reached only after careful study of the pension problem and of the merits of a formal system of some sort. Thus, one employer who has devoted a large amount of study to the question, and who has served on a State Pension Commission, said : "We have no rigid or definite pension system. We do, however, have a more or less informal pen- sion policy, under which aged workers are taken care of according to their need. 131 132 INDUSTRIAL PENSION SYSTEMS "I am positively of the opinion that a pension cannot be claimed by an industrial worker as a right. At the same time it is good business for an organization like ours to take care of its super- annuated workers, not on the ground of kindness or charity, but on the practical ground that it in- creases the good will of the working force. I be- lieve, moreover, that good will is increased to a greater degree by an informal method of pension than by a rigid system where pensions are paid more or less without regard to the merits of the persons receiving them. I think it is a mistake to make any stir over the fact that pensions are paid. The recipients themselves are the best of advertisers, and the fact that the company takes care of its superannuated workers will become known to the entire force in a very effective way. "In my judgment, pensions should be based on the merits or needs of the individual pensioner, and not as a reward for long service. Where a pension is paid because of length of service it be- comes in effect a deferred wage and is bound to be so considered. The inevitable tendency wall be that the pension will be taken account of by the wage-earner in making his wage bargains. This I regard as undesirable. "The pensions paid by our establishment have been paid only after a very careful canvass of the situation in particular cases. The aim has been merely to give a sufficient amount to enable the recipient, with any other income which he or she may have, to live on the basis of a reasonable minimum of comfort. If, for instance, it is known that the worker has accumulated some funds, or i AN INFORMAL PENSION POLICY 133 has some other means of income, the pension is made very small. In other cases it is more liberal. In some cases pensions have been increased m recent years to allow for the increase in cost of liv- ing. On the other hand, in two cases pensions have been reduced." Several other employers, after carefully study- ing the pension problem, have thus far decided against introducing a formal system. Some of these doubtless have an informal pension policy. Among advantages claimed for an informal policy as against a formal system are: 1. Complete freedom from contractual obliga- tion. 2. Avoidance of the issue of deferred pay. Since pensions would in no individual case be assured, the worker would not be disposed to ac- cept a reduced rate of compensation, 3. Greater discretion as to the amount and conditions of the benefit, and thus better control of the cost, 4. Freedom from demands for increased benefits. 5. Greater freedom in hiring workers of ad- vanced years ; under a formal system there would be a tendency not to take on such workers. 6. Greater good will value. Benefits dis- tributed under an informal policy are, it is urged, 134 INDUSTRIAL PENSION SYSTEMS likely to be more appreciated than where they are counted upon long years ahead under some formal plan, and where, when received, they may be looked upon as disappointing. 7. In years of stress the benefits can be modi- fied without causing as much dissatisfaction as would result from a change in a formal plan. Among disadvantages urged against an infor- mal policy are : 1. That in a large establishment it is difl&cult to get into sufi5ciently close touch with the workers to ascertain their needs accurately. 2. That the administrative burden of consid- ering the merits of individual cases is unduly heavy. 3. That payments become a pure charity and thus tend to humiliate the worker, and to accen- tuate class distinctions between employer and employee. 4. That the informal policy has a very narrow appeal and consequently brings little response from the members of the active force. 5. That an informal policy in effect discrim- inates in favor of the shiftless and improvident workers, as against the thrifty. 6. That the benefits are likely to be inade- quate. AN INFORMAL PENSION POLICY 135 7. That the distribution of benefits is likely to be influenced by favoritism of executives whose opinions must largely be depended upon, and that discrimination and dissatisfaction may thus be created. 8. That a large concern may lose in prestige, on the ground that it is not keeping abreast of the times if it does not have a definite retirement system. The force of these various arguments will de- pend to a considerable extent on conditions in the individual establishment. Thus, in an or- ganization with a large number of plants and with tens of thousands of workers, where even execu- tives of the second or third rank may not come in direct contact with the employees, it would be necessary under an informal policy to throw much responsibility on subordinates. In these cases there is a very strong likelihood that a lack of uniformity will result. In a smaller organization, or one where the plant managers are in close con- tact with the workers, on the one hand, and with the Board of Directors, on the other, the difficul- ties on this score are less. From the standpoint of direct financial outlay, an informal policy has an advantage over a for- mal system, since to a considerable extent the 136 INDUSTRIAL PENSION SYSTEMS cost can be controlled by the management. If, however, this results in retaining inefficient workers on the payroll, the saving in direct cost may be more than offset by a loss in efficiency. Moreover, even under an informal policy, the benefits must be fairly substantial and the cost of the scheme must bear some reasonable relation to the number of workers needing assistance at retirement. The advantage of an informal policy in permit- ting the hiring of old men is apparent. There can be little question that it is far better to provide jobs than to provide pensions. While in many industries there is an indisposition to hire men over fifty-five years of age, others find that they can advantageously use men much older than this. If, however, such an establishment adopts a formal pension system, it will be much less likely to hire old men, and this even though it definitely announces that such workers will not be allowed to go on the pension roll. The man- agement will be fearful that some of these older workers wiU, as a matter of fact, eventually have to be pensioned, while the great body of workers will take the ground that pension benefits should go to those who spend the greater part of their lives in the service of the company. There will, AN INFORMAL PENSION POLICY 137 therefore, be pressure to discourage the hiring of men of advanced age. Of the objections to an informal policy, one urged with special emphasis is that there is likely to be serious discrimination in the distribution of benefits, either through deliberate favoritism on the part of subordinate executives, or through in- ability to determine with any reasonable accuracy the conditions affecting particular individuals. Yet in this respect a formal system of the "dis- cretionary" type seems to offer little advantage over an informal policy. As previously pointed out, one type of executive may keep on the pay- roll, until he reaches the retirement age, a worker who really should be dismissed, while another may dismiss a worker amply able to perform his task, either to reduce the pension expenditure or for other reasons.^ The objection that pensions under an informal policy become a mere charity is regarded by some as vital. Others, however, regard them not as a charity but as a means of building up good will. Under a pension system of the "discretionary" type the benefits are made to appear as a gratuity or charity and, moreover, as a charity of an osten- * In the public sen'ice the danger of favoritism is far greater. Indeed, an informal policy is not a practical method of deal- ing with the superannuation problem in government service. 138 INDUSTRIAL PENSION SYSTEMS tatious sort. Yet, as a matter of fact, as clearly shown in Chapter II, they may actually be paid for by the worker. In the case of an informal policy there is no reason why the payment should thus assume the nature of deferred pay to the extent of depressing the current wages, since very few workers will ever receive a benefit and since no worker can count with assurance on receiving one. Where an informal policy is used, the employer should be extremely careful not to hold the pros- pect of a pension before his employees in any definite way, since, to the extent that he does this, there is danger that it will come to be relied upon and thus assume the nature of deferred pay. In- stead, his attitude should be that provision against superannuation is the duty of the individual worker. Under an informal policy, it should be understood that the pension is in the nature of good will, and is in no way a contractual arrange- ment. One practical disadvantage of an informal policy, although not inherent, is that the manage- ment will be disposed to estimate the probable cost by some rule of thumb, only to find in a short time that the outlay is running far beyond expec- tations. It is important, therefore, that the man- agement, in fixing the broad lines of such a policy, AN INFORMAL PENSION POLICY 139 recognize clearly that the outlay will to a greater or less extent reflect the actuarial features of a formal system, particularly in respect to a continu- ing increase in cost over a long period of years.^ This diflflculty need not be a serious one in the case of small establishments, provided estimates are frequently revised. In very large establishments, however, this question may easily prove an embarrassing one under an informal policy. Some objections to an informal policy as com- pared with a formal plan were outlined by the In- dustrial Bureau of the Merchants' Association of New York as follows: "The pension system gives the employee grow- ing old in his employment an assurance of a definite income after retirement, while the infor- mal method gives such an employee only the hope that the employer will have appreciated his services sufficiently to reward him to some extent. The difference to the faithful employee who is growing old is very great indeed. "Undoubtedly the average employee prefers to retire under the provisions of a regular pension system rather than through the munificence of the employer. Pension payments are considered to be only what is due the employee — a normal part of his return whicn he has earned by faithful and long service ; informal pensions, even if oper- ated with the greatest tact and kindliness on the 'See p. 157. 140 INDUSTRIAL PENSION SYSTEMS part of the employer, savor much of charity to the employee. Surely no employer who so appre- ciates the value of long and faithful service in an employee that he will make a substantial retire- ment gift, would knowingly prefer to make it under circumstances which are disagreeable to the recipient. "Most pension systems state that the employer is under no legal obligations whatsoever, yet no reputable concern would consider stopping pension payments to employees. Under an informal method, the beneficiary is by no means certain of receiving continued assistance. The management with which the former employee has had intimate association may be superseded by persons who have no special interest in the aged beneficiary. "In the large industrial concerns where the man- agement is centralized and the workers are numer- ous and spread through many departments or plants, and where close contact between the man- agement and the men is impossible, the informal method is obviously inadequate. On the one hand, it fails to assure the employees that all of them will be cared for as they are entitled to expect; on the other hand, the work of adminis- tering it is too cumbersome. Furthermore, the large corporation finds that it can conduct its affairs efiiciently and economically only through uniform methods, the cost of which can be esti- mated in advance with accuracy. In this respect, the pension plan is superior to the informal method." While these objections are entitled to respectful AN INFORMAL PENSION POLICY 141 attention, some of them are open to criticism. It will be noted that this statement asserts that "a pension system gives the employee growing old in his employment an assurance of a definite in- come after retirement." In view of what has been set forth in previous chapters this statement can- not be held to apply to the ordinary pension sys- tem of the "discretionary" type. Some of these, indeed, give little more assurance, in reality, than an informal method. Likewise the statement that "no reputable con- cern would consider stopping pension payments to employees" is open to question. Certainly the majority of pension plans specifically stipulate that payments may be so terminated. Moreover, where a change in the rules is made, as has been done in some cases, by which the age and service requirements are lengthened, the inevitable effect is to deprive a number of employees of the pension which they would have obtained under the original plan, the prospect of which may have been an important inducement to continuance in the service. Such a change in the rules, while perhaps in accord with the letter of the plan, can hardly fail to seem unjust to the worker who thereby loses his pension. As to the contention in the statement just quoted that the work of administering an informal 142 INDUSTRIAL PENSION SYSTEMS policy in large concerns is too cumbersome, it must be remembered that no pension system operates automatically. Even under a formal system indi- vidual cases will have to be passed upon by the pension committee or pension board, while in any establishment there will be from time to time workers who, though not strictly entitled to a pension under the rules, will, nevertheless, for one reason or another, call for special consideration by the pension authorities. In other words, even under a formal plan, there will be a considerable number of special cases which wiU call for indi- vidual attention. For a concern of moderate size it may safely be asserted that the administrative burden is much smaller under an informal policy than under a formal pension system. The head of a company with several thousand employees stated that under its informal pension policy the Board of Directors were required to give only a negligible amount of time to consideration of pension cases. He further contended that there is no serious diffi- culty, even in a larger establishment, in getting into sufficiently close contact with the worker to make an informal policy entirely practicable. Unless the number of workers is so great as practically to compel the adoption of a formal system, the use of an informal policy can largely AN INFORMAL PENSION POLICY 143 be determined by the purpose which the employer seeks to accomplish. Where the primary object is to relieve actual distress of faithful workers who have rendered unusually long service, an informal policy has many attractions. It obviously will not be the equivalent of a formal retirement sys- tem recognizing contractual rights. If, however, the intention of the employer is to reward all workers who render an unusual length of service, regardless of their financial condition at the time of retirement, then it is reasonably certain that an informal system will be too inadequate and too cumbersome to meet the needs of a large estab- lishment. CHAPTER VII COST OF PENSION SYSTEMS Although the question of cost obviously is a vital and, indeed, often a controlling consideration in deciding on the adoption of a pension system, it is entirely safe to say that a great majority of such systems have been started without any accu- rate conception of the ultimate outlay involved. As an inevitable result, as already noted, a large number of pension schemes, both public and pri- vate, have come to grief. The determination of the cost of a pension sys- tem for any individual establishment is a highly expert actuarial task and, at best, involves many uncertainties. Expenditures under a pension plan project far into the future and ordinarily increase for a long period, so that the "peak of the load" is not reached until forty or fifty years, or per- haps even more, after the sytem is started.^ Exact calculations are, therefore, quite impossible. About the only thing that can be said with posi- tiveness on this score is that all worth-while pen- * In this connection see p. 157. 144 COST OF PENSION SYSTEMS 145 sion schemes are expensive. Obviously, much depends upon the scope of the plan and the char- acter of the benefits provided. Many pension plans include benefits which in a strict sense are not pensions proper, but are in the nature of sav- ings or life insurance. All these features tend to increase the cost. No reliable estimate of the cost of a pension sys- tem in any individual case can be made without most careful study of the particular facts as to the ages of the workers, sex distribution, rates of labor turnover, and various other details. Actuaries are agreed that there is no pension formula capable of general application. The cost of a pension sys- tem in one establishment might be very radically different from the cost of an identical plan in another establishment where employment condi- tions on the surface might seem very similar. Starting with a given scheme of benefits, how- ever, it is possible to present general estimates of the cost of a pension plan which will afford the employer some rough measure of the probable financial burden involved. The immediate cost of a pension system will depend on the method of financing. If no pro- vision is made to meet the liability in advance, the cost will be much greater than where a fund is gradually built up on the compound interest 146 INDUSTRIAL PENSION SYSTEMS principle. For example, an annual contribution to a pension fund equivalent to two per cent of the payroll should yield an income sufficient many years later to meet pension disbursements that would then be equal to a much larger percentage of the payroll of a force of the same size and gen- eral character. Methods of Financing a Pension Scheme The method of financing a pension plan is there- fore of primary importance. Four principal methods may be indicated : 1. The setting aside at the outset of a fund large enough to provide an income sufficient to meet the pension disbursements. 2. The setting aside of a smaller fund, supple- menting this with annual appropriations. 3. Annual appropriations, without a fund, to meet each year's expenditures as they arise. 4. The building up of a fund on an actuarial basis by setting aside such percentage of every worker's pay as actuarial estimates indicate will be necessary to provide the pension. This scheme may be supplemented by a lump-sum fund at the start. The first of these methods will seldom be prac- ticable. In the case of an establishment of mod- erate size, the settmg aside of an adequate sum COST OF PENSION SYSTEMS 147 would seriously, if not hopelessly, embarrass the company in its business. Even in the case of ex- ceptionally large and strongly financed companies, moreover, it will be very difl5cult to make certain that any fund, so set aside, will prove adequate. The second method is much better, but still uncertain, as there is no assurance that the appro- priation of each successive year will not have to be greatly increased. The third method is highly objectionable, as practically certain to land a pension scheme on the rocks of business depression, or of unforeseen expenditure. Of all methods the fourth is the one usually recommended by pension authorities where a formal system is introduced. It involves extensive actuarial estimates, and a heavy administrative burden, with periodical revisions of the original estimates. This, however, is the price which an establishment setting up a formal pension system must expect to pay. This actuarial burden is largely obviated in the case of a paid-up annuity system. By this actuarial, or "reserve," method the total fund to be built up is the sum of the amounts necessary in each individual case as indicated by calculations taking account of age, expectancy of life, and various other factors. Such a fund, 148 INDUSTRIAL PENSION SYSTEMS therefore, is in theory sound, provided the plan is not departed from. Actually, as shown later, there are so many factors that cannot be anticipated, that even such a scheme must be almost constantly "revalued" in order to assure its solvency. Under this method the interest accumulation goes a long way towards meeting the final pen- sion obligation. It could be argued that the use of the funds by the company would more than offset this difference. But as a practical matter the argument in the case of a pension system is in favor of the reserve method, even from the em- ployer's standpoint. From the employee's side the advantage is altogether in favor of the reserve method, with the pension funds kept entirely separate from those of the company. Otherwise the prospect of a pension long looked forward to may suddenly be swept away by some acute busi- ness depression or other unforeseen contingency. In the case of a system of paid-up annuities, the worker has complete protection in respect to benefits already earned by previous service. Even with an annuity system, however, it may be de- sirable to set aside or build up a fund which will yield an income sufficient to meet the yearly cost of annuities. While the actuarial method of accumulating a fund is extensively used in public service pension COST OF PENSION SYSTEMS 149 systems, it is too seldom employed in private pension plans. The result is a very rapid increase in the expenditure for pensions which often, and, indeed, usually necessitates increased appropria- tions, or forces a radical reorganization of the plan. Outside of the amount of the benefit and the years of service or the retirement age stipulated, the cost of a pension system by any given method of financing ordinarily will be influenced chiefly by the fact whether or not the plan includes with- drawal equities and death benefits. Obviously, a system which does not provide for a withdrawal equity to employees separated from the service prior to the retirement age, or which does not provide a death benefit, will cost less and, indeed, very much less, than a system otherwise similar but under which such benefits are included. In discussing this feature there frequently has been a tendency to compare the costs of non- contributory with those of contributory systems. It should be emphasized, therefore, that the mere question whether the entire cost is borne by the employer, or is shared between him and his em- ployees, cannot, if all other conditions are the same, affect the actual cost. The question, who pays, is a detail which, while important, does not enter into the actuarial problem except in so far as it may influence the character of the benefits 150 INDUSTRIAL PENSION SYSTEMS provided, or the number and class of employees included. The confusion on this point probably has arisen because it happens that non-contribu- tory systems usually exclude withdrawal equities and frequently exclude death benefits, whereas a contributory system ordinarily includes both. This is entirely natural, since, under a contribu- tory system, employees will almost certainly insist upon the right to withdraw their contributions in the event of separation from service, and, more- over, will be disposed to demand death benefits and other benefits which they might not be in a position to demand under a non-contributory system. Systems without Withdrawal or Death Benefits As a rough approximation it may be said that a pension system for industrial wage-earners, pro- viding a modest retirement benefit — but with no withdrawal or death benefit — will require an annual contribution of at least two to two and a half per cent of the total payroll at normal rates of wages, in the case of a representative manufac- turing corporation of substantial size. It should be emphasized that this cannot be laid down as a specific formula, since conditions peculiar to a given establishment or to a given industry may be such as to require a much larger amount. On COST OF PENSION SYSTEMS 151 the other hand, it may be that for some establish- ments a contribution of slightly less than two per cent would suffice, say, for instance, in the case of a concern having an unusually large proportion of women workers, few of whom would ever go on the pension roll. It would seldom happen, however, that a pension system providing only a modest retirement benefit can be maintained on a much smaller annual contribution than two per cent of the total payroll. On such a basis, more- over, it ordinarily would be necessary to make special provision to cover the cost of meeting accrued liabilities.^ It is true that several industrial establishments with pension systems in force have found that the outlay during the brief periods that these have been in operation has been considerably less than two per cent and, indeed, even less than one per cent of the total payroll. But it is not reasonable to expect that costs can permanently be held down to such a ratio if the plan is really effective. All well-informed students of the pension problem are agreed that such a small percentage of the payroll will not suflfice to provide pension pay- ments over a long period of years, even under a plan which includes no withdrawal or death benefit, and under which the retirement benefit "See p. 172. 152 INDUSTRIAL PENSION SYSTEMS itself is of modest size. Moreover, a contribution of two per cent ordinarily cannot be expected to provide pensions for "back service" of the existing force. The cost of pensions for such back serv- ice, constituting what is technically known as the "accrued liability," would have to be met either by special appropriation, or by increasing the annual rate of contribution over a period of years. For instance, if a contribution of, say, two per cent were required to meet the future pen- sion liabilities, the fund might speedily become bankrupt if it immediately had to meet pensions! for those workers already at, or near, the retire- ment age. In some cases, such a contribution might cover part of the cost of "accrued liabili- ties." 1 Subject to these, and various other, qualifica- tions the statement may be ventured that many industrial establishments of substantial size and normal labor turnover could hope to finance a pen- sion system of this limited sort on an annual con- tribution of two to two and a half per cent of the payroll. In many cases, however, unforeseen contingencies will compel supplemental contribu- tions to the fund in order to maintain its solvency. A representative of an engineering organization which has instituted several pension systems has * For a further discussion of this point, see pp. 173, 174. COST OF PENSION SYSTEMS 153 said: "Rarely is it feasible for a corporation to appropriate in advance a sum suflBcient for all pen- sion needs." ^ Systems Providing for Withdrawal and Death Benefits As just explained, a pension system providing for withdrawal equities to those members of the force who are separated from the service before reaching the retirement age, or death benefits for those who die before reaching that age, must necessarily cost more than a plan otherwise simi- lar, but under which no such benefits are provided. Such withdrawal equities and death benefits tend, of course, to interfere with the building up of the pension fund under the operation of the compound interest principle. Broadly speaking, it may be assumed that, for a given establishment, a pension system providing the same retirement benefit as could be secured by a contribution of two per cent of the payroll where no other benefits were promised, but which, in addition, provided for withdrawal, disability, and death payments, will require a total contribu- tion of at least five to six per cent of the payroll, probably more.- 'Elmer B. Tolsted. Cotton, November, 1920, p. 7. ' In the case of public service pensions of this type, the cost frequently is greater than six per cent of the payroll, and not 154 INDUSTRIAL PENSION SYSTEMS Since the ordinary contributory pension plan dqes provide these benefits, such an estimate may be regarded as roughly applicable to a pension system of this type. But, as already pointed out, it should be kept in mind that the question whether the system is contributory or non-con- tributory is not the governing consideration. Such a cost ratio would be equally applicable to a non- contributory system which provided the same schedule of benefits. Again, it should be emphasized that this is noth- ing more than a rule of thumb, and cannot be taken as a working formula until verified by actuarial calculations based on the experience of the individual establishment. It also should be repeated that these estimates may easily be upset by special circumstances. For instance, the inclusion of highly paid executives at liberal rates of benefit might very seriously in- crease the cost of the plan.