Social Security In America

Part II

OLD-AGE SECURITY

Chapter VIII

PROVISIONS FOR THE AGED IN THE UNITED STATES

THE AGED in the United States may be classified in 10 groups, as follows: (1) The old person who is still engaged in some occupation until 70 or perhaps even until 80. (2) The fortunate minority which may rest on its economic laurels, drawing upon inherited wealth or upon savings of a successful economic life. (3) Those who have earned and receive a satisfactory pension from their former private or public employer. (4) The large, though gradually decreasing, number of recipients of war pensions, whose number may perhaps increase if the pension principle is applied to the veterans of the World War. (5) The very large, perhaps the largest, number of those who are supported by their children or other relatives. (6) A rather limited number of persons receiving regular relief from private philanthropic agencies. (7). Guests or inmates of private homes for the aged, showing a very great variety of standards of comfort. (8) The aged population of our poorhouses or almshouses or county farms. (9) The aged in homes for incurables or insane asylums. (10) The recipients of State old-age assistance, the latest development in the care of the aged.

Unfortunately, there are no figures to indicate the distribution of the 61/2 million persons over 65 years of age among those ten classes. At least approximate estimates, however, can be made of recipients of public and war pensions, inmates of public almshouses, private old folks' homes, and hospitals for incurable and mental disease, and fairly complete data are available showing the number of recipients of old-age assistance in the several States. The total number of these classes, however, amounts to considerably less than a million. Only rough guesses can be made of those still employed, living on savings, or living in children's homes. And the population of cheap lodging houses and the utterly destitute are an absolutely unknown quantity. A few local investigations which have been made are not sufficiently trustworthy. No study made in the pre-depression era

can serve as a guide because of the tremendous changes which have taken place in the value of savings, in the employment of the aged, and in the ability of the majority of workingmen's families to support their parents. Perhaps a thorough investigation of the distribution of our aged population among these classes should be the first task in a scientific study of the old-age problem.

DEVELOPMENT OF STATE OLD-AGE ASSISTANCE LAWS

A series of State commissions began almost 30 years ago to investigate the plight of the aged, and shortly thereafter the American Association for Labor Legislation and the fraternal orders led by the Eagles, began to urge legislation on behalf of the needy aged. Until 10 years ago the only permanent provision for the needy aged in nearly all the States was through the medium of the so-called "almshouse" or "poor farm." The shocking conditions existing in the majority of these institutions were described in a book by Harry Carroll Evans, published in 1926 by a group of fraternal organizations.{1} This book summarized the findings of the surveys of American almshouses conducted by these organizations, with the aid of special examiners from the United States Department of Labor. Insufficient and unfit food, filth, and unhealthful discomfort characterized most of them. Even in institutions with sanitary and physically suitable buildings, it was found that feeble-minded, diseased, and defective inmates were frequently housed with the dependent. aged.

The cost of maintaining old people in these institutions, as was revealed by a financial survey of almshouses made by the Federal Department of Labor in 1925, was high, principally because of inefficient "overhead." {2}

Stimulated by the facts disclosed in these two reports, the drive for regular non-institutional aid for needy old people made more progress. A series of measures variously described as "old-age pensions," "old-age assistance," "old-age relief," and "old-age security" were passed by State after State, beginning with Montana in 1923, totaling 18 by the middle of 1931, and 28, with two additional Territorial laws, by January 1, 1935. These measures offer citizens of long residence, who have small assets and no financially competent relatives, monthly grants to enable them to maintain themselves outside institutions. The maximum monthly sums authorized range from $15 to $30 (the latter being the commonest figure). New York

{1} Evane, Harry C., The American Poor-Farms and Its Inmates (Des Moines, 1926).

{2} Stewart, Estelle M., "The Coat of American Almshouses", Bulletin o/ the U. S. Bureau of Labor Statistics No. 386 (U. S. Government Printing Office, Washington, D. C., 1925).

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and Massachusetts put no maximum on their possible grants. From January 1 to July 1, 1935, 7 additional States enacted old-age assistance laws, and about 10 other States revised and liberalized their old-age assistance laws in anticipation of Federal aid.

The early measures made the county the fiscal unit. The trend now is toward State aid to the counties or State assumption of the entire responsibility.

The old-age assistance statutes mentioned above mark the first legislative attempts to remedy the complete and shameful neglect of the old-age problem in the United States. Even with their limited functioning they have enabled 236,000 destitute old people, who have no family able to support them, to escape the miserable almshouse

existence to which many needy aged persons previously were doomed. One of the serious limitations of these measures is the long residence qualification, 15 years or more, which characterizes most of them. In this regard a sampling survey made in six cities by the Research Section of the Federal Emergency Relief Administration, Division of Research, Statistics, and Finance, is pertinent. Table 35 presents the results of this survey. While the residence requirements of the various States differ widely, it would appear from this sampling investigation that a reduction of required residence to 5 years in the last 9 before applying for assistance would include practically all the old people on relief at the time of the survey and yet not fasten upon the States the burden of providing special assistance for mere transients.

