The Pension Problem and Its Solution

Pension: An allowance made to anyone without equivalent. In England, it is generally understood to mean pay given to a state hireling for treason to his COUNTRY.-DR. JOHNSON’S Dictionary.


THE definition quoted from the first edition of Dr. Johnson’s famous Dictionary serves to emphasize some distinctions concerning pensions not always borne in mind.

One is, that a pension is an allowance granted to an individual without financial coöperation on his part. The term annuity, on the other hand, is used to describe a similar allowance provided at the cost of the beneficiary in whole or in part.

The latter half of the good doctor’s definition became later a source of no small embarrassment to him, when George III, of blessed memory, conferred upon him an annual pension of £300. Notwithstanding his definition, Dr. Johnson ended by accepting the pension, though his critics never ceased to insist that his political views had been warped by his enjoyment of the royal favor.

Americans past middle life, whose memories go back to the days immediately following our Civil War, while not sharing Dr. Johnson’s sweeping condemnation, nevertheless look askance at all pensions, and more particularly at governmental pensions. Our CivilWar pensions had their beginning as an expression of the gratitude of a nation to those who had suffered in its service, and to the dependents of those who had given their lives as the full measure of devotion. Had it been limited to these, the purpose of the nation would have been fulfilled. What was intended as a gracious expression of a nation’s gratitude grew into a system of organized privilege. Our pension legislation developed into the greatest legislative abuse in the history of the government, and constitutes to-day a monument to the weaknesses of our law-makers and of our presidents; for in this matter our presidents have shown no greater courage against the assaults of political and personal privilege than have our congressmen.

In this uncomfortable record there is one notable exception — Grover Cleveland. In the second session of the Forty-ninth Congress, in words of patriotism and common sense, he vetoed, and by his veto defeated, a general pension bill — for there has never been a Congress that could have passed a pension bill against the veto of a president. President Cleveland’s message of February 11, 1887, makes good reading today for the patriotic American.

Our Civil-War pensioners numbered, on June 30, 1917, fifty-two years after the war closed, 618,326. Their annual pension-roll amounted to something over one hundred and fifty-two millions of dollars. Our total pension bill for the coming year, 1918-1919, will amount to more than two hundred millions, and will show an increase over last year’s pension bill of many millions of dollars, made necessary mainly by an increase in the minimum pension of Civil-War pensioners. It is not too much to say that the Civil-War pensions, conceived in a generous spirit of patriotism, have resulted in a demoralization of Congress and the nation unequaled by any other legislation in our national history.

The government is wisely seeking in the present war to forestall a similar and far greater pension-roll by providing insurance for soldiers at net rates. Whether this precaution will be effectual to defend the treasury against a combination of organized privilege and political weakness in the post-bellum days remains to be seen.

War pensions are in a class by themselves. The pension systems, which to-day engage so large a part of public attention, arise partly out of economic conditions due to the modern industrial organization of society, and partly out of a gradually quickening social conscience. Their development may be traced in a few words.

The personal pension is an ancient institution. For centuries it has been customary for sovereigns and for governments to confer upon individuals the gift of a pension. Sometimes such a gift was the reward of great military service, sometimes a recognition of distinguished achievement in literature, in art, or in philanthropy.

A little more than a hundred years ago another conception of the function of a pension began to be discussed. The transformation of Europe from an agricultural into an industrial population brought great numbers of men from the land into the factories, situated generally in villages or towns. Under the new industrial system these workers became dependents in old age. It became clear that, under the new organization of society, some method must be found by virtue of which individuals living upon fixed pay may receive under definite conditions a retiring allowance after income-earning power has ceased. This was the origin of the modern pension system.

The conception that lay behind these pension systems was that which remains with us to-day. There must be provided, in some way, a modest living for the individual upon small fixed pay, which may defend him against dependence when he can no longer earn a living by his own exertions. The development of this notion has taken two forms—the first, an old-age pension paid entirely by the state or the municipality or the employer; the second, an old-age annuity provided upon fixed rules, through annual payments of both the employer and the employee. Pension systems to-day differentiate themselves as between these two conceptions.

Twelve years ago the Carnegie Foundation was instituted by Mr. Andrew Carnegie, with a generous endowment. Its purpose was to provide pensions for college teachers grown old in the service, and to lift from their minds, as the time of retirement approached, the apprehensions which hang over a man whose salary has been small, whose obligations have been great, and for whom old age may mean dependence. When it was instituted, there was no other thought in the mind of Mr. Carnegie or of his trustees than to pay such pensions, upon the non-contributory plan, to teachers in the United States and in Canada, as could be reasonably provided through the income of the endowment.

This undertaking has been faithfully carried out, although the pensions that could be provided were necessarily restricted to a limited group of colleges and universities. The administration of this problem inevitably brought the officers and trustees of the Foundation face to face with those social and economic questions which are involved in the maintenance of a pension system. As sincere men, they were obliged to examine the whole question, and to seek to determine their own obligations toward the teachers of the English-speaking countries of North America. The result of this twelve years of work has been a solution of the pension problem of the Foundation which reflects so fully the difficulties of the situation, that the story of this effort contains in effect the history of every pension system and the principles upon which its solution must be sought.

The pension problem, as it lay before the Foundation, resolved itself into three practical questions. First, is the free-pension system, as originally adopted, in the interest of the college teacher? Second, if a free-pension system is not in the interest of the college teacher, what are the fundamental principles upon which a pension system for teachers must rest, in order that it may be socially just and economically and financially secure? Third, if the Foundation shall change from the present basis to a new one, what is a fair fulfillment of the expectations of teachers under the old system of non-contributory allowances?

Europe has had an experience of a hundred years in the conduct of pension systems, though the literature of the subject has only recently become available. It is evident to any student who examines this history that a pension paid by the employer — whether that employer be a government, a corporation, or an individual — will, as soon as the pension is adjusted to the conditions of wage and living, have the practical effect of deferred pay. In a civil-service pension system, for example, embracing groups like teachers, policemen, or clerks, salaries will, after a limited number of years, adjust themselves to the assumed benefit accruing from a pension provided without expense to the individual. As a result, the pay of the whole group is depressed by the amount of the pension, which only a minority receive — for in all pension systems only a minority come to pensionable age.

The most interesting example of the working out of this inevitable effect is that of the British Civil-Service system. This was established in 1857, on the non-contributory plan, the government paying the whole pension. For fifteen or twenty years it met with general approval; but gradually the beneficiaries themselves became convinced that their pensions were merely deferred pay and reacted unfavorably on salaries. As the result of a gradually growing agitation, a parliamentary commission, composed of some of the ablest men in England, was appointed, in 1902, to look into this question. After a thorough study, extending over five years, the commission completely sustained the contention that a pension paid by an employer is in its practical effect deferred pay, which only a minority ever receive.

There is, indeed, no such thing as a free pension when it is involved in the relation which exists between employer and employee. It will inevitably be absorbed in wages, with the result that, while all salaries are affected thereby, a few beneficiaries only will receive the deferred pay provided under the pension system. For these reasons, therefore, the non-contributory pension system will not only prove a disappointment in time, but will also work a practical injustice. It is likely to work mainly in the interest, not of the individual, but of the agency which employs him. It goes without saying that many of the so-called pension systems instituted by industrial companies, railroads, banks, and other organizations are not pension systems in the true sense, but are bonuses intended primarily to secure faithful and continuous service; whereas a true pension system should have as its primary object the defense of the individual against dependence, whether he be under one employer or another.

A second serious objection to the noncontributory pension system lies in its ever-growing cost. The steady growth of the pension load in a municipality or a state is illustrated by practically every non-contributory pension system of the world. For example, the pensions of the London Metropolitan Police in 1844 cost less than one per cent of the pay-roll of the department. By 1890 their cost had risen to seventeen per cent, and by 1915 to twenty-nine per cent. The Austrian Civil-Service pensions, before the present war, had grown to be thirty-three per cent of the pay of the active list. The free-pension system is alluring, because at the beginning the expense is small; but in the long run the burden becomes intolerably heavy.

Aside from the economic and financial weaknesses which have just been alluded to, there is a more serious objection to the free pension which only those who have administered such a system can fully understand. This lies in the fact that, to get something for nothing, or to seem to get something for nothing, has always proved demoralizing. The so-called free pension is perhaps the most prolific breeder of human selfishness ever set up in the social order. Whether for preachers or for teachers, for civil servants or for workingmen, a pension system nominally paid for by someone else is almost sure to prove in the long run a disappointment, and to make an appeal to a human weakness common to the best of men.


When the trustees of the Carnegie Foundation had reached this conclusion, they were only at the beginning of their problem. It is one thing to recognize the weaknesses of the free pension; quite another to construct in its place a system that shall be at once secure, permanent, and fair to all concerned. Before one can hope to construct such a plan, it is necessary to have a clear conception of the risks against which the teacher needs to protect himself.

The typical college teacher of to-day, in the United States and Canada, begins his career as an instructor at about the age of thirty, at a salary of about fourteen hundred dollars a year; somewhere between thirty-five and forty, he will be a junior professor, with a salary of two thousand; and about the age of forty-five, he will become a full professor, with a salary of three thousand.

The typical teacher marries as soon as he has secured a firm seat as an instructor or junior professor; and although college families, particularly in the eastern part of the United States, show the diminishing birth-rate characteristic of American life, it still remains true that the typical teacher will have a wife and from two to three children to support.

To such a man, looking forward to family life upon the modest salary scale indicated above, a healthy optimism is a necessary endowment. Nevertheless, the greatest obligation which rests upon him is to protect his family and himsell against the serious hazards which the lack of an independent income necessarily brings. No other misfortune is more to be dreaded than dependence. One of the most touching letters that ever reached the Carnegie Foundation came from the widow of an old college teacher in the Middle West. For forty years he had given himself unselfishly to the work of a teacher, and he did not feel himself underpaid though his highest salary never exceeded twelve hundred dollars. When his widow wrote gratefully to acknowledge the first payment of the modest pension coming to her under the rules, she added, ‘You cannot perhaps understand what this means to me; but with our small house, which was all John could save out of his salary, it means the difference between dependence and independence. When I think of that I say, “God bless Andrew Carnegie!”’

There is a charming sequel to this incident, that I cannot forbear telling. When this letter was shown to Mr. Carnegie, he found it difficult for some minutes to find his voice; but when he finally found it, he said, ‘I have had some large dividends in my time, but never so big a dividend as this.5

The danger of dependence for the teacher, or for his family, arises mainly out of two hazards. The first is the risk of his own premature death. In a group of men who begin as instructors at the age of thirty, one half will die before reaching the end of their earning ability. Against this risk the teacher is in honor bound to make such provision as his resources, backed by reasonable economy and foresight, will permit.

The second hazard touches himself primarily, but touches also, closely, his wife’s happiness and security. This is the risk of dependence which may come on termination of his incomeearning capacity from increasing age.

These, briefly stated, are the capital hazards which every teacher with a family must face. The first can be met only by some form of insurance; the second by some form of old-age annuity planned to protect the wife in case she survives her husband. The practical question is, who shall provide against these risks, and what is the machinery under which the provision may be met most securely and most reasonably?

In attempting to answer this question the Carnegie Foundation sought the advice of experts in Europe and America. It brought together the insurance and pension literature of the world. The material thus gathered was finally laid before a commission composed of college teachers, of university presidents, of trustees and officers of the Foundation, and of actuarial experts, which formulated the fundamental principles of a pension system in such clear terms, that they are likely to be accepted in the future as the conditions of a true system of annuities.

The principles set forth by the commission fall into two groups — one resting upon social and economic considerations, the second upon financial and actuarial grounds. The most essential of these are in the first group, —

1. The function of a pension or annuity system is to secure to the individual who participates in it protection against the risk of dependence due to old age or to disability.

2. The obligation to secure this protection for himself and for his family rests first upon the individual. It is one of the primary obligations of the existing social order. Society has done its best for the individual when it provides the machinery by which he may obtain this protection at a cost within his reasonable ability to pay.

3. Men, either on salary or on wages, are, in the economic sense, employees. The employer, whether a government, a corporaration, or an individual, has a direct financial interest in the establishment of some system which shall enable old or disabled employees to retire under satisfactory conditions. In addition, society demands today that the employer assume some part in the moral and social betterment of his employees. The obligation of the employer to coöperate in sustaining a pension system is primarily a financial one, and, in the second place, a moral one.

4. A pension system designed for any group of industrial or vocational workers should rest upon the coöperation of employee and employer.

And in the second group, —

1. In actuarial terms, a pension is a deferred annuity upon the life of one or more individuals, payable upon the fulfillment of certain conditions.

2. In order that an individual participating in such a system may be assured of his annuity when due, one condition is indispensable: there must be set aside, year by year, the reserve necessary, with its accumulated interest, to provide the annuity at the age agreed upon. On no other conditions can the participator obtain a contract, since this is the only plan upon which the cost can be determined in advance. The man of thirty who participates in a pension plan under which he expects an annuity thirty-five or forty years in the future, will take great risk of disappointment in accepting any arrangement less secure than a contractual one.

Having made clear these underlying principles of a pension system, the commission then took up the question of insurance, and showed that the protection against dependence during the productive period of life, both for economic and for social considerations, must articulate with protection against dependence in old age. The insurance which provides, during the productive period of a man’s life, against the hazard of premature death should dovetail with the old-age annuity, which defends himself and his wife against dependence after his income-earning pow - er deteriorates. Any agency, therefore, which seeks to deal with the problem of protection for the teacher, should offer him both insuranceand old-age annuity.

Following this conclusion, there has been established an agency called the Teachers Insurance and Annuity Association of America, with a capital of one million dollars, incorporated under the insurance laws of the State of New York, which will offer to the teachers of the United States, Canada, and Newfoundland policies for insurance and for old-age annuities at net cost—all overhead expense being paid from the income on the capital provided, or, if this should in time prove insufficient. by the Carnegie Foundation from its own funds. The one million dollars of capital was provided through the generous aid of the Carnegie Corporation.

The life-insurance policies offered will be those best suited to the circumstances of the teacher’s life. Any teacher may through the actuary of this Association obtain expert advice as to what form or forms of policy best suit his situation. The cost of these contracts for insurance and for annuily is at net rates, and any profit arising from favorable mortality or from interest above the legal rate inures to the benefit of the policy-holders.

A man at thirty, for example, can carry a term policy, ending at sixty-five, for $5000 insurance, at a cost of about five dollars a month. It is hoped that the outcome of this provision will be that college teachers will not diminish the amount they now put into insurance; but that, by investing the same amount, they may obtain a correspondingly greater protection. The typical college teacher to-day carries life insurance approximately equal to one year’s pay.

In the same way, the teacher may accumulate by modest monthly payments an old-age annuity, to begin at sixty-five or any other age at which he may desire to avail himself of it. In the accumulation of the old-age annuity his employer, the college, assumes its proportion of the cost. The college instructor at age thirty, with a payment of five dollars a month, and a similar payment on the part of his college, accumulates at age sixty-five an old-age annuity of a thousand dollars. Should he retire at an earlier age, his annuity would be less, at a later age, more. Upon his death, his wife would continue to receive half of the amount of the annuity paid her husband. Under the conditions of his policy, should he die before retirement, all this accumulation, — both his own payment and that of the college, — with the accrued interest, goes to his wife and family in addition to the insurance. Thus, while the five per cent contribution of the college will, after a number of years, come to be discounted in the salary, it will still remain true that this money returns with interest to each individual teacher; and though it be deferred salary, it ismuch to his advantage that the college should pay this amount to his credit into a reserve for his protection.

Such a plan does absolute justice to each individual. It rests upon sound economic and financial ground, and affords to the teachers of the United States and Canada, for the first time, a means whereby they may protect themselves and their families against the hazards of life which necessarily hang over a family supported by the modest fixed salary of a teacher. The solution thus attained after years of study not only is in the interest of the teachers, but lends itself to a freedom of movement impossible under any restriction of pensions to a limited group of institutions. The question of protection against dependence ought not to be complicated with other aims, but should stand squarely on its own feet. Best of all, such a plan makes an appeal to personal independence and personal sense of responsibility, instead of weakening these qualities.

The full effect of this coöperation between the college and the teacher will not be fully appreciated until time has shown the benefits which it brings to each. In the long run it will profoundly influence both the teachers and the colleges. The plan of insurance and annuities which is thus in time to replace the old pension system contemplates, in the long run, a coöperation of the colleges and the teachers, so planned as to secure for the teacher the largest measure of security, with the fullest freedom. Nothing short of this will permanently dignify and strengthen the teacher’s calling, which was the object at which the author of the Foundation aimed. The method by which this was to be accomplished, he left to be worked out by his trustees as time and experience might decide.

The great gain to the college teachers of the United States, Canada, and Newfoundland, coming out of this great gift, lies in the fact that a solution of the pension problem has been worked out on terms which are just and feasible, financially sound and enduring, and within the reach of the income of the small college and of the modest pay of its teachers, and on conditions which make for self-respect and independence.

Meanwhile, through the aid of the Carnegie Corporation, supplementing the income of the Foundation, a most generous provision has been made, to continue, for a generation and more, the payment of pensions on the noncontributory plan to the six thousand teachers in the seventy-four colleges and universities in the United States and Canada associated with the Foundation. There will be expended in these payments during the next fifty years over fifty millions of dollars. To these teachers also all the facilities of the Teachers’ Insurance and Annuity Association are made available.

The trustees of the Carnegie Foundation undertook the administration of a trust in a field but little understood. In working out the plan which has been briefly outlined, they sought to answer the three difficult questions before them, thoughtfully and sincerely. These same questions confront, each of the numerous pension systems organized in our country in the past dozen years.