^ infrequently greater than ten per cent. Oftentimes, however, such systems provide for substantial benefits to widows or dependent children, which add greatly to the cost. If the death benefit is limited merely to the return of the employees' contributions, the cost might be less than five or six per cent. * An instance is cited of a company where a considerable number of such executives went on the pension roll at one time, with the result that the "curve" of the pension load was thrown radically out of its calculated course. In this case it happened that nearly all of these executives died within a single year, with the result that the curve was speedily brought COST OF PENSION SYSTEMS 155 In practically all cases it is necessary to revise original estimates at frequent intervals, in order to guard against such departure from them as might eventually involve the scheme in bank- ruptcy. Failure to take this precaution has been responsible for the collapse of many pension funds or schemes which at their inception apparently were sound. Indeed, it is hardly too much to say that bankruptcy, either actual or constructive, has been the common fate of pension plans. This has been especially true in public service. Most of the systems now in effect in private industry have been in operation for too short a period to test their soundness, but, as stated in an earlier chap- ter, the financial stability of many of them is ex- ceedingly doubtful. Even with frequent revision of estimates, there is danger that unforeseen events will upset calcu- lations, and that supplemental contributions will be required unless the benefits are modified. It has been remarked that no gratuitous circum- stance comes to the relief of a pension scheme. The accidents and contingencies almost invariably operate against the plan from a financial stand- point. back to its normal. If, however, these executives had lived to an unusual age, the plan might easily have been perma- nently embarrassed. 156 INDUSTRIAL PENSION SYSTEMS Long-Continued Increase in Pension Disbursements Mention has been made of the almost invariable tendency of pension disbursements under any formal plan to increase, and to increase for a long period of time. The public generally is familiar with this prin- ciple as illustrated by the pensioning of veterans of the Civil War, under which the disbursements continued to increase heavily long after succes- sively predicted "peaks" had been reached. This experience is largely the reflection of a funda- mental actuarial principle, which also holds in the case of private industrial pension systems. This tendency is well illustrated by Chart 1 giv- ing estimates of future pension disbursements under three plans, as prepared in the office of an organization which has installed several pension systems. These curves may be regarded as more or less typical of the normal course of pension dis- bursements for a large establishment. It will be noted that all of the curves in this chart show a fairly rapid and continuous rise over a period varying from forty to sixty years. In only one of the three curves shown is the peak of the load reached earlier than fifty years. One reason why expenditures thus increase is COST OF PENSION SYSTEMS 157 that new pensioners are steadily being added be- fore those originally pensioned die. Thus the average expectancy of life for males at age sixty Chart 1. Curves Showing Estimated Course of Pension Expenditures Over a Long Period of Years Under Three Different Plans. (Prepared by Independence Bureau, Philadelphia, Pa.) Published in Cotton, November, 1920. k no.em 1 1 I M I [ T 2l: it i'-:. a ;r- I9ZO ITSO I140 *9S0 t*tO /f«» «< is about fourteen years. If ten persons in a given force are retired each year at age sixty, the pen- sion roll might increase to one hundred and forty 158 INDUSTRIAL PENSION SYSTEMS before new additions were offset by deaths. This, however, might require a period of much more than fourteen years. In the meantime workers of younger age at the time the plan was started would begin to come on the rolls in increasing numbers. The principle involved is illustrated in Chart 2 prepared by an expert for the Massachusetts Com- mission on Pensions. This chart also clearly brings out the fact that while the provision for present workers is a more immediate problem, it is far less important from the standpoint of ulti- mate cost than the provision for new entrants into the service.^ Actual Experience under Private Pension Plans Experience of Baltimore & Ohio Raiload Com- pany. It is interesting to compare these typical curves with actual experience under one of the oldest pension plans in the United States, that of the Baltimore & Ohio Railroad Company. This plan was established in 1884, on a non-contribu- tory basis, to succeed a Relief Association which had been established a few years earlier. At the time that the pension plan was inaugurated there was turned over to it by the Relief Association ^ Report of Massachusetts Commission on Pensions, 1914, p. 59. COST OF PENSION SYSTEMS 159 160 INDUSTRIAL PENSION SYSTEMS the sum of $86,000, and the Railroad Company agreed to contribute $25,000 annually, together with an additional sum of $6,000 representing in- terest accruing on a $100,000 endowment of the Relief Association (provided that this sum was not required for other purposes). Assuming that there was no drain on this endowment, the Rail- road's total contribution to the plan would there- fore have been $31,000 per year. As a matter of fact, this was the actual contribution for several years. For the first eight years of the operation of the plan the appropriation by the company was more than sufficient to meet the payments to pen- sioners, but during the next five years the pay- ments ran heavily in excess of the railroad's contribution which, in 1901, was increased to $75,000 and, in 1905, to $82,550. In a very few years, however, the pension disbursements heavily exceeded this increased contribution and, by 1913, the latter was increased to $146,000; again, in 1914, to $234,000; and still again, in 1915, to $266,000. The rapid increase in payments and in the amount required from the company are shown in the accompanying table. ^ *It may be noted that the amounts appropriated by the company were supplemented by some other miscellaneous re- ceipts from subsidiary companies and from other sources. A statement of these is not essential to the comparison. COST OF PENSION SYSTEMS 161 Doubtless the exceptionally rapid increase in disbursements in recent years is partly due to the fact that the company's force had been steadily Table 2. Payments to pensioners and amounts appropriated by the company under Baltimore and Ohio Railroad Com- pany's non-contributory pension plan 1885-1915. Fiscal Year Ended Payments to Pensioners Amount appropriated by Company Sept. 30. 188.5 S 7,354 18,125 20.669 23,438 24,160 25,100 27,894 22,381 31,954 34,457 34,800 34,726 46,346 50,242 52,117 49,026 55,830 63,143 64,730 67,199 73,322 82,972 95,310 112,356 129,247 157,273 174,746 193,908 212,645 234,292 266,538 S31,000 ' 1886 31,000 ' 1887 ' 1888 ' 1889 31,000 31,000 28,000 « ' 1890 30,500 (( ' 1891 31,000 June 3 II 1 0, 1892 ' 1893 24,750 29,500 « 1 ' 1894 31,000 (1 ' 1895 31,000 1^ -^^^^i a^. !* O ci c go ^ » r c o ^ bfitC ^ cj H ^' c4 & cs u I ^ ) Q,S) l« :'S. & -S a ■- S I- u E.2 ft. Q C R O E o o T E ^ •S e's ?; ft-^ ■" 9 « o:s O t. t- i3 -S E ■£ o S*j ^ = c ^ £2S 2° > n't: U): « S5 I 2 55.