It must be conceded, however, that the maximum possible grants in some of the acts are inadequate for comfortable existence and that

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actual grants, as information recently gathered indicates, in some States are even below general relief standards. In only 16 of the States were the measures functioning at all at the end of 1933, and only 9 more States started to give pensions in 1934. Moreover, during 1934 the grants were given throughout the whole State in only 11 States and 1 Territory. To quote from the recent report made by the United States Bureau of Labor Statistics, "sharply curtailed benefits and refusal to take on new pensioners, even the discontinuance of the system altogether until times improve, these are some of the measures to which the pension officials have been forced. In certain other jurisdictions, the result has been to crystallize the plan and to build up a waiting list as large or larger than the number of actual beneficiaries." {3}

The history of the old-age assistance movement in the United States {4} indicates that the American States were slow to enact legislation giving aid to the destitute aged. Long before they took action, European countries, industrial as well as non-industrial, had recognized the problem of old-age dependency by making provisions for old people. In Australasia, public old-age relief systems had become well-established before the World War. In the United States, on the other hand, the movement for old-age assistance did not get under way until after the depression of 1920-21.

This indifference to the problem of the aged can be explained only partially by the American public's lack of confidence in State action. The fact is that a large portion of the American people were convinced that persons who had been hard working and thrifty all their lives would not become destitute in their old age; only shiftless and lazy people were faced with dependency in their later years. This meant that to give State old-age relief was tantamount to rewarding the one who had not done his duty toward society. In addition to this philosophy of thrift and self-reliance, there was--and there still is--extant in the United States a conviction that it is the duty of the children, and not of the State, to take care of the old. It is assumed that if the State relieves the children of this responsibility, family ties are loosened, and, since the family is one of our most highly valued institutions, this danger is to be avoided at all costs.

Investigations on the extent of old-age dependency made by a number of State commissions in the twenties and early thirties disrupted

{3} Parker, Florence E., "Experience Under State Old-Age Pension Acts in 1933", Monthly Labor Review, vol. 39, no. 2, August 1934, p. 257.

{4} The following summary of the history of the old-age assistance movement is based on chap. III of Report on Old Age Relief by Connecticut Commission to Investigate the Subject of Old Age Pensions (Hartford, 1932).

once and for all the comfortable belief that "deserving" citizens do not become dependent in their old age. But the laws which were passed following the recommendations of the commissions made it clear that even though the States instituted a system of old-age relief, children and relatives were not to be relieved of the responsibility to provide for their aged parents. All laws, with the exception of those of Arizona and Hawaii, exclude from State assistance all those who have financially competent children or relatives.

The movement for State old-age relief began in Massachusetts, where, in 1903, the Bureau of Statistics of Labor made an investigation in which it attempted to calculate the cost of a system of old-age assistance. The next step in the history of the movement was again taken by Massachusetts, where, in 1907, the legislature appointed a commission which was instructed to investigate old-age dependency. The report of this commission was not made until 1910. From that time on a number of old-age survey commissions investigated the problem.{5}

There are to be distinguished in these investigations two periods--one period before the depression of 1920-21 and the other since then. In the first period the commissions held very divergent views on the reasons for old-age dependency. A number of them recommended health insurance as a solution to the problem of old age; others were opposed to State action in the field, while only two were sympathetic toward old-age assistance grants. The Pennsylvania report of 1919-21 marked the beginning of a new trend. In it, the attitude that poverty and pauperism were the direct consequences of laziness and deliberate transgressions was abandoned for the first time, and the State was urged to grant old-age assistance. From that time on the many commissions which were appointed to study the question all reached the conclusion that it is the responsibility of the State to provide for its dependent aged if no children or relatives are able to do so.

The brief history of legislation in the various States, given in the following paragraphs, is based on Bulletin No. 561 of the Bureau of Labor Statistics, Public Old-Age Pensians and Insurance in the United States and in Foreign Countries. The first State law was passed in Arizona in 1915 by an initiative act, which abolished almshouses and established provisions for old-age assistance and aid to

{5} The following is a list of these commissions and the years in which their investigations were started: 1910, Massachusetts; 1914, Massachusetts; 1915, Wisconsin; 1917, New Jersey (two commissions), California, Massachusetts; 1919, Ohio, Connecticut; 1919-21, Pennsylvania; 1922, Montana; 1925, Massachusetts, Nevada, Indiana; 1926, Virginia; 1928, California; 1929, New Jersey, Minnesota, Maine; 1930, New York; 1932, Connecticut.

dependent children in their stead. However, it was worded so loosely that it was declared unconstitutional on account of its vagueness. In the same year Alaska passed a law providing assistance to its aged pioneers. This law, though it has been amended on different occasions, is still in effect at the present time.

No action was taken by any State until 8 years later, in 1923. In that year three States (Montana, Pennsylvania, and Nevada) passed old-age assistance laws, but only one of them, that of Montana, has remained on the statute books. In 1925 the Nevada State Legislature passed a bill repealing the 1923 law and putting another one in its place. The Pennsylvania law was declared unconstitutional in 1924 on the ground that it was in conflict with a provision in the State constitution, which prohibited the legislature from making appropriations for charitable, benevolent, and educational purposes. A movement was started immediately to amend the constitution, but it was not until 1931 that the amendment passed the legislature. Since this amendment had to be re-passed in 1933 and then submitted to a referendum vote for approval, it was not until 1934 that Pennsylvania secured action. Thus the decision of the court deferred legislation for 10 years in Pennsylvania.

