A critical analysis of industrial pension systems

Prefatory Note

In offering this volume on industrial pension systems to the public the undersigned desires to explain that the material was gathered in the course of an investigation of the pension problem made for the Bemis Bro. Bag Company, of which Mr. A. F. Bemis is President, and that it is through their courtesy that the information thus assembled is made available for publication. It should be understood, however, that the Bemis Bro. Bag Company assumes no responsibility either for the accuracy of the results or for any opinions, expressed or implied.

Contents

CHAPTER PAGE

I. Purposes of Pension Systems

Introductory 1

CHAPTER I Introductory

"Pensions are more irrevocable than any ordinary kind of legislation." This statement, while applied by the author x to governmental pension systems, is almost equally applicable to private pension schemes. A pension system never should be started by an employer until he has satisfied himself beyond reasonable doubt that it will be continued. An establishment may suffer little because it does not adopt a pension system. But it may suffer much if it adopts a system without most careful examination.

Many industrial corporations have studied the problem long and carefully without reaching a decision. Some apparently have decided defi-

1 Geoffrey Drage. "The Problem of the Aged Poor."

nitely against a formal system. Many others, which have adopted plans without such careful study, have been compelled almost immediately to revise them. It has been stated that very few of the industrial pension plans in the United States to-day are so financed that they are likely to remain solvent without refinancing or modification. "With that staggering fact staring them in the face, it is no wonder that sensible business executives refuse to be stampeded into adoption of pension plans." *

In the case of many municipal and other public service pension plans, failure carefully to count the cost has already resulted in bankruptcy of the pension system, either actual or constructive. Indeed, it is hardly too much to say that the history of pension schemes has been a record of mistakes or failures. Even the elaborate Carnegie Foundation plan was forced to undergo a radical reorganization only a few years after it was started.

The financial aspects of the question, moreover, important as they are, are of subordinate consequence as compared with the broad economic and social aspects.

The problem is an exceedingly complex one.

1 "Pensions for Industrial Employees." Elmer B. Tolsted in Cotton, November, 1920.

The very nature of a pension is by no means generally understood or, indeed, easily definable. The word "pension" has come to have a very loose significance, and often is applied to payments which in a strict sense are not pensions at all. The various types of pension systems present differences so marked that they cannot be intelligently discussed as a single group. Arguments applicable to public service pensions may not hold in the case of private systems. Finally, it is extremely difficult to determine the ultimate effects of such systems, not merely upon the worker's efficiency and his material well-being, but even upon his character. A system which upon its face is well adapted to meet an immediate condition may produce evils far worse than those which it seeks to remedy.

A leading British actuary in discussing general old age pensions has said: *

"The real fact is, that the more one studies such a thorny question as this, the more numerous and the greater are the difficulties which become apparent, and the more it is seen that, if the working classes for whose benefit old age pensions are advocated are not to be injured rather than assisted, the utmost caution and deliberation must be exercised before any irrevocable step be taken."

1 George King; cited by Lee Welling Squier in "Old Age Dependency in the United States," p. 277.

It is, therefore, almost imperative, before taking up the question how a pension system shall be established, to consider whether it should be established at all. Until a satisfactory answer can be given to the latter question, there is little occasion to discuss the question of method.

Broad Objects of Pension Systems

Among the more important motives which lead industrial employers to adopt pension systems are:

A desire to provide for the old age of dependent, superannuated employees.

A desire to reward employees who have rendered unusually long service.

A desire to increase efficiency, first, by the elimination of superannuated or incapacitated workers on a humane basis and, second, by stimulating the good will and effort of the active force.

A desire to hold the worker to the job, thereby reducing labor turnover.

A desire to exercise a disciplinary control over workers in respect to strikes and in other ways.

In some pension plans all of these motives are present; in others, only a portion.

The broad objects of pension systems, as above enumerated, will now be examined.

Pensions as a means of providing for dependent and superannuated workers A large number, perhaps a large proportion, of industrial workers either can not or do not make adequate provision for their old age. When such workers reach a stage of superannuation the employer is faced with the alternative of throwing them back on society, with the knowledge that they will become objects of charity, or of himself making some provision for their remaining years. This practical fact has been an important and probably the controlling consideration in the establishment of industrial pension systems of the day. From humanitarian motives the employer is not content summarily to dismiss such superannuated workers after long years of service. Moreover, he often hesitates to do this, on the practical ground that such a policy may have an unfavorable reaction upon the larger body of employees still continuing in the service.

Opinions as to the moral obligation of the employer. At the outset it is important to determine whether the employer is really under a moral obligation to make provision for such workers. Clearly, if such a moral obligation exists, it should be met.

The idea has a strong appeal. The worker has rendered a lifetime of service, yet for one reason or another may not have acquired a competence.. Worn out with years of labor, he is no longer able to secure employment. Is not the employer, therefore, properly to be charged with the responsibility of maintaining him in his old age?

Some writers on the pension problem insist that there is such an obligation. Some industrial managers, moreover, have accepted this point of view. While the contention has been set forth in various ways, it may be epitomized in the statement that industry should not 'scrap' its old and incapacitated workers and throw them back on society in their dependent age."

In the opinion of many other students of social problems, however, there is no such obligation. Instead, these critics hold that the responsibility for providing against old age rests primarily upon the individual himself or, at least, that it cannot fairly be placed upon the employer alone. They argue that, while the employer may elect to provide for his superannuated workers when they have completed their service, he is under no moral obligation to do this. Some, furthermore, contend that any attempt to relieve the individual of his responsibility is certain to have a deteriorating influence upon private character, by diminishing

PURPOSES OP PENSION SYSTEMS 7

the qualities of self-reliance, thrift, and even self-respect.

The general attitude of employers on this point is, perhaps, sufficiently indicated by the fact that the great majority of private pension plans now in operation in industrial establishments specifically deny any right on the worker's part to a retirement benefit, and place this on the basis of a gratuity.

The argument that the employer is under a moral obligation to provide for the old age of his workers is reflected in the following excerpt from a discussion by Squier in his "Old Age Dependency in the United States": *

"From the standpoint of the whole system of social economy, no employer has a right to engage men in an occupation that exhausts the individual's industrial life in ten, twenty, or forty years; and then leave the remnant floating on society at large as a derelict at sea. From the standpoint of public economy, it is argued that every industry should be compelled to bear its own burden of waste, whether of material, machinery, