Teachers' pension systems in the United States

Front matter

Book 8_^i_Z3L

PRESENTED m"

PREPARED UNDER THE DIRECTION OF

PART I. THE PROBLEM OF TEACHERS' PENSIONS „ Page 1 TTAPTFR

I. The Evolution of Teachers' Pensions in the United

Mutual Aid Associations \oky:,o^k rl

The Beginnings of Unsound Legislation, lby4-18yo I5

Development of Governmental Contributions 23

Unsoundness of Funds Demonstrated 26

Present Extent of Teachers' Pension Systems 29

Growth of State-Wide Systems 30

Conclusion: Present Tendencies and Forces 34

n. The Teachers' Pension Problem Outlined

Groups of Persons to be Included ; " " " c ^'^

Extension of Systems to Contingencies other than buper-

Conditions under which Benefits Should be Granted... 41

Amount of Benefits r^"", 1«

Division of Cost between Employer and Employees 40

Contributions of Individual Members 53

Right to Management 55

Securing Enactment of the System 5°

III. Superannuation Benefits

Eligibility for Superannuation Benefits 57

Compulsory Retirement ^3

Amount of Superannuation Benefit o3

Provisions for Minimum and Maximum Pensions 72

IV, Disability Benefits

Conditions under which Disability Benefits are Provided. 79

Amount of Disability Benefits ^

Medical Examinations and Reexaminations 02

V. Death and Withdrawal Benefits

Death Benefits • ^

Benefits at Resignation or Dismissal QO

Withdrawal and Loan Privileges 92

VI. Determining the Cost of Benefits

Growth of Pension Payments 95

Cost as Related to Method of Financing System 100

Actuarial Determination of Cost 10^

The Problem of Accrued Liabilities I04

Inadequacy of Contributions in Existing Systems 107

Estimating the Liabilities of a Going System 1 13

Cost and Liabilities Involved under Different Benefits... Ii5

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Chapter Page

VII. The Division of Cost Between Government and Teachers

The Wholly Contributory System 118

The Non-Contributory System 119

The Joint or Partly Contributory System 120

The Division of Cost between Teachers and Government in Existing Systems 122

VIII. The Government's Contribution

Various Elements Determining Amount of the Government's Contribution 125

Coordinating the Various Elements of the Contribution. 135

Unsound Methods of Financing the Government's Contribution: The Cash Disbursement Method 135

Unsound Methods of Financing the Government's Contribution : Using Special Revenues not Determined by Pension Needs 137

Unsound Methods of Financing the Government's Contribution: Fixing Rates not Related to Pension Needs. 140

Unsound Methods of Financing the Government's Contribution: Amount of Contribution Discretionary 142

IX. The Teacher's Contribution

Contribution not on a Cost Basis : Uniform for all Members, Irrespective of Age, Salary, Sex and Service.... 145

Contribution not on a Cost Basis : Graduated According to Salary 145

Contribution not on a Cost Basis : Graduated According to Length of Service 146

Contribution not on a Cost Basis : Graduated According to Salary and Length of Service 146

Contribution of a Uniform Percentage of Salary for all Members, with Benefits Adjusted on a Cost Basis.... 148

Rate of Contribution Graduated According to Age and Salary : Benefits on a Cost Basis 150

Distributing the Contribution over the Period of Service. 151

Minimum Contribution as a Prerequisite to Full Benefit. 152

X. Compulsory Participation and the Right to Management Compulsion for New Appointees : Option for Teachers

Already in the Service 155

Compulsion for Present Teachers 156

The Selection of the Managers of the System 157

PART II. TYPICAL TEACHERS' PENSION SYSTEMS OF TO-DAY XL Systems without Reserves

Pittsburgh Teachers' Retirement Association 166

New Jersey 35-Year Service Pension System 169

Maine School Pension Fund 173

XII. Systems with Inadequate Reserves : State Systems

Illinois Teachers' Pension and Retirement Fund 176

New York State Teachers' Retirement Fund 179

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Chapter , , ^ ■ t- i iH-}

New Jersey Teachers' Retirement Fund .••• io3

Minnesota Teachers' Insurance and Retirement Fund... IQO

Wisconsm Teachers' Insurance and Retirement Fund... I93

California Teachers' Retirement Salary Fund I95

Virginia Retired Teachers' Fund iQo

Michigan Teachers' Retirement Fund 200

XIII. Systems with Inadequate Reserves: Local Systems

Philadelphia Teachers' Retirement Fund 203

Cleveland Teachers' Pension Fund 207

Boston Teachers' Retirement Fund 209

Boston Teachers' Permanent Fund 212

Baltimore Teachers' Retirement Fund 214

Buffalo Teachers' Retirement Fund 21b

New Orleans Teachers' Retirement Fund 218

Denver Teachers' Retirement Fund 219

XIV. Systems with Inadequate Reserves: The Chicago Fund

The Fund Wholly Contributory : 189S-1907 220

City Contribution and Compulsion for New Entrants

First Step towards Actuarial Reorganization m 1917 231

XV. The Massachusetts Fund, the First Scientific System ; The Connecticut Fund

History of the System 234

Provisions of the System 230

Connecticut Teachers' Retirement Fund 239

XVI. The New York City Fund

History of the Old Fund 243

The Bill of 1916 • 240

The Enactment of the Reorganization Law of 1917 255

Provisions of the New System 259

XVII. The Pennsylvania System

Teachers' Contributions 271

State Contribution 271

Reimbursement 272

Valuation ^72

Management ^73

Relation to Local Funds 273

XVIII. The Scientific Pension Laws of 1919: New Jersey, Ohio

and Vermont

Ohio 282

Vermont 2»7

Appendix

1. Comparative Analysis of Teachers' Pension Systems 295

2. References to. Laws, Statistical Reports, etc.. Relative to

ALL THE Teachers' Pension Systems in the United States 307

3. Laws Providing for Sound Teachers' Pension Systems 34^

(a) Massachusetts 34°

(b) City of New York 355

xiii

(c) Pennsylvania 374

(d) Connecticut 386

(e) New Jersey 392

(f) Ohio 410

(g) Vermont 425

4. Actuarial Tables 431

5. BiBUOGRAPHY 441

XIV

This volume constitutes one of a series of studies in the field of public administration made possible by a generous appropriation for this purpose by the Rockefeller Foundation. With the approval of the committee to which the disposition of this fund was given and under the editorial direction of Dr. F. A. Cleveland, this study was begun, but was later transferred to the Institute for Government Research under whose direction it was completed and by which it is now published.

The Institute, early in 191 8, issued a volume by Lewis Meriam, a member of its staff, dealing comprehensively with the Principles Governing the Retirement of Public Employees. That volume, as its title indicates, dealt with all classes of government employees and was a critical and constructive, rather than a descriptive study. The present volume deals with only one class of public employees and is both critical and descripive. It aims to give the provisions that have been, or should be, made with regard to the retirement of a group of public employees which, by its size and special character, makes of this problem one requiring independent consideration.

The importance of this problem of efficient public administration has for years been recognized, and for the solution of it a wide variety of devices have been employed, but only in a few instances have these schemes operated satisfactorily. The extent of the reorganization that must be effected, and its great significance can be appreciated when the fact is noted, that of the nearly one hundred teachers' retirement systems now in operation in the United States, only a few can escape total collapse unless fundamentally altered. Some of these systems include ten, fifteen, or even twenty thousand teachers each. Twenty-two of them are state-wide in their operation. They apply to over three hundred thousand public school teachers, i. e., to nearly one-half of the total number of teachers in the United States and they have liabilities in the neighborhood of half a billion dollars for the discharge of which, in large part, there are no assured assets. Besides the necessity for putting these systems upon an equitable and sound financial basis, there is need for the establishment of retirement allow-

XV ance systems in those states and localities which as yet have none. At present seventeen states have neither state nor local pension systems for their public school teachers, and in twelve of the remaining states there are only a few local systems. Approximately one-half of all the public school teachers in this country are not covered by any pension provisions.^

It need not be pointed out that the making of adequate financial provision for the retirement from service of teachers whose abilities have become impaired by age or otherwise is not simply a matter of equity and humanity and of significance from the standpoint of general social betterment. In several respects it is a question of direct administrative efficiency. For not only do proper retirement provisions make it possible to relieve the working force of relatively incompetent members, but the teaching career is made more attractive and thus draws to its service a better personnel and stimulates its members with a higher esprit de corps.