Ohio, too, took some first steps in the year 1923. The question of old-age assistance was submitted to a referendum vote, but it was decided adversely by a vote of almost 2 to 1.

By 1925 the movement had gained considerable impetus. Although only Wisconsin enacted a law in that year, there was much activity in a number of the States. California passed a law, which, however, was vetoed by the Governor. Bills were introduced in the legislative sessions of Illinois, Indiana, Kansas, Maine, Michigan, Minnesota, New Jersey, Ohio, and Texas. In Indiana and Illinois the bills passed the lower house but were not acted upon by the upper chamber. In four States (Colorado, Minnesota, Pennsylvania, and Utah) commissions were appointed.

In 1926 one law was added, that of Kentucky. In the same year the Washington State Legislature approved a bill, which was vetoed by the Governor. In 1927 Maryland and Colorado enacted old-age assistance laws.

At the end of 1928, after 6 years of agitation, there were only six States and one Territory which had made provision for their aged. They were Colorado, Kentucky, Maryland, Montana, Nevada, Wisconsin, and Alaska. All the State laws were of the optional type, i, e., they left the adoption or rejection of an old-age assistance system to the discretion of the counties. For this reason these laws had very limited effect. In these six States there were slightly

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more than 1,000 recipients of old-age assistance grants, and these were found almost exclusively in Montana and Wisconsin, the former having 884, the latter 295 old people on their old-age assistance rolls. The total amount spent by the six States in 1928 was, in round numbers, $200,000.{6}

From 1929 on the trend in legislation has been toward making the adoption of the old-age assistance systems mandatory upon the counties. This type of legislation proved much more effective, especially when it was accompanied by a provision by which the State shared in the expense of the county. Of this latter type was the California law which was passed in 1929. In the same year Minnesota, Utah, and Wyoming passed laws which did not provide such State assistance, although those of Utah and Wyoming made the adoption of the system mandatory upon the counties.

In 1930 the Massachusetts and New York laws were passed which not only were of the mandatory type but also provided that the State share in the expense of the locality.

In 1931 and 1933 State legislatures were very active in the field of old-age assistance. It is estimated that 100 bills were introduced in the legislatures of 38 States in 1931. In that year five new laws were enacted in Delaware, Idaho, New Hampshire, New Jersey, and West Virginia. Of these, all except the West Virginia law were of the mandatory type, but only Delaware and New Jersey provided for State funds. Colorado and Wisconsin amended their laws making them mandatory upon the counties as well as making State funds available for the purpose of old-age assistance.

Ten more laws were added in 1933 in Arizona, Indiana, Maine, Michigan, Nebraska, North Dakota, Ohio, Oregon, Washington, and Hawaii. With the exception of Hawaii, they were all mandatory upon the counties, but in Oregon and Washington the State did not share in the expenses of the locality. Arkansas passed a law in 1933, but it was declared unconstitutional by the State supreme court.

Iowa and Pennsylvania passed mandatory laws in 1934, the State bearing the entire cost. By the end of 1934, 28 States and 2 Territories had passed old-age assistance laws.

Summary of the Provisions in Effect, January 1, 1935.-Table 36 summarizes the provisions of the various laws of the United States. As indicated in the discussion above, the effectiveness of these laws depends to a large extent on the degree to which the State shares in the responsibilities of administration and cost. The State has complete supervision or exclusive State administration only in those States where it bears the whole cost. This is the case in Alaska, Dela-

{6} "Operation of Old Age Pension Systems in the United States in 1931", Monthly Labor Review, vol. 34, no. 6, June 1932, table 5, p. 1266.

Ware, Iowa, Michigan, North Dakota, Ohio, and Pennsylvania. In other States, where the State bears part of the cost of old-age assistance, there is a considerable amount of State supervision. This is true in Arizona, California, Indiana, Maine, Massachusetts, New Jersey, and New York. Colorado and Wisconsin are the only States which give money to the counties and leave to them the administration of the fund, requiring only an annual report to the State office. Such an annual report is required in a number of other States from the counties administering the laws. This provides little guaranty that the laws are actually enforced. A number of States left the entire responsibility to the counties, requiring not even an annual report. These States were Kentucky, Minnesota, New Hampshire, Utah, and Washington.

It is safe to make the general statement that the purpose of these old-age assistance laws has been carried out more effectively in the States which provide effective State supervision than in those which make the counties entirely responsible. The ratio of recipients of assistance grants to the number of people of eligible age is highest in the States where there is complete State supervision.

In other respects the various laws are quite similar. All State laws require that the recipient of assistance grants must be needy. With the exception of Arizona and Hawaii, they all specify that assistance grants must not be paid to old people who have children or relatives able to support them. New York and Massachusetts are the only laws which do not set a maximum amount of assistance; this maximum is as low as $15 in some States, but most of the laws set it at $30 a month. The age limit is 65 years of age in a majority of the States; but in quite a few of them it is 70. The most serious restrictions are the citizenship and very long residence requirements. Under most of the laws, in order to receive old-age assistance, a person must have been a citizen and a resident in the State for 15 years, and in a few States the residence requirement is even higher. Many States require also a long period of residence in the county or city. The great majority of the States have income and property qualifications. The property limit is $3,000 in most of the laws, while the income limit is $300 to $365 a year. A few of the newer laws omit altogether these property and income qualifications and leave to the administrator the decision of whether or not a person is in need. Many of the laws include the provision that the transfer to the assistance authority of any property the applicant may possess may be demanded before assistance is granted. In most laws there is a provision that assistance must be denied to persons who have deprived themselves of property in order to qualify for aid. Almost all the laws provide that the amount of assistance paid shall be a lien on

the estate of the recipient and shall be collected upon his death or the death of the surviving spouse. The majority of the laws provide for a small funeral allowance.

In addition to these qualifications, several old-age assistance laws make sure that the recipients of aid are "deserving" citizens. People who have deserted their husbands or wives, who have failed to support their families, who have been convicted of a crime, who have been tramps or beggars, who have failed to work according to their ability, are ineligible to assistance in most of the States. Inmates of jails, prisons, infirmaries, and insane asylums are also barred from receiving grants. A few States permit the payment of the assistance grant to a benevolent and fraternal institution after a recipient becomes an inmate, but they make such payment subject to the proviso that the institution may be inspected by the old-age assistance authority.

After this survey of the many restrictions in the old-age assistance laws, particularly the requirement that the recipient must be in actual need, it is not surprising to find that their operation has been much more limited than in other countries which have adopted non-contributory old-age pension legislation. The percentage of old people on assistance rolls in the United States is far below that of European countries, Canada, and Australasia. Several of these countries pay pensions to all aged persons whose income is less than a specified amount, not requiring proof of actual need.

Operation of State Laws.-Data furnished by the Bureau of Labor Statistics indicate the experience under old-age assistance acts in 1934. Some 236,000 old people were being cared for through the medium of public old-age assistance at the end of 1934. During the year over $32,000,000 was spent for this purpose. (See table 37. )

Although 28 States and 2 Territories had old-age assistance acts on the books at the end of 1934, in only 25 States and 2 Territories were grants actually being paid. In 3 States the act was entirely inoperative because of lack of funds. In only 10 States was the system State-wide.

The average monthly grant paid ranged in the various States from 69 cents in North Dakota to $26.08 in Massachusetts. In the former State a total of $507,744 should have been available to meet the old-age assistance obligations. The system is, however, financed by a property tax of 0.1 mill, which, during 1934, yielded only $28,534. The amount paid in grants totaled $24,259. The sum available for distribution, therefore, fell short of the sum awarded by more than $475,000. Dividing the funds among the recipients on a pro-rata basis, the average was 69 cents a month.

(IMAGE OF TABLE 37)

The three State-wide systems of longest experience are those of California, Massachusetts, and New York. It is an interesting fact that year after year the average allowance runs practically the same in these three States (one of which has a maximum of $30, while the other two have no maximum). In 1934 the average grant was $20.21 in California, $26.08 in Massachusetts, and $20.65 in New York.

These data were collected in the annual survey of old-age assistance made by the Bureau of Labor Statistics. The figures indicate, however, that 13 States and 1 Territory were paying grants averaging less than $10 per month in 1934.

How far the grants actually paid fell below the maximum allowable under the law is indicated by comparison of the last two columns of table 37. One column of the table shows the number of persons in each State who had reached the age at which they would be eligible for benefits under the act. It should be borne in mind in this connection, however, that age is only one of the requirements that must be met. Practically all the laws also make certain requirements as to residence in the State and county, citizenship, means, etc.

The number of recipients of old-age assistance is very low in States which have financial difficulties. That many more people are in need of assistance becomes clear from the following tabulation, which shows the number of applications received in some of the States since the passage of the law:

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In all the States for which this information is available the applications far exceed the number of recipients of actual grants.

Activities of State Legislatures From January 1, 1935, to October 15, 1935.-In the first 10 months of 1935, State legislatures all over the country were very active. During this period action on the social security program was pending in Congress, and, while the Social Security Act did not become law until August 14, 1935, many of the States passed new laws or amended their old laws in anticipation of proposed Federal aid. The trend in State legislation during that period reflects in most cases the provisions of the Social Security Act as they crystallized during congressional discussion.

Eight States (Alabama, Arkansas, Connecticut, Illinois, Missouri, Oklahoma, Rhode Island, and Vermont) and the District of Columbia passed new old-age assistance laws in the period from January 1 to October 15, 1935. In addition, the Florida Legislature adopted a law, which, to become effective, had to be approved by a referendum vote. The provisions of these laws are briefly summarized in table 38. It is worthy of note that, with the exception of the Florida law, all these new statutes are of the mandatory type. All provide for a central State agency to administer or supervise the administration of the law, and all provide for State financial participation. None of these new laws makes citizenship of many years' duration an eligibility requirement, and the State residence requirement is in most cases 5 years within the 9 or 10 years preceding date of application--a considerable liberalization in comparison with the laws passed prior to 1935. The same is true of the county residence requirement, which, in a number of the new State laws, was canceled entirely. Only the Arkansas and Missouri laws, have an age requirement as high as 70 years, and the Arkansas law provides that its age requirement is to be lowered to 65 beginning with 1940.