^ SS 5= o 5 = E a; 4> " t. C 4, O S P(^ O) ^ o > .a £ so. = = g s S o c « * - 5 o » __ S o !M O C £ ■" £ Crt > ^ a^ P M u 3 .1- Ea 2il ill) l-> tH 'S)£ o 2<"2 fi - boxl'c o S "a ■S.2 "Sic 3S ^w o o O'C.S S a « -s .2 S > « -" g 4) 5, ^ O.'O eo ^ -^ O ^ c 5 g.s - .5 ^ -^ c ^ rt J) ■= 3 -2 p. >> CO ; 5P>. £3 4, a ^ 9 « o J5 .5 g S: 1 as » 'JJ J3 X S .S 3 caj3 aj be-* 3^ JO ^ C' « CO « a o *=? fe be c a -a " «i S W o g 3 o ^X! ai •e ^s O j2. ft- "to ^ a ta '^ 4, a, " O. fl 4> 1» 4» ' ^4 ^ — O CO C ,§ "" •- g a u ^ S ■" = o n «' . 2 o o £ ^^ a ^- "2^ o c .5 o cd ?= bca c s^ „, as CT3 CS S <3 3: 3 CD a &- o a g:^.2 bO-w M o S-^ I c •« i- g t, S- ^ t- 4" Q 1^? O T3 St3 OS 3 ■3 2 bfl bc3 .2 >? 33 u U a ^S = 2^5 2 § a cd 2 fi pater a g may the Si 3-e^„ ■- S rt bD ae.5 a u Cm ° u c c a M •? 1^' « 4) 4; 5 a- c3 o ""i^ S-S&.E o^-a *! "" J3 • -■ 4> O T3 O 41 H 222 INDUSTRUL PENSION SYSTEMS § CQ .a 5 c 3 5 6 ;i3 «< c c ,-8 3 c c iM a i a 5 £ -5" a a c 2 -c = ■" -^•ogc .2 W go ^ 3 Ji c J3 -2 &. '-s^ g H il .§ a '^ 3 !» "^ -- O g 1-1 £ =-2 »«■ S! 3-J3 !>>X «.5 E-SS ■5 9 ^■3 *s < 02 C>3 3 £■=■5 £ 3W £"•3 ^5 o' £ S ^3 _ I- O 3 o 5 5 «-g "^ 2 s-= i ^ t-5 3 o.ii d a- a o^ 3 53 -w t) t t. S .5: c "Is"* T3 J3 ^ M S ?gs 5^? ribu Sys iona pe I.P^ v|.s 1^? IS «.> S 5 o oi .2 ii 't; -^ ■ E =i . 5 ^. 5 fc 2i S'O'- o ^, O O 01 ^ «^ c c is ^ -^1*. la O ^ <^ ?' --i <^ ^ t 3 tp.2, I ^ - o Q e3 CJ5 O 0-* 33 ot XI -tS ►« >^S S ?i S *! o'-o "is 2c« "Is 2-Si m Si ." O. C .5 3 J3 „ %^ ■S - Si-S^ ° 3 g" jj SUMMARY AND CONCLUSIONS 223 ■aS c"S ^:s -^ ccucc s^ be II ^..^oa E?OACiOT3.i3^^ JjC C ■'-•4) (11 32 S >§ « 2 »« Si-s alSsSS £=SS SS5 S -351 ^-1 is|°i4 ^si , O) o 3 IB C Of, C ^•s^ s.|| illl 224 INDUSTRIAL PENSION SYSTEMS cretionary" type of pension is seriously inade- quate and, indeed, may be grossly inequitable. The contributory type of pension system usually meets this issue in part. A system of paid-up annuities on the lines described in Chapter V should meet it squarely, regardless of whether or not the worker directly contributes to the cost of the plan. While, however, the question of direct contri- butions is of less importance than the question of contractual right, the contributory system is to be recommended wherever it is practicable. Not only will workers ordinarily take a keener interest in the plan, but they can feel that they are largely providing for their superannuation through their own effort. It has been shown that the employer cannot reasonably expect a pension system to bring tan- gible results in the way of reduced labor turn- over, or greater contentment, sufl5cient to justify its administrative burden and cost. An annuity system, however, because of its greater certainty and more direct appeal, may have an important influence on labor turnover. It has also been shown that the use of pension systems for purposes of disciplinary control is likely to prove disappointing while, moreover, SUMMARY AND CONCLUSIONS 225 such use of a pension system is inherently ob- jectionable. The one controlling incentive to adopt a re- tirement system from the employer's standpoint is that it may enable him more readily to dismiss workers who, because of superannuation or other disability, are no longer able to perform their tasks and who reduce the efficiency of the force as a whole. While other results of a pension sys- tem may be important, they ordinarily will be incidental to, or at least collateral to, this main object. The inevitable tendency of expenditures to in- crease over a long period of time under a formal pension system should be clearly appreciated. An employer who decides to inaugurate a pension or annuity system should have the cost most care- fully estimated by competent experts, making certain that all due attention is given to the problem of "accrued liabilities." Practically the only safe method of financing a formal pension system is on the reserve basis, after detailed actu- arial calculations. Even then, frequent revalua- tions of the plan will be necessary to safeguard its solvency. In general, the only safe policy is to determine the benefits on an actuarial basis, by the amount which the contributions will jus- 226 INDUSTRIAL PENSION SYSTEMS tify, and not to make them directly contingent upon the salary or wages of the employee. The too common practice of following the pro- visions of some plan that seems attractive is an exceedingly dangerous one. While the type of plan should be determined on broad grounds of equity and economic soundness, the details should be worked out with special reference to the needs of, and the conditions prevailing in, the individ- ual establishment, particularly in respect to age and sex distribution and labor turnover. Any at- tempt to apply a general formula is practically certain to lead to disaster in a large majority of cases. Unless an employer is ready to assume the burden and expense of thus preparing a sys- tem adapted to his individual needs, he should avoid committing himself to the adoption of any formal system. Broader Aspects of the Pension Problem From the standpoint of the individual em- ployer the pension problem may seem to be chiefly one of costs and tangible results. In reality, these considerations are far less impor- tant than the fundamental issues of social and economic policy involved. The pension issue is, indeed, one of the broadest and most far-reaching SUMMARY AND CONCLUSIONS 227 of the many perplexing problems arising out of the industrial relationship. Final judgment on the broad question as to whether any system of pensions is desirable in private industry will depend very largely upon the attitude of the critic towards the labor rela- tionship from a social standpoint. Those who feel that it is desirable that wage earners shall be responsible for their own destinies, and who wish to reduce the element of paternalism on the part of the employer to a minimum, will, in general, be opposed to private industrial pension systems, at least unless these are of a contractual char- acter. They will be receptive to the argument that most pension systems keep down immediate or money wages and tend at the same time to accentuate class distinctions between employers and employees. Such critics, if consistent, will take the position that even though the task of raising the real wage status of workers as a whole may be slow, in the long run Labor will be bene- fited b^ meeting the situation squarely rather than by accepting such temporary relief as may be aJBforded through pension systems, at least where these tal^e the form of a gratuity. Others, who have no prejudice against pension systems per se, often may be inclined to oppose the ex- 228 INDUSTRIAL PENSION SYSTEMS tension of such systems in private industry until the various complexities of the problem have been more carefully analyzed. Experience thus far has been too brief and too limited to warrant final conclusions on many points. As the Ap- pendix accompanying this volume shows, most private industrial pension systems are of com- paratively recent origin. Thus, of ninety-three pension plans there listed, only ten were in- augurated prior to 1910. This limited experience would, in any event, necessitate conservatism in passing judgment. The ultimate results of such systems can be determined only after very ex- tended operation. A further consideration in this connection is that many students of the pension problem feel that it is not one to be undertaken by employers alone, but jointly by employers, employees, and the general public. It will be remembered that several of the authorities cited in Chapter I took such a position. The individual employer, faced with the neces- sity