A soundly constructed teachers' pension system is one that must meet a variety of requirements. Its financial arrangements must be such that permanent solvency is assured; the incidence of its burdens and benefits must be justly apportioned not only as between the different groups of teachers, but as between them and the public, as represented by the government; it must be so organized and administered that the greatest possible efficiency of service on the part of the teaching force will be secured ; and, finally, it must make reasonably adequate provision for disabilities to the teachers concerned whether arising from old age, sickness or accident. So far as possible, too, provision should be made for satisfying the equities involved when teachers are dismissed or themselves desire to resign their posts.

The present study, while not a pioneer one in the sense of being the first attempt to make a scientific investigation of teachers' pensions in the United States, is the first comprehensive, critical, and descriptive treatment of the subject.

*An investigation made in 1917 showed that there were then ninety-four teachers' retirement systems in operation. These systems covered 332, 554 teachers.

This did not inchide various mutual benefit associations, such as exist in St. Louis and Washington, D. C, with voluntary memberships and wholly financed by the teachers themselves. This list of ninety-four was made up entirely of schemes which were official and integral parts of the public school systems concerned.

It should be noted, however, that this figure is obtained by including the entire teaching staffs within the jurisdictions concerned. The actual

xvi

In 1906, the state of Massachusetts appointed a commission, with Mr. Magnus W. Alexander as chairman, to study the general problem of "old age pensions, annuities and insurance." Incidentally, the commission touched upon the problem of pensions in the public service and published in 19 10 a report which stimulated a good deal of sound thought in the country. Beginning in 1910, Mr. Herbert D. Brown prepared a series of reports, all of which have been published by the national government, dealing with the civil service retirement system of Great Britain, New Zealand and New South Wales, Australia, and the problem of establishing a retirement system by the national government for its employees. The New York Bureau of Municipal Research became interested in the pension problem soon after its establishment. It made a thorough actuarial investigation of the New York City Police Pension Fund — the first actuarial investigation of a civil service pension fund in this country — and prepared a report, which resulted in the establishment in New York City of a commission to investigate all the nine pension funds, including the teachers' fund, in operation in New York City and led to similar actuarial investigations of funds in other cities. The sound pension thought which emanated from these three active centers, Washington, New York City and Boston, spread over the entire country and affected the teachers' pension movement.

The first to consider the establishment of a sound pension system for teachers was the state of Massachusetts. The state board of education was directed in 19 11 to investigate the establishment of a state-wide retirement system for teachers and to submit its recommendations before January, 19 13. The investigation, aided by Mr. C. A. Prosser and Mr. W. I. Hamilton, resulted in the establishment in 1913 of the first scientifically constructed teachers' retirement system in this country.

New York City came next with several attempts to reor-

number of persons covered must have been considerably less since many exercised the right, ordinarily granted at the outset, to decline to be enrolled. Participation of all new appointees being made compulsory, however, the proportion of non-participants has been steadily diminishing. It should further be noted that the figures stated were compiled from the report of the United States Bureau of Education for 1917 and cover only the year 1915-16. Moreover, for some of the localities, the number of teachers was not given in the federal reports and had to be obtained through correspondence with the local pension fund officials.

xvii ganize its insolvent retirement fund for teachers. It finally effected a sound reorganization in 191 7. In the meanwhile the Carnegie Foundation for the Advancement of Teaching became convinced of the necessity for a reorganization of its retirement system for college professors. It began a study of the problem in 1912 and since that time has reviewed in its annual reports the pension progress in the country, thus greatly contributing to the scientific consideration of the problem.

The establishment of the sound systems of Massachusetts and New York City gave considerable impetus to the movement of reorganization. Connecticut followed the example of Massachusetts in establishing a similar system for its teachers. The state of Pennsylvana profited from the reorganization experience of Massachusetts and New York City, and established a new system introducing certain novel features and improvements. Illinois and New Jersey have appointed state commissions which are now considering the question of the reorganization of their teachers' retirement systems.

The reports of each of these investigating commissions, and the other publications mentioned, presented mainly a picture of one or another local situation and discussed certain aspects of the problem, but made no attempt to survey the entire field of teachers' pension systems in this country, nor to examine the whole movement and summarize the principles evolved and results accomplished. As the movement progressed the need for such a broad investigation has been felt, and to answer this need the preparation of the present volume was undertaken.

The first step in the investigation was to make a search through the session laws and codes of various states for all the laws which had been enacted with reference to teachers* pensions. Annual school reports of the United States Bureau of Education and of the different states, official documents, educational magazines and other publications, which had appeared on the subject during the last thirty or forty years, were scrutinized, and an exhaustive bibliography was prepared.

At the same time letters were sent to the officials in charge of the different systems, the existence of which was ascertained, requesting copies of financial reports, statistics and

xviii other information necessary for determining their financial operations and present condition. These letters elicited favorable replies and secured considerable and very valuable material.

In the chapters constituting Part I of the volume nowpublished a description of the evolution of teachers' pensions and an analysis of the general problem of providing retirement allowances to teachers is given, together with a discussion of the principles governing the establishment and maintenance of sound systems. In Part II an account is given of the movement in the United States and a descriptive and critical examination made of the history and present condition of the more important systems now in existence. Twenty-four systems were thus selected for detailed study, the main features determining their selection being their age, sources of support and scope of membership. The funds of fifteen of the systems thus selected are in part provided by contributions from the teachers organized under them ; four derive their funds wholly from this source ; while five of them make no demands upon the purses of the prospective beneficiaries. In the aggregate, it is estimated that the twenty-four systems described affect over three-quarters of all the teachers embraced in the ninety-four pension systems now in operation in the United States.

In general, it may thus be said that the volume, combining as it does a discussion of principles with the description of the experiences of existing systems, should be not only a substantial contribution to the science of administration, but an immediate and practical aid to teachers, school authorities, legislators and all other persons interested in solving the problem of reorganizing their own systems or establishing systems, in case they already have none, upon bases that have been tested by experience and are in accordance with sound social, economic, and financial principles. Furthermore, most of the considerations and principles which apply to the educational services of the state are applicable to the other administrative branches of our federal and state governments. Mr. Studensky's volume, therefore, finds a very proper place in the series of "Studies in Administration" which the Institute for Government Research is publishing.

During the opening months of 1919 while this volume was in press, three states. New Jersey, Ohio and Vermont enacted laws establishing new pension systems on approved principles

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These laws have been fully discussed in a concluding chapter which was added to the book while in press, and the laws themselves are reproduced in full in Appendix 3. It was not found practicable, however, to amend the text at every minor point to take account of the establishment of these new systems.

W. F. WiLLOUGHBY.

XX

PART I THE PROBLEM OF TEACHERS' PENSIONS

Chapter I The Evolution Of Teachers' Pensions In The United States

While the problem of teachers' pensions^ may in one sense be regarded as a purely technical one, it is in reality also historical. Only in the light of an understanding of the way in which the problem has assumed its present form, and of the attitude toward it on the part of both teachers and legislators that has resulted, can the technical considerations developed in the subsequent chapters be successfully applied.

The history of the movement for teachers' retirement pensions in this country may be divided into three periods. The first period opened in 1869 with the establishment of teachers' assurance and mutual aid associations. The second period began in 1894 with the securing of retirement legislation, but without due regard to sound principles. The third period is now opening with a movement toward reorganization of existing retirement funds and the establishment of new funds on a sound basis.

The leading role in the movement during the first two periods was played by the teachers' associations. The attitude of the government and the public was one of indifference. With the new period, however, the government and the public have begun to take an active part in the teachers' retirement movement, and an intelligent cooperation between them and the teachers is developing.

'The term "pension," as applied to amounts paid to employees after retirement from active service, is objected to by some as implying a payment charitable in nature, that is, as a gift for which no full equivalent is returned on the part of the recipient. Therefore, viewing these payments as essentially deferred payments for services actually rendered, we find employed such terms as "retirement allowances," "retirement salaries," "service annuities," or simply "annuities." In this volume, however, the writer has not deemed it necessary to forego the use of the term pensions, although, when used, he does not intend to imply that a charitable element is involved.

Mutual Aid Associations. While sporadic organizations of teachers for social or other special purposes have no doubt existed in this country from early days, no recorded instance of a teachers' mutual aid society is found until 1869. In that year, in a certain large school in New York City, collection lists were several times circulated among the teachers with an appeal to them to contribute towards the payment of funeral expenses of a fellow teacher who had left no funds. It then occurred to Mr. Vanderbilt, a young and active teacher of one of the New York City schools, that instead of soliciting voluntary contributions each time a death occurred, it would be far better to organize an association in which each member would pledge himself to contribute one dollar whenever called upon and would also be assured that a similar benefit would be paid upon his death by a similar assessment upon all other members. He called a meeting of teachers and they established the New York City Teachers' Mutual Life Assurance Association. The significance of the establishment of this association was the fact that besides mere philanthropy it introduced an element of self-protection — the contributor not only helped to defray the expenses of funeral to a fellow teacher but also secured a right to a like benefit for himself. Probably no one at that time thought that the establishment of this modest organization marked the beginning of a great mutual aid movement and later on of a pension movement among teachers.

In Brooklyn, two years later, a similar organization was established. But the example of the teachers of these two cities was followed by the teachers of other cities only slowly. The Jersey City teachers founded an association in the year 1880 and Camden followed in 1885. The provisions of these associations as compiled in 1897 are shown on the following page.'

'The following data are extracted from a table published in Review of Reviews, June, 1897, p. 711.

Name

Date

of Establishment

Membership

Assessments on Call

Annual Dues

Amou Beni

Sick

NT OF

:fits Death

Annual Income

Capital

New York City Teachers' Muual Life Assurance Association

$1

None

None

$500

None

Brooklyn Teachers' Life Assurance Association

$0.50 u u

$300 u

$556

Jersey City Life Assurance Dept.

Teachers' Association

1880 1885

300 120

$1 $1 u u

$300 $120

« u

Camden Teachers' Insurance Benefit Association

The benefit provided in the association of Camden was too small to cover more than the bare funeral expenses, but in the other associations the benefits provided the dependents with a few hundred dollars above the amount necessary for a modest funeral and might therefore be properlytermed life insurance. Viewed as measures of life insurance these associations appear primitive and imperfect. They required no regular annual assessment but assessed their members whenever necessary; they had no capital and they considered capital unnecessary. They did not understand that insurance could be sound only if based on mortality tables, and that the number of deaths among their members would increase in the future and would make the assessments on the younger members too burdensome.

Sick Benefit Associations. Next to the problem of burying the teacher and helping his dependents the problem of the sick teacher and the possibility of ofifering him at least temporary relief attracted the attention of the leaders of the mutual aid movement. Most of the associations established after 1885 provided not only death benefits but also sick benefits payable for certain limited periods. The teachers of Detroit established such an association in 1888; those of St. Paul did the same in 1890; the Chicago teachers soon followed in 189 1, and were joined by the teachers of Des Moines, Lincoln and Evansville. Meanwhile a still more rapid progress was made in the East, among the teachers of Rochester, Buffalo, Paterson, Hoboken, Trenton, New Bedford, Swarthmore, Scranton, Baltimore, Savannah and others.

In the development of these sick benefit societies, important improvements in the matter of financing the benefits were introduced. Unlike the lump sum death benefits, the sick benefits, which had to be paid day after day to many beneficiaries, could not be financed by means of sporadic assessments and without capital on hand. Regular annual dues were therefore introduced and the attempt made to build up permanent capital funds. Nevertheless, these associations were just as unsound financially as the pure life assurance societies earlier discussed.

The amount of dues and benefits and other information about some of these associations are shown in the table on the page opposite.

Old Age and Disability- Annuity Associations. There were, of course, numerous cases which the life assurance and sick benefit associations could not help; for example, that of a teacher becoming permanently disabled through sickness, or becoming too old to continue teaching. Encouraged by the apparent success of the life assurance and sick benefit funds, the leaders of the teachers decided to take up this difficult problem and to organize associations which would provide these teachers not merely with temporary relief but with a permanent and urgently needed one in the form of annuities payable to the end of their lives.

The teachers of New York City and Brooklyn were the pioneers of this movement. They established their voluntary s s s s

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