The same general trend toward more liberal provisions can be traced through the many amendments adopted by States which had laws prior to 1935; 16 States and 2 Territories amended their laws in the period from January 1 to October 15, 1935.

In five jurisdictions the laws, which up to that time had been optional, became mandatory upon all political subdivisions (Hawaii, Maryland, Minnesota, Montana, Wisconsin). Central State administrative agencies were established in eight jurisdictions (Hawaii, Maryland, Minnesota, Montana, Nebraska, Nevada, Washington, and Wyoming). At the same time legal provisions for State financial participation were introduced in eight jurisdictions (Hawaii, Maryland, Minnesota, Montana, Nebraska, New Hampshire, Washington, and Wyoming).

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The requirement that a person must have been a citizen of the United States for many years before he could become eligible for aid was canceled quite generally by State legislatures. A provision was substituted according to which otherwise eligible citizens should not be barred because they had not been citizens for a required period of time (California, Hawaii, Iowa., Michigan, Minnesota, Montana, Nebraska, New Hampshire, Oregon, Washington, and Wyoming). Residence requirements were liberalized in 14 of the jurisdictions (Alaska, California, Colorado, Hawaii, Iowa, Maryland, Massachusetts, Minnesota, Montana, Nebraska, New Hampshire, Oregon, Washington, and Wyoming). Four States (California, Minnesota, Montana, Wisconsin) lowered their age requirement from 70 to 65, and one (Michigan) provided that it was to become 65 in 1940. A number of other changes were made in the laws within this period.

Table 38, summarizing the provisions of State old-age assistance laws as of October 15, 1935, shows that at that time there were 36 States, 2 Territories, and the District of Columbia which had passed old-age assistance laws. The Florida Legislature had passed a law, which, to become effective, had to be submitted to a referendum vote.

INDUSTRIAL PENSION SYSTEMS

Beginning in a modest way about 1875, several hundred of the most important companies in American industry have voluntarily created systems providing pensions for their own employees when they become superannuated or permanently and totally disabled. The motives behind the establishment of these systems have been many, and the reasons for their continuance have not always been those which led to their original initiation. Generally speaking, the managements starting and maintaining these systems have not only desired to provide employees with security in their old age, but have also wished, usually from necessity, to dispose of aged personnel who are inefficient in the productive processes of modern industry. A third closely-related motive has been to use the pension system to clear out older employees periodically in order to give younger employees a chance to move up in the ordinary channels of promotion, a measure which not only replaces inefficient employees with younger men who are more efficient, but one which makes the younger men more satisfied with their own jobs and their own prospects. A fourth motive, also relating to economy, has been a desire on the part of certain companies to maintain conditions of employment so attractive as to draw into their service persons of superior capabilities. One motive of the pension systems of the railroads has been to facilitate the retirement of older persons who might consti-

(IMAGE OF TABLE 38- PART 1)
(IMAGE OF TABLE 38- PART 2)

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tute a menace to the safety of the traveling public. With the great expansion of various mechanisms for automatic control of train movements and improvement in safety conditions generally, this motive perhaps has not been as strong in recent years as it once was.

The use of the offer of a pension, coupled with certain restrictions, was considered the means of accomplishing the results indicated by the motives which have already been mentioned, without undue burden on the company. These restrictions, as will be pointed out presently, were so framed, however, that two further important ends were comprehended. First, since the pensions were payable only to persons who continued in the company's service to the time of their superannuation or disablement, the deferment of pensions acted as an inducement for employees to remain in the service, reducing various expenses connected with training new employees in place of others who had left the service. Ordinarily the qualification for receipt of pension is further conditioned upon uninterrupted service, and voluntary interruption in service by resignation or otherwise results in forfeiture of service credits acquired prior to such event. This latter class of restriction was aimed at discouragement of strikes as much as anything else.

In the initial stages the pension movement grew rather slowly in this country. By 1900 only about a dozen plans had been established.{8} By 1910 the number of plans in force was about 60; by 1920 about 270; and by 1930 about 420. On January 1, 1935, there were approximately 750 voluntary pension plans in effect.{9}

The majority of the plans, considered in terms of employees affected, have been in the heavy industries. Over 40 percent of all employees affected by these voluntary pension plans in 1930, the last date for which comprehensive employment data were available, were on class-I railroads; another 18 percent were employed on public utilities; 11 percent in iron and steel companies; 7 percent in companies engaged in production of chemicals and allied products; and approximately the same percentage in companies engaged in the manufacture of machinery exclusive of transportation equipment.

The number of employees affected by pension plans in 1930 was approximately 3,500,000. Despite the unusually rapid growth in the number of plans since that time, the number of employees affected is probably substantially smaller today than in 1930, because most of the

{8} These figures and those which follow in this section were taken from Latimer, M. W., Industrial Pension Systems in the United States and Canada (Industrial Relations Counselors, Inc., New York, 1933).

{9} Estimated by the pension division of the Metropolitan Life Insurance Co. Library.

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new pension systems have been established in companies of relatively small size, and employment in the companies already maintaining plans has been greatly reduced.

Following the passage of the Railroad Retirement Act in 1934, some of the railroads limited the operation of their voluntary pension plans and some have cut their retirement benefits.

Generally speaking, the great majority of employees affected by voluntary pension plans are in the employ of companies of great size. In 1930 about 25 percent of all employees affected were engaged by companies which had more than 100,000 employees. Almost 70 percent of the employees were in companies which had more than 25,000 workers, and 98 percent in companies which had more than 2,000. While the recent expansion in the number of industrial-pension plans has affected necessarily a group of companies of much smaller size in point of number of employees, the movement still remains one predominantly confined to large industry. At no time have more than 15 percent of the gainfully occupied employees engaged in manufacturing, mining, and mechanical industries, and in trade and transportation been covered by these plans.

With but few exceptions all the employees of the companies which maintain pension plans are eligible to participate in those plans. Where a contributory system is established, participation is ordinarily optional for the whole staff at the time of initiation of the plan, and frequently this is true for employees hired subsequently. In a number of important instances, however, participation is a condition of employment for new employees.

As has already been indicated, the award of a pension to an employee is based upon continued employment for a considerable period of years and is contingent upon the employee's being attached to the company in active service at the time of attaining the age of retirement or at the time of becoming disabled. There are many differences in detail in the retirement. age and in the length of service period required as qualifications. Generally speaking, however, the employee must have attained the age of 65 and have completed from 20 to 25 years' service and be permanently and totally disabled.

The methods of computing the benefits are themselves quite numerous. Under the majority of the plans, in terms of employees covered, the benefit is 1 or 1.5 percent of the average pay during the final few years of service multiplied by the number of years of service.

Reference has been made to the fact that these large companies have established pension plans, among other reasons, because they have found it inadvisable to follow a policy of retiring superannuated and disabled persons without a pension. As a matter of fact, however, considerable numbers, at least in the railroad industry, are

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retired without pension, even though a pension plan is in operation. {10} Figures for industries other than railroads are not available, but it is probable that many employees retire without pensions, since many plans are similar to those in effect in the railroad industry in that they fix a compulsory retirement age and prescribe a minimum service qualification for receipt of pension.

Prior to about 1925, with few exceptions, voluntary pension systems provided that the companies were to bear the whole cost of paying the pensions. Most of the plans were begun with but little knowledge of the costs involved, and no very careful study was given to the financing of the liabilities assumed. By reason of a number of factors, including the rapid rise in money wages in the period after 1915, the slackening of the rate of expansion of individual companies, the effects of various policies calculated to reduce labor turnover, the decline in mortality rates, and various other causes, the pension payments of individual companies grew rapidly. By about 1925 it began to be more widely appreciated that the maintenance of a pension system involved very considerable costs and that proper accounting and safe financing involved setting aside funds currently at interest to be used later to pay retirement annuities.

The recognition of the principles of sound financing and accounting was hastened by the entrance of the insurance companies into this field, for these companies began to solicit group annuity contracts actively at about the same time. In order for the insurance company to assume the obligation of paying annuities, it would, of course, be necessary for them to collect premiums in respect of all promises of benefits. As companies became more cognizant of the costs involved, they were increasingly reluctant to assume the total burden themselves. New plans were arranged and old plans revised to induce employees to share the financial burden. In practically every case this involved an agreement to refund employee contributions upon withdrawal or death before qualifications for retirement were fulfilled, though in a number of cases no interest was paid upon such refunds. Occasionally insurance companies were able to induce companies to provide that after a certain period of service employees who were willing to leave their contributions with the insurance company would receive a deferred annuity earned both in respect of their own contributions and those of the employer. But this practice has been relatively unimportant. In 1925 less than 15 percent of all plans involved employee contributions. Early in 1935 the propor-

{10} Transcript of record, United States Court of Appeals for the District of Columbia, October term, 1934, po. 6355, Railroad Retirement Board et al. v. The Alton Railroad Co. et al., p. 178.

tion was probably about 60 percent, although the considerable majority of employees were still under plans in which they bore no part of the cost.

Early pension plans were in large part established and maintained by the management without reference to or approval of stockholders. Failing this approval, the plans were ordinarily subject to revision or discontinuance at any time and the payment of pensions was also subject to suspension, even where a grant of pension had actually been made. When the necessity for setting aside funds currently came to be realized, it was recognized that if such funds were to serve their purpose some safeguards had to limit their use; and, of course, insurance companies for their own protection could accept funds only on condition that they be used as intended. These financial considerations, coupled with the increasing skepticism by which the completely discretionary type of plan came to be viewed by the employees themselves, led to a material strengthening of the legal foundations of voluntary pension plans, although even in such cases the action taken was not put up to the stockholders for ratification.

As has already been pointed out, the early pension plans were begun without an adequate realization of costs and no special provision was made for accumulating funds to meet the liabilities. Almost without exception the pension payments made during the year were charged to current operating expenses; indeed, until 1928 the accounting regulations of the Interstate Commerce Commission prohibited the use of any other method by companies under the jurisdiction of that Commission. As early as 1918 or 1919 some companies began to set up book reserves to meet the liabilities for pensions which had been granted, although they still failed to take into account the fact that there were additional liabilities for active employees with long periods of service which would ultimately have to be recognized in the calculation of annuities payable. The real accumulation of funds coincided approximately with the entrance of the insurance companies into the field. Thereafter the growth in funds was rapid and continued even in the depression years, probably because during the period of liquidation many large companies became possessed of large sums which were not needed in their business and thus found an unusual opportunity to provide funds to cover liabilities already accrued. It has been estimated that by the end of 1931 the total sum set aside for pension purposes was $625,000,000, of which $105,000,000 was in the hands of insurance companies, $460,000,000 in trust funds, and $60,000,000 consisted of balance-sheet reserves.{11} Not all these funds were irrevocably earmarked for pensions, but probably at least

{11} Latimer, op. cit., p. 873.

the sum of $500,000,000 to $550,000,000 was so designated. At the beginning of 1935 total funds set aside for pensions under private industrial plans probably aggregated $800,000,000, of which about $700,000,000 was so restricted as to be usable only for pension purposes.

Large as these funds were in 1935, they were probably far from meeting the total liabilities which had accrued to that date. It was estimated that as early as 1928 total liabilities for pension funds were as much as $2,200,000,000, and probably since that time the liabilities have increased despite the shrinkage of employment.{12} At the beginning of 1935 there were about 175 companies (including railroads), employing normally in excess of 2,000,000 persons, which made no guaranty whatever of awarding the pension or of continuing the annuity payments once the pension was granted.

The half century of experience with voluntary pension plans has shown that they have been inefficient and inadequate as sound social insurance measures. The proportion of all employees in the field affected has been small, never rising above 15 percent; nor are there very good grounds for supposing that the field is capable of any material expansion. Many industries never have any acute problem of aged persons because of marked cyclical and seasonal variation in the number of employees and because of their refusal to rehire employees after a certain age when once they have been dropped from the pay roll. The rate of turn-over of business enterprise itself continues high and employees periodically are thrown out of work because their employers fail to continue in business. It is a reasonable conclusion that in the future pension plans on a voluntary basis will be confined, as in the past, to large-scale industries and specifically to "public utilities and manufacturers of the basic commodities required for the functioning of a mechanized civilization." {13}

Even within the field which these voluntary pension systems embrace, the terms of the plans are restricted so that relatively few employees qualify for pensions. On the railroads, for example, although fully four to five million persons have at one time or another probably been employed by railroads with pension plans, less than 120,000 have been awarded pensions.

Probably no survey of industrial pension systems has ever discovered every system in existence. But it has been estimated that in 1927 the number of pensioners did not exceed 90,000 and that the total annual pension payments were not more than $55,000,000.{14} An estimate from the same source for 1931 was that pensioners did not

{12} Ibid., p. 609.

{13} Ibid., p. 945.

{14} Ibid., p. 216.

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exceed 140,000 at the end of that year and that pension payments aggregated no more than $97,000,000. Latest available information, for 1933, indicates that pensioners at the end of the year were not more than 165,000 and that payments in that year were not in excess of $115,000,000.{15}

Average per-capita pensions were about $50 per month in 1927, $58 in 1930, $61 in 1931, and about $58 in 1933. The decline after 1931 was mainly the result of reductions in pensions by most of the railroads.

Moreover, these voluntary plans contain many elements of discrimination. In most cases, at least until recent years, the benefits have been related to the pay of the final few years of service. While this has protected all employees to a certain extent against the hazard of change in price levels, it has nevertheless produced pensions which were much larger in proportion to the total value of service rendered for executives and supervisory employees than for the rank and file. Moreover, the continuous-service requirements have discriminated against low-salaried employees as compared with those in official and executive positions. And, as has already been pointed out, there are many elements of insecurity, inadequate financing, and lack of sound legal basis in pension systems even at the present time.

Apart from these inadequacies in the plans themselves, industrial retirement systems have entailed certain unfortunate social consequences. A concomitant of these plans is a hiring-age limit which forbids the employment of persons over 45 to 55years old. Whereas the genesis of these age restrictions is frequently to be found in conditions other than pension plans, the pension systems, nonetheless, have introduced a further reason for keeping these limits in effect. The apparent desirability, from the strictly company viewpoint, of maintaining low hiring-age limits might, in the main, be eliminated by a modification of existing regulations. This modification would entail a provision that employees might receive upon retirement age whatever pension they had earned during their period of actual service, without forfeiture because of failure to remain in the service of a single employer. Moreover, the provisions of pension plans which attempt to tie employees to a particular firm are undesirable even though their actual effectiveness is open to question. Insofar as they have been effective in this direction, however, they are not desirable.

Generally speaking, industrial pension systems viewed as a managerial device to limit superannuation among the personnel, clear

{15} Based on material supplied by Industrial Relations Counselors, Inc., New York.

channels of promotion, and add to the relative attractiveness of the employment of a particular firm, and, in general, improve personnel efficiency can be helpful and successful, although for various reasons they have frequently not had such results. Viewed as a means of providing security to industrial workers in old age, because of their limited application and restrictive provisions requiring long and continuous service for a single employer, they are wholly inadequate. Nor do they give promise of substantially adequate protection in the future. Social insurance with a far broader coverage and without these restrictions is essential to old-age security. Social legislation aimed to provide insurance against old-age dependency will in no way interfere with the solution of these strictly managerial problems. On the contrary, a social insurance scheme aimed to prevent old-age dependency by imposing a uniform burden on the pay rolls of all industries and employers, by spreading over the whole employed community the costs of the high proportion of aged employees which characterize many firms maintaining private pension systems and by making absolutely secure the payment of such part of the total benefits as is provided under the law, will be of material assistance to companies which for various reasons may wish to supplement the stipulated benefits.

RAILROAD RETIREMENT ACT

The first important legislative measure toward the provision of old-age security in the United States was the Railroad Retirement Act passed by Congress in 1934. {16} This established contributory old-age annuities for employees of steam railroads, sleeping-car companies, and express companies. When the act was tested in the Supreme Court in 1935, it was declared unconstitutional by a five-four decision on the ground that "several of its inseparable provisions contravene the due process of law clause of the fifth amendment" . . . and that "the act is not in purpose or effect a regulation of interstate commerce within the meaning of the Constitution." {17}

A second Railroad Retirement Act was passed by Congress and approved on August 29, 1935.{18} The new act provides annuities for employees on the same scale as the first Railroad Retirement Act. As in the first act, credit toward annuities is guaranteed the older workers so that the system will function for them as well as for the young men just entering the service. The worker who leaves railway employment before reaching the age of 65 is entitled to the annuity

{16} Ch. 868, 48 Stat. 1283 ; 45 U. S. C., Sects. 201-214.

{17} Railroad Retirement Board et al. v. Alton Railroad Co. et al., 295 U. S. 330.

{18} Ch. 812, 49 9tat. 967; 45 U. S. C. (1935 8upp.), Sects. 215-228.

due him on the basis of the number of years of railway service. Annuities vary with the wage and the number of years of service. A higher percentage of the first $50 of monthly wages is used in computations so that the annuity drawn by the lower-paid worker constitutes a higher percentage of his average wage than the annuity of the better-paid man. This is sound public policy, as the low-paid worker needs a higher ratio of his wage for subsistence. There is a death benefit, payable to widow or dependent next of kin of persons dying after beginning to receive, or becoming entitled to receive, an annuity; and retiring employees may elect to receive reduced annuities and have the annuity continued to a surviving spouse.

Employees in the active service of steam railroads, sleeping-car companies, and express companies, and former employees on leave of absence or furlough, subject to call for service and ready and willing to serve, as of the date of enactment, August 29, 1935, are included in the retirement system. All benefits under the act are payable from appropriations from the general funds of the Treasury. The effective date of the act is March 1, 1936, and annuities become due and payable 90 days thereafter.

RETIREMENT SYSTEMS FOR PUBLIC EMPLOYEES

Approximately 75 percent of all public employees in the United States now enjoy old-age protection under retirement systems established pursuant to law and financed generally by employee and employer (Government) contributions.

The largest of the public retirement systems is the civil-service retirement and disability fund for civil-service employees of the United States Government. This fund was established in 1920, and on June 30, 1935, had 48,665 annuitants on its rolls, to whom it paid $48,082,396 during the fiscal year ending on that date. With an active membership of 420,000 employees, it is the largest public employees' retirement fund in the entire world. Civil-service employees contribute 3 1/2 percent of their basic wages to the fund, and Congress appropriates amounts which to date have been appreciably less than the employee contributions. The congressional appropriations will have to be greatly increased in future years, as the system contemplates full credits for prior service, the costs of which are to be borne by the Government. Retirement allowances are payable after 15 years of service and attainment of specified. retirement ages. Seventy years is the retirement age for most classes of employees, but for extra-hazardous employments the age may be as low as 62 years. The average annuity in the last fiscal year was $988.03.

Besides this large system the Federal Government. maintains smaller retirement systems for special groups of employees. The

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most important are those for the Army and Navy, which at the end of 1935 had over 21,000 men on their retired lists. The men enlisted in the Marine Corps, the employees of the Panama Canal Zone, the Lighthouse Service, the Coast and Geodetic Survey, the diplomatic service, the Coast Guard, and the commissioned officers of the Public Health Service are all protected against superannuation by special pension funds.

In addition to the retirement systems of the Federal Government, several States and municipalities pension their employees. Nine States at the close of 1934 had retirement systems for (general) State employees with somewhat less than 100,000 members and 5,000 annuitants. Additional State and local teachers' retirement funds had 560,000 members, 12,000 annuitants, and annual pension costs of $20,000,000. Between 400 and 500 retirement systems for municipal employees were also in existence, some covering substantially all municipal employees, but the majority providing only for policemen and firemen. At the end of 1934 these municipal systems applied to approximately 160,000 elpployees and had 25,000 pensioners on their rolls, with annual pension costs of $18,000,000.

A considerable number of public retirement systems are not on an actuarially sound basis. This applies to most of the policemen's and firemen's funds and to many of the older retirement systems for teachers. Even in the Federal employees' system Congress, until the present year, failed to make any appropriations to meet the accrued liabilities assumed by the Government for past-service credits. Only a few of the public retirement systems, however, have thus far been in serious financial difficulties, compelling their abandonment or a reduction of promised annuities. On the whole, public employees enjoy far better old-age protection than any other group in the population, although that protection is neither complete nor perfect.