of retiring aged or disabled workers who are reducing the efl&ciency of his force, can hardly be blamed for not waiting until the problem is worked out on these broad lines, or for adopting any system which seems to promise an improve- ment over a continuation of existing conditions in his establishment. But it should be recognized SUMMARY AND CONCLUSIONS 229 that such efforts, however well meant, may prove unsatisfactory. It may fairly be said that most pension systems now in operation do not make a substantial ap- proach toward solving the problem of old age dependency among industrial workers. From the evidence presented in preceding chapters, it is obvious that only a trifling proportion of wage- earners ever go on the pension roll. A much larger number, although spending the greater part of their lives in industry, become separated from the service without any retirement benefit. If Industry is to undertake to deal with the super- annuation problem at all, it may fairly be re- quired to devise some more equitable and more effective method than that reflected in existing private pension practice. In this respect the annuity system, discussed in Chapter V, has a particular appeal, and especially if its introduction could be made general among industrial establishments. With such a system in practically universal operation, the great body of wage-earners would be making some provision for support in old age and (except for the "trial service" period) pro rata with every year of service rendered. Because of this fact the annuity system seems entitled to most serious considera- tion, not only by industrial executives, but by the 230 INDUSTRIAL PENSION SYSTEMS public at large. If, instead of pensioning off a mere handful of superannuated workers, a system can be devised by which the great majority of these workers will have acquired a substantial pro- vision against old age by the time they become superannuated, then society as a whole, as well as these individuals, should reap a substantial benefit, while the burden would be distributed in- stead of falling on the last employer. Under such a condition it should be possible to effect a material reduction in the cost of poor relief, which is a very important factor in the tax bill of every community. More important than this possible reduction in taxes, however, is the fact that the great body of wage-earners could feel that their income in old age had been fairly earned by their service during their productive years. The difference in the effect upon national character of having these workers thus virtually self-supporting in their old age, instead of objects of charity, or recipients of gratuities, can hardly be over-estimated. APPENDIX I ANALYSIS OF PENSION PLANS IN INDUSTRIAL ESTABLISHMENTS Note The following tables give a brief analysis of im- portant features of those pension plans of industrial establishments assembled in the course of this study. Because of the numerous details in any given pen- sion plan and the great variation in provisions as between different plans, it is impracticable to present all the facts in such a condensed comparative analy- sis. For example, the age and service requirements contained in the plan of one large company are as follows : (a) "Any male employee when he shall have reached the age of seventy years, and any female employee when she shall have reached the age of sixty-five years, shall be required to retire, irrespec- tive of length of service. (t>) "Any male employee when he shall have reached the age of sixty-five years, and any female employee when she shall have reached the age of sixty years, who in either case shall have been in the continuous service of the Company twenty years or more, may, at the request of the employee, subject to the approval of the Executive Committee, be re- tired from active service. 231 232 INDUSTRIAL PENSION SYSTEMS (c) "Any male employee when he shall have reached the age of sixty years, and any female em- ployee when she shall have reached the age of fifty- five years, who in either case shall have been in the continuous service of the Company for twenty-five years or more, may, at the request of the employee, subject to the approval of the Executive Committee, be retired from active service. (d) "Any male or female employee who shall have been thirty years or more in the continuous service of the Company, may, at the request of the employee, subject to the approval of the Executive Committee, be retired from active service. (e) "Any employee who shall have been fifteen years or more in the service of the Company, and who shall have become permanently totally incapacitated through no fault of his or her own, as the result of sickness or injury (compensation for which has not otherwise been provided), may, at the request of the employee, subject to the approval of the Executive Committee, be retired from active service." To give all the information with respect to age and service requirements for a large number of companies would have made the tabulation so unwieldy as to be almost unreadable. Instead, effort has been made to give the age and service requirements that would, as a matter of practical experience, be most generally applicable. Thus, in the case of the plan above quoted, the age and service requirements are given in the table as sixty-five and twenty, respectively, for males, and sixty and twenty, respectively, for females, as it seems reasonably certain that more workers would be retired under these provisions than under provision (a), which requires an age of seventy APPENDIX I 233 for males and an age of sixty-five for females, or under provision (c), which reduces the age limit, but increases the required ser^dce period to twenty-five years. It should be understood, therefore, that in most cases the plans contain other provisions than those listed in the table. Most plans, moreover, contain exceptions, or special provisions. In order to get complete information in any specific case it is neces- sary to refer to a copy of the plan itself. It will be noted in the first column under the head- ing "Amount of Pension" there is given a percentage of the average salary for the final ten years which is to be multiplied by the number of years of service. Thus if the average annual wage for such a ten-year period were $1,000 and the pension one per cent of this for every year of service, the total pension in the case of a worker with, say, thirty years of service, would be $300, as follows: Average wage for final ten years $1,000 One per cent of this 10 For thirty years of service the total pension would be 300 The use of the final wage for ten years of service is 80 common that this has been taken as a standard. In many cases, however, the average wage for the final five years, or the final three years, of service (or some other period) is used as a basis. Such cases have been indicated by inserting in parentheses the number of years actually taken as a basis. With respect to maximum and minimum amounts of a pension, it should be noted that sometimes this 234 INDUSTRIAL PENSION SYSTEMS is a given percentage of such average wage for the final ten years (or other period), and that sometimes this is limited by a fixed maximum. Thus, in the case of the American Brass Company the maximum is sixty per cent of the average salary for the final three years of service, provided this amount does not exceed $5,000. Where it was known that the company had a group insurance plan in force, this fact has been indicated under the column headed "Death Benefit Provision," but since the number of companies adopting such plans is constantly increasing, the information on this point may not be complete. An examination of this appendix table shows that a service requirement of twenty years is very com- mon, and that a shorter period is infrequent. Service requirements of twenty-five years are fairly frequent, and are found in connection with an age limit of sixty-five years, as well as of sixty years. In many cases, as already indicated, the same plan provides both for an age requirement of sixty-five years with twenty years of service, and for an age requirement of sixty years with twenty-five years of service, or some other arrangement. The age requirement for women frequently is five or ten years less than that for men, or, in other words, frequently is fifty-five, or even fifty years. A considerable number of plans provide for com- pulsory retirement; in a majority of such cases this is fixed at seventy years. In many plans provision is made for retirement at the request of the employee when he has fulfilled APPENDIX I 235 the terms of the plan. In such cases the pensionable age is either sixty years or sixty-five years. In gen- eral, the plan reserves the right to the employer to' retire a worker at the discretion of the Pension Board or Committee; in some cases, however, it is provided that the worker shall not be arbitrarily retired against his own wishes. In general, where a minimum allowance is stipu- lated, this is $18 or $20 per month; a minimum of $300 per year is provided in a number of cases. Maximum provisions vary widely. One plan, that of the Midvale Steel & Ordnance Company, provides for a flat pension of $30 per month in all cases. 236 INDUSTRIAL PENSION SYSTEMS 1 3} in a> d d d d m m ath isio H- 1 t— ( h-( d l-H d (D B > 3 3 3 a> a> d O O o o C5 "h3 6 6 jJ a. 1 CQ > o a 03 O^ Oh '^bl 1^8 >-I o !->' 5r; M 1 ^-i^ «« D. ci,«^ a€© § a g^ b2 *" ^ 0) t^ bO 03 < "=3 o E 0) CO 1 ^ m '- >» >0 ,„ 01 5° A eS w o t- " ^ ° *" § >> ^ ^ ^ -^ -- g , t<^ "O § sss IC o OOO fe.s c< (N (N (N(N.-i en •TO 0) 0) & fe fe to CD «5S<0 CO »o t- <1> -< CO ^ fO iC c^ ■* tn c^ -tSj^ d >— 1 .— 1 l^ .-H tH Oi 05 Oi oc Ol OS Oi 05 I-H I-H -H ,— »-t I-H »-H l-H =a : d ° J •cC » ^ >> 8 '.^ c bC d 3 c i ^ 03 c d bc ^ C ■« s 1 O Eg m ^ b'3 ^ dec'- a (- c < bD i*^ 02 "c S ^ 2 M • o . 5p . j: O O d Sfc^S-S £ a 2 d 0) 03 OJ J ^ <3 < < < PQ « APPENDIX I 237 ^ ^ o (D m 1 a d o o o o a > ^2 ^ ^ >,'a >>o S^ >-, ^3 ' s P^ P»H .-H O ^ Oi O) 03 ^ o o o o • ' bC a ri^ CO c -^( 2 (^^ c a. . Cl O ^ mo U o O o o • aCLi o °a : too; 0) • dS 3 • p^ : 73T3 c ■% . 'o~u Z 2 ^ > > t <^r9 a> 0) :: -oO UO o AiJ "So a a <" ^ OS a? to P to O 05 5 a s m a ,— u o ao ^^ >:'C CO B g cS M at. Sg. a a .cga"" at; rt"" _ «•- S o a CO cSg S .2 «> Si « ic o a S t< S == '*>'*' o 2 S ft. X! W CLi o O a O ^ S >^ o.Sf ft^ <*-. a o o c-< H fe P^ Em o a in , »o CO a eo ■^ 00 OJ 03 Oi 05 05 *"• '"' T-l .-H t-l I-H 1-H o O t w o s ^ O ^5 el u rr! > O m S > «> oo fci •Sg» 05 ti 2 * 2 O) _ 3 p>i.9 a * +j ■^ a> o >;. >> oj II 2 (» a ■7:3 aJ 03 3 0) o* bC O 1 20 20 (if dis- abled) 25 25 20 0) bC o o »«»n "5 <0 O O 1/5 CO Date of Plan 1919 1914 1915 1915 1919 1 Murphy Varnish Co Nettleton (A. E.) «feCo.. Newport News & Hamp- ton Ry., Gas & Elec. Co Newport News Ship- building & D. D. Co... Niagara Falls Power Comnanv APPENDIX I 241 p. a P. ^t: a hJ Pi 3 o o o p. 3 o t-, o 6 d d d 1^ d 6 d mum a t2 a 41 o a^ )er y $15 er m $20 a u s €© a (1) CO l- p. p. p. P. p, u. a p. 6 6 d 6 d ^aga ^ a ^ ti o CO a §'^ ^ s^ p.g fc^ ^ ^ ^ 6^ £>• (U ,-1 ^ ^ ^ ;^ ^ ^ 03 9"t3 .—1 T-l CM (N i-H »— 1 y-l T-l 1—1 i-H ooo § »do lO WC kO OO ip o >C lO U? "5 o 1— ( 1— ( I— 1 (N(M(M (Mo r-t 1—1 § 1-t o> a> Oi a> Oi 05 OJ OS Oi l-H 1—1 t-l "■^ 1—1 1-< '"' 1—1 »a H o O «8 o o 0_p, p. o^ Oh Cl^ • m • . CO t- ■ — I J3 P, Ui« -l . > > H • CO t- -:; ^ Pli-'Cl, 3 *J .2 P-l CQ ^T3 O 0) pg 242 INDUSTRIAL PENSION SYSTEMS S o > t^ 6 d d «@ a^ a© a P. a a a 3 •g rj O ■*-i s 'ro Oh I-' 8^ og 6 8a "o S ^l ^1. g 4J 3 O b2 "^ ^ o y.~s -S a c3tC 1 e3 I 03 -^ S.S 1 gg^gg g g i CO OJ* 1 P ^^ 10 10 :2s io»oo 00 ■* aj.H (MC^ M N(N (N ca(M 8 T3 V CB d.i: cS 3 9 o fe fa fa bO < ss »o 100 >rt 10 <:ph CO CO CO"5t>- CD»0 O 5 0,2 CO MO ■^ ,-1 CO M 1 s SS 01 55 S 53 iS ^ S """ ,-H rt *"■ 1-^ <-H r-< 3 o o «n On -n-d bc Jt "O c3 OJ 3 *J_c^ a b. o 03 bC ^ +j a 03 cj M.2 o . ^ 05 o fl ^ — ^ HP • a aj ^ 5 bc ^.a S3 ^^ O ,s. APPENDIX I 243 en at o 1—1 " 12 So a^o 9 o sa Pi o§oe£ a^ a p, ft b >> ^-B C^ 0) ^ # ^ ^ ^ ^ r-l ^ (M .a a OO O O O O lO c5(M N (M (N(M (M fii ^ Tt< (N CO Tf o Ol OJ OS a> Oi »-H '"' I— 1 -8 « «s o o -a £^0 M-i a ^ O O P 1-1 m t- Oh 3 O o EH m CO U L^ ^H ^ L^ 03 "3 S. "' a a^ n «u C3 s is o S >> Hi ^ ^^ ;^ ^ ^ ^;fJ ^ 1-H (N ^ tW ^ ^ ;?? (M -H 03 O ^ I tn ID O cl , t a M 9> a> <^,(/J u 3 "3 rr O o C3 tf ElH fe Cl, a o O o ^ —< o=a c3 o) o (U (P o aao « o U C U eQ o ~ c PQO CQ =8 O J2 O Sa So o 3 ^a O APPENDIX I 245 i;, d (u o b (j 3- o. 3 00 in (35 "p. CI 1— < I— 1 Q^ 6 6 d o a o a oo a CO (M (^ tH (f^ (-. €^ ti 0) (D (1) a ft, ft 1 d C3 CI L4 o O ;J d S ?^ <*-! cu M O >, ?s a ^ _ > O Ci O bC o lO o to ,__4 00 o > S S a c3 O bC ©5 O ft. ^ ft €^ o OJ (M ft m 13^ 03 i 13^ "a" c3 (/: lb «3 0) o > 9'^ o ** 03 "p. IB 01 >> b > 0) o > c3 CI 3 s O (N bC c3 O 73 o o o iG'=' OOOO O OO o n to CO lO ^ t^ lO to o Oi a OS 05 s s ""^ ""^ ""^ > =a d '-3 ra d a O O d 6 O O W. C33 o QJ a o 6 b a m O w e a r/) C i, o _X oT S £ ^, 1^ '3 0) o c C 5 a c w o « o CM 03 ft a o oi bJD •o +3 a; o o .« Ma; j3 03 .2rt o-M a es i* M a2 „ as . -w OJ CO ' •a . aj a ^x! 3 " c3 to a gaJ? M oa O OJ3 oJ (C a Oi o ^ M^ CO Kc^^ (5j 0) «-i ■•-'!»> c^>»2a CS >ti >H, "C i o „ I 0- « o- r-a- a; r/; C be • , _ ^ aS"" a o r^ S'S o a on « o ,a F -^ >.2 246 INDUSTRIAL PENSION SYSTEMS ^S.S d c3 d d 03 d § g a d c3 ■•^ oj to 'S.'p.^'iS.^^'S'^ "a S o'> ^^ IM <<-• d d o d -"^ d -"^ d 1— II— (Qt— (1— IhHI— 1 1— ( d g >>o ^o ^o ^o i>,o ao a^ >^o a CO UM U,M t-M UCO t-Sfc^St^Sit'^t- o 0,p,a.ftP.p,o,'^& ^ ^ .£! ^ ^, 3 o o o u o x g >>§ ^S ^S >>S ^ O ^ ^ iXu-, p.«4-, &<« a,«*-. P< 5 "^ PL| CS o § O.O.O.O.O. ^-ui li^ lo >c lo ic r^ 1^ t>. t^ t^ >iO^ TO a < -S a ^ S-'s^l <*; t, .-5 (1) OOOQOOOOOOOO op oo .co 5 o^ 0305C5CiOi050503C5 C 3 a. -; g o" -3-2 U ^^ d 6 O ^ .s 248 INDUSTRIAL PENSION SYSTEMS .3 (U t-. o ^2 c a CI yOn < a fl> OJ >. -t o JD p. i y gw ^ L'>>. Mo ~ "^ > O "" cs a lo fct w o o g: (U--5 n^ a (N cS aJ« ^.9 n^ (3 fl%?f ^ a > O rt i- >*-< U C3 H O o ^ 5> o T3 "3 Q dJ 0) > to \^ o3 Q _i a 03 P. a o O CD . o O o ■p. a O M T3 ^i^a-s J= O 03 tsburg See N Ison & For sa. nly) -k-' ■—';-< ^^ O £ ^ ^ "" i S-go. ** ""id, ^ c o o -2* S E ^ 'i' J* o a a 1^1 a as c 0% iried his i butoi ■50 c ^ ""it- as C t< 0. l§ •D-O - 2^5-2 •t-S •a "t- « ft a .•o^S'ftiH) illlf^ Si g«ap«c £ no a* C _ beo c =?2 ^2 ^ =^-2 ^^ !isi|l or those ea to contrib 1 pernianen e such amo be made au "3-= iployees under 16 employee require ild up and maint nipany to contrib contributions wil .2£.S 0.2 a. w;<^ -J?5 0, ^*- tn « J3 ^ -o ^ « ""I '3 J= 250 INDUSTRIAL PENSION SYSTEMS O 3 ej s-" Pe] '3 bC U, "w P-( >> CD c3 ft a >> a & aO tJ a rri be fl fl fl _a -u CD OT '-D a T3 '3 L^ d >, >iflPl COocofl Ofc^HOoS _^--fl. 'E o OT =2=?^ fl fl >>^ bc^flroa G ?i " « « :=:"C 2-2 p.w-S.S' O-ijfl aiO.!B (Ud) 00 cU-fl-t^C-tJ >,« 1fl§ e^l P^"^^ ^l|J|§l-oti o ^ i; -kj ~ —' " <<-i ?i . .S J3 ? o,