/Uj AG, SUPERANNUATION IN THE CIVIL SERVICE. REPORT OF A SPECIAL COMMITTEE OF THE National Civil-Service Reform League, 1901 " It cannot be too clearly and generally understood that the princi- ples of Civil Service Reform in no wise countenance any tenure of office other than during the continuance of merit and fitness. The League again expressly disclaims any advocacy of Civil Service pensions as a part of the Merit System, which contemplates such pensions no more than did the system of appointment and removal by favor prevailina: before the Merit System was introduced. On the contrary, the protect tion which an assured tenure during efficiency affords to public servants should enable them, by the exercise of frugality and forethought dis- played by all prudent persons, to provide out of their current earnings for the ordinary contingencies of age and infirmity, and the League would see with pleasure the adoption of reasonable rules for the ascer- tainment from time to time of continued efficiency on the part of public officers through fair and practical tests applied impartially and in good faith." — [resolution adopted by the league at its annual meet- ing, DECEMBER I4, I9OO.] Report of the Committee on Superannuation in the Civil Service. To the National Civil Service Reform League : THOSE now in the classified civil service of the United States who have become superannuated, have not en- tered through the civil service examinations. As pointed out in the last annual report of the United States Civil Service Com- mission, the average age of entrance has been only 28, while the law has been in operation only seventeen years, so that the average age of those who entered in the beginning can be only 45. Neither the law nor the rules require permanency of tenure. Any one can be dismissed for incapacity or in- efficiency, as well as for misconduct. In order to secure jus- tice, the appointing officer must give his reasons, and the employee concerned must be given a chance to reply, or to explain, before the final act of dismissal. If the temptation to make dismissals for political purposes has been removed so that old men are no longer put out sim- ply to make room for political favorites, on the other hand, under the old system, there were often political reasons for keeping incompetent old men in office, and still more frequently were original appointments made of men who had already passed the age of iisefulness merely to please in- fluential politicians who wished to foist on the government incapable men who vt^ould otherwise be on their own hands or on the hands of influential supporters. Indeed, numerous ap- pointing officers of large experience under the " spoils system" have testified without contradiction that the needs of the ap- plicant were most frequently and urgently set forth ; his fitness hardly ever. It is very difficult for public officials, unless compelled by some stringent regulations, to discharge subordinates who have become incapable from old age when these subordinates have been faithful in the past and are absolutely dependent on their salaries for support. The extent of this evil it is hard to ascertain, some experienced officials considering it greater than do others. It is true that mere age tables do not tell the whole story. Some men at seventy-five have more vigor than others at fifty. Yet, as an average, seventy may be taken as the general age of the end of activity. In the United States Army sixty- four is the age of retiring. In the civil service the require- ments are not so exacting on the physical forces as in the army, with the exception of a few small departments like the Railway Mail Service. It is to be remembered in this con- nection that experience and knowledge of the history of a department make a man, too old to enter new employment, yet invaluable in that in which he has long served. Every man of business is familiar with such cases. If we assume then that about as many over seventy are thoroughly useful as under it are incapable from old age, we may use seventy as a fair basis for obtaining an approximate estimate of the situation. In the eight departments at Washington in 1893 there were 228 persons of seventy years of age and over out of 11,657, or almost exactly 2 per cent. In 1900, the only other year for which the data are accessible, we find there are 262 of seventy years of age and over out of 10,967, or a little over 2 per cent., making an increase in seven years in the ratio of 6 and 2/7 in 10,000 a year, while the number of persons of eighty years and over has actually decreased in those seven years. In the New York Post Office in 1900 there were only 21 of seventy years of age and over out of 3,561 employees, or less than 6/10 of i per cent. The best answer to the claim that the new system will " fill the public service with old men" is found in the experience of the state service of Massachusetts. There are 800 positions in that service strictly under competitive examinations. The civil service law has been applied to them for 16 years, while for 24 years before, the appointing power in the state had been under the control of one party only — the heads of the de- partments being retained for long periods without change — and there were no clean sweeps. While vacancies were filled for political reasons, practically no removals were made during all of this time except for cause. This service therefore repre- sents the most stable service, for 40 or 42 years, that is known in the United States; quite as stable as the present classified service of the United States. There is no system of pensions or fixed retirement or fixed terms of office, or age limit or re- curring examinations, and yet the Secretary of the Massachu- setts Civil Service Commission informs us that only 3 out of the 800 or 3/8 of one per cent, are of 70 years of age or over. As to the remedies, the more radical ones now generally proposed for superannuation are the following : I. A civil pension list. II. A retirement fund to be made up by deductions from salaries. III. A provision requiring endowment or deferred annuity insurance from all seeking admission to the Civil Service. IV. Provision for the forced retirement of a certain per- centage of employees each year. V. Recurring examinations for promotion, reductions and dismissals. VI. A daily record of efficiency for the same purpose. VII. Fixed terms of office. VIII. Forced retirement at a certain age. And also certain combinations of these. The first three plans provide for old age support while the last five provide for compelling retirement, with no other means of support than what the incumbent may voluntarily have provided for himself. Under provision for old age sup- port a more stable and experienced service is secured. Under the present system in the United States there is great com- plaint that the more active and efficient public servants who have entered through competitive examinations too frequently retire from the service just as they have gained experience and have reached their most useful period, in order to take positions in private life where promotion and provision for old age can better be secured. Of course, no forced retirement system would lessen this tendency. On the other hand, old age provisions tend to make employees stay on after the age of maximum usefulness till they have reached the age for re- tiring on a pension, and the number of old employees to be dealt with is larger than in a system where no such provision is made; that is, the supply of old-age support increases the demand for it. The civil pension system has led to great abuses in the past in England. It is extremely unpopular in America. There is danger of a civil service lobby in Congress should the system be adopted. The retired list for the United States Army officers was established in 1861. The officers receive 75 per cent, of their active service pay, and the retiring age is sixty-four, and below that age in case of permanent dis- ability. In the army this system has worked to great advan- tage and has led to no important abuses ; no one thinks of aboHshing it. In England the age of retirement in the civil service is sixty, and separation from the service at that age is compulsory with some rare exceptions, while pensions on re- tirement before sixty are granted in most cases of permanent incapacity. No persons are granted a pension who have not been at least ten years in the service, and then the payment is calculated on one-sixtieth of the salary on retiring for each year of service, with 4o/6oths as a maximum. The pensions paid in the British service amount to 16 per cent, of the salaries paid for active work. The British pension list is, how- ever, unduly enlarged. For example, many gratuities are granted on retirement where regular pensions are not allowed, and in some cases the pensions are made equal to the full salary. If we should take the retiring age for the United States civil service, as has been before suggested, at 70, instead of 60, as in the English service, the pension list would cost eventually, it is estimated, from 4.3 to 7.2 per cent, of the salaries paid for active service, in order to give pensions of 60 per cent, of the average salary during employment. The per centage varies according to circumstances. It depends upon whether only strong and healthy employees are allowed to enter the civil service or persons of average health. The above per centages are calculated on the basis of no resignations. With a reasonable number of resignations before 70 the per centage would be still lower. That the highest rate sug- gested, namely, 7 and 2/10 per cent., is amply high is proved from the experience of the British retired civil list where the actual per centage of those retired to those in the service is far below the theoretical maximum that the application of the same mortuary tables, without allowing for resignations, (viz. 21 per cent.) would show, taking the average age of entrance into the British servce and the British age of forced retirement. It is fairer to base a provision for old age on the average salary during employment rather than on the salary at retire- ment, as the salary at retirement is usually the highest received by the employee, and as otherwise there would be the tempta- tion to secure an increase of salary just before retirement in order to increase the pension. II. A retirement fund made up of deductions from salaries might be in two forms, (a) a deduction from all salaries for the immediate support of a retired list and {l>) annual deduc- tions from the salaries of those hereafter to enter the service, which should be allowed to accumulate at compound interest to form a fund for annuities payable only to those who have thus contributed, {a) At present it would take only about 2 per cent, of the average salaries of those in the departments at Washington to pay the full average salaries of those of seventy years of age and over, and only 1.2 per cent, to pay pensions at 60 per cent, of the average salary. If a further deduction were made from the pensions of those who had been in the service for less than forty years, on the Enghsh system, it would re- quire still less. But those now in the service include only those who are able to do some work, while the retired list would also include the absolutely helpless. Besides this a pension at the end of the service tends to increase the number of persons who will stay on for the sake of pension; so that in the future we should have to allow for deductions 4.3 per cent,, and possibly even more. Besides other objections this system is extremely unfair to those coming into the service young and staying on for many years. They would have had deducted from their salaries very much more than would liave insured them the same annuity at the same age in any insurance company, and those older and nearer the age of re- tiring would have paid far less than their share. ((^) The plan of beginning with those now entering the service would be more fair. In England this system was begun in 1829. The deductions were 2.5 per cent, on all salaries not exceeding $500 (^100), and 5 per cent, on 8 all others. This deduction, considering the high rates of in- terest on safe investments at that time, and considering the early age of entering the service, might have sufficed but for the large number of persons under 60 years of age who became entitled to share in the fund, and but for the basing of the pen- sions on the maximum or retiring salaries and some unexpected charges on this fund. In 1857 the fund had amounted, after all payments out of it to over $5,000,000, but the chief charges on the fund had not then fully matured and it be- came evident that with the greatly swelled pension list this fund was inadequate, so it was turned into the general ex- chequer and regular pensions at the same rates were as- sumed by the government. A royal commission in 1888 reported in favor of 5 per cent, deductions from salaries, but this recommendation has never been followed. The average age of entering our classified service is 28 years. Starting with that, it would require continuous annual payments of $27 a year on male lives, to pay an annuity of $600 to those who should attain 70 years of age. That would be 2.7 per cent, on a salary of $1,000. This cost is based upon information to cover the special case, furnished by one of the largest life insurance companies in the United States. They actually issue such policies now, under the name of " deferred annuities." On the basis of paying the same annuity at the age of 65 and over, instead of at 70, it would cost $55.20 a year, or a little over twice as much as if payable at 70 and over. This dijBference is caused by deducting five years of payments and five years of accumulatious at com- pound interest and adding five years of annuities to be paid. It suggests how much is added to the cost of pensions in Great Britain by making the age of retirement sixty, instead of 65 or 70. The cost of these deferred annuities includes, of course, expenses and profits of the insurance company. Theoretically the government could insure at less cost, but on the other hand, it must be assumed that the government would be limited to investments in United States bonds with very low rates of interest, while insurance companies can secure 4.5 per cent. It should be borne in mind that the rate of interest is a very important factor in calculating the accumulations for long periods. Accumulations at 4 per cent, compound interest are .9 far more than twice as great as those at 2 per cent, com- pound, because compound interest accumulations are on a basis of geometric progression. So that after all, the cost of insurance by the government would be greater than in first class companies. The government might make deductions on the basis of the cost of company insurance, use the fund for its own pur- poses and pay the annuities on the same basis as the com- panies, but this would be making up the difference out of the pockets of the people, and when once the annuities, at least for any considerable length of time, are not strictly confined to a self-sustaining fund, there comes in the old danger of a lobby and claims for special privileges, as in the case of direct pensions. The Brosius bill introduced December 4, 1899, provides a deduction of 2 per cent, for a civil service retire- ment fund to be invested in United States bonds. The retir- ing annuities are to equal 75 per cent, of the highest pay re- ceived. All persons 70 years of age who have been in the service 35 years are to be compulsorily retired. Persons 60 years old who have been 30 yeais in the service may be vol- untarily retired and so may all disabled persons who have been in the service twenty years. The Civil Service Commission is to decide all questions of retirement and establish regula- tions. Annuities are to be paid from the retirement fund and not otherwise, and if demands exceed the fund, they fail. Em- ployees who are discharged or die before retirement are to be refunded the amount of pay withheld. It seems quite evident that the 2 per cent, withheld under such conditions would not suffice to pay these annuities. III. The advisability of requiring insurance in the way of de- ferred annuities from all those who enter the service is largely a matter of the cost of this insurance. A deferred annuity pay- able, for example, at $600 a year, every year of life over 70 on male lives beginning at 28, (the average age of entrance into the classified service), would require payments of $27 a year, or 2.7 per cent, on an average salary of $1,000. On a larger average salary the proportion would be the same. For exam- ple, 60 per cent, of an average salary of $2, 000 would be $1,200, and an annuity of $1,200 at 70 and over would cost $54 a year. lO beginning at 28, or just 2.7 per cent, of $2,000. Those enter- ing under 28 would pay less, and those over 28 correspondingly more. While this remedy applies only to those entering the service it could be extended by correspondingly larger pay- ments, according to increase of age, so as to apply to all who have been in the service for some reasonable number of years. At the age of 38 for example, which is 10 years over the aver- age of entering the classified service, an annuity of $600 a year at 70 years of age and over would require annual payments of $52.20. For those somewhat longer in the service and older, and to whom the increased deductions would come hard, a smaller annuity might be required. To those who are still nearer the age of 70, however, the cost of such a deferred annuity would entail too large a deduction from the salary to be reasonable. For example, it would take a payment of about $3,600 from one at the age of 69 to procure an annuity of $500 a year for the rest of his life beginning at 70. As all those now in the service nearing 70 years of age came in before the civil service law was enacted, that law could not be blamed, if the United States government were asked to deal liberally with these cases. Their number is very hmited. A considerable part of the cost could be deducted from their salaries, and in a few years the extra expense from this source would cease entirely. The insurance companies would, we feel sure, after inquiry, be willing to make deposits of good securities in the United States treasury to assure the payment of these deferred an- nuities. They already make such deposits with various state treasuries as security. The insurance should be limited to all such companies as would consent to this plan and perhaps to such as would also submit to and pass national inspection. There will be no objection to this latter. It would be a good advertisement, and if it would lead to substituting a national examination for the frequent and often useless re- examina- tions by numerous state authorities, it would be of great advantage to the life insurance system of the country. To the pure deferred annuities could be added a life insur- ance payable in case of death under 70 years of age, or various other forms of life insurance, at the option of the employees, through the payment of additional rates, so that in case of a death before 70 the estate of the deceased might receive back the face value of the deductions made from the salary. The II cost of this added life insurance would be about $20 a year, beginning at 28 years of age, for one thousand dollars, pay- able only in case of death before 70 years of age, so that, beginning at 28, an annuity of $600 a year could be secured if the employee survived the age of 70 — and a cash payment of $1,000 on death if he should die before 70 — on an ann,ual payment of $47.00, or 4.7 per cent, of the salary of $1,000, The amount of added insurance is taken at $1,000, as that represents roughly a little above the average amount deducted from the Salaries of those who would die between 28 and 70. The plan above suggested in its general features has already been adopted in Victoria by the Act of 1890, which re- quires that such insurance shall be effected during the term of probation as a prerequisite for final appointment. The poli- cies are made non-assignable, and in this country it might be well also to have them deposited with the government. An- other precedent is found in the German compulsory old age insurance, adopted in 1881, which supplements for the lower grades of the civil service, the pensions which apply only to the higher. One of the objections to this plan is that it does not pro- vide for those who become prematurely old before the age of 70 or allow those over 70 who are still useful to stay on. Perhaps a proper modification of the plan would be for the Gov- • ernment to allow as m.any of its employees over the age of 70 as are really useful, to stay on on regular salary, on condition that the annuities falling due on their lives would be used, as long as they remained in the service, as a fund from which to pay annuities to those who had become superannuated under 70, so that the government could be supporting as many of the superannuates under 70, as there were employees staying on in the service at 70 or over. This more elastic arrange- ment would cost the government nothing. It would be fair to all, as all on entering would have an equal chance of receiving the annuity before 70 if incapacitated, or of being employed at a salary larger than the annuity when over 70. Some age limits and minimum length of service should be fixed for those receiving annuities under 70. On separation from the service for other reasons than would entitle one to an annuity (such as resignation), the policy might be assigned to the em- ployee going out, and he might keep it up for his own benefit 12 by continuing the annual payments, or turn it into other forms of insurance on equitable arrangements with the insurance companies. In addition to this plan it might be well to provide for honorable transfers in some cases with diminished salaries. Some positions require unusual activity and energy. An in- cumbent may be unable to do the work of such a position as well as when at the prime of life, and yet be not generally incapacitated. He might indeed be extremely valuable to the government in some other position for which his energies are amply sufficient and where his experience and knowledge would tell. To allow such transfers would give the govern- ment the benefit of younger men in the more active offices and yet not deny to it the experience of the older. The average age of retirement and the amount and kind of insurance might well be very different from what is suggested here. The suggestions have been made with an idea of presenting some conception of the cost and ad- vantages of such a system. IV. Forced retirement of a certain percentage of employees each year has some precedent in the navy of the United States, where it was recently adopted and did good at the time. As a permanent policy it is subject to the objection that it will retire too many at one time, and in one department, and too few at another time, and in another department. If no pro- vision were made for old age support of some kind, it would be very hard on those who have been long in the service, and have become old, but who, not having had previous notice of any such regulation, have made no provision of their own for support after retirement. V. Recurring examinations for promotions, reductions and dismissals without provision for the support of those dismissed, are open to the objection last stated ; so are also the plans of daily records of efficiency for the same purpose, or fixed terms of office, or retirement at a certain age, if taken alone. Without going too much into detail, it seems that the sys- tem of recurring examinations, combined with personal inspec- 13 tion and report by a government physician, and with the fol- lowing plan of daily records of efficiency, would be a good method of ascertaining the period when retirement should come to each individual. If it were combined with the more flexible plan of annuities above suggested it would serve as a basis for determining those who could still be retained ,to advantage though over 70, and those who should be retired under that age. VI. As to the plan of daily records of efficiency for promotions, reductions and dismissals, whether alone or in combination with recurring examinations and physician's inspection, this seems certainly to have many advantages. The appointing officers can tell better than can any one else the real merits of the employees when they are directly under them. Where the office is too large for that, the head of the division can do the same, and if a record of daily efficiency is kept, based on a good system of ascertaining the amount and quality of the work done, it would certainly aid very much in securing fair- ness of treatment and in weeding out the inefficient. Such a system was adopted in the Navy Department under Secretary Long, in 1897, for preliminary tests for promotion, and has been recommended by the Civil Service Commission in its Sixteenth report as very valuable. As to political motives influencing the action of the heads of divisions it maybe stated that most of such heads of divisions are now within the classified ser- vice, and receive their places by promotion from those who have entered under civil service examinations. As to the best plan to be adopted, however, although the views of exper- ienced appointing officers at present differ a good deal, it seems that in the end they will work out a better plan than this com- mittee can do. But it may be prophesied that any such plan would combine many of the features of both the last two remedies. VII. As to fixed terms of office the remedy does not seem advisable. The plan for fixed terms of offices may have two interpretations. It may allow for reappointment at the end of the term, or dismissal may be final and absolute when the term is completed. If reappointments are allowed it is but a haphazard remedy at best and pretty sure to be ineffectual. It is haphazard, as many may need to be dis- missed before the term expires and it will be ineffectual be- cause the same reasons that prevent removal for old age and incapacity will induce reappointment. Under the four year term law, if there is no political motive for removal, there is never any pretense even of an examination of the record of efficiency and reappointment becomes a perfunctory affair. Many illustrations can be given of reappointment of per- sons who have passed the age of usefulness, on grounds of pity, even apart from any political influence. For example in the service of the State House at Massachusetts the only old man kept in an important position of late years after his usefulness had passed, held one of the few offices that was sub- ject to a four year term. What little political influence there may have been was rather in favor of creating a vacancy, but it seemed so hard to refuse reappointment when he was too feeble to find employment elsewhere, and as his subordinates could do the work, he was continued on and recently died in office. If the dismissals, on the other hand, are made final and absolute it would work great injury to the service by depriving it of the experience gained in office and of some of the ma- terial needed for promotions to higher positions. For exam- ple, if the ten year limit, which is often suggested, were appHed, at the very time that an employee has shown his ability for promotion by the best possible test, that of experience in office, he may be forever put out of the service. VIII. The system of forced retirement at a fixed age has the double disadvantage that some men are dismissed whose ser- vices are still of the greatest value and that others who have not reached the specified age are, and perhaps long have been incapacitated, are retained. The British system and the United States Army system provide for retirement at a fixed age, but they also provide for putting on the retired Hst, under suitable conditions, those who have become unfit for service before reaching that age. So those systems are open to only one of the two objections. is RECOMMENDATIONS. Your committee unanimously recommend, as the best rem- edy for superannuation, a system requiring life insurance on the deferred annuity plan, by all employees during probation, as a prerequisite to their final appointment, the policies to be non- assignable and in government control, and to be secured by deposits from the insuring companies, in government control ; those employees still capable and useful at the fixed age to be allowed to stay m the service at regular salary, on condition that their annuities go to a surplus fund with which to pay annuities to those under that fixed age who have become incapable from age and through no fault of their own, together with a system of daily records of efficiency, combined perhaps with recurring inspection by a government physician and in some cases, with examinations, to determine who may stay in over the fixed age and who below it are to share in the surplus annuities^ The exact age at which the annuities would normally be payable, varying perhaps for different kinds of service, the amount of annuity to be paid for in the various grades, the age and conditions under which the surplus annuities would be paid to those superannuated below the normal age, and all other details necessary to carry out the plan as more fully outlined heretofore, should be fixed by regulations to be drawn by some special commission, composed perhaps of the Civil Ser- vice Commission and some experienced officials of the depart- ments, appointed by the President. It might be well to apply this system to a portion only of the classified civil service, say to the departments at Washington, and to the larger post- offices and custom-houses, just as was done when the civil service law was first put in operation, and then to extend it as rapidly as the commission, with the approval of the President, may deem expedient. Respectfully submitted, Richard Henry Dana, William Dudley Foulke, Silas W. Burt, Committee. LIBRftRY OF CONGRESS 012 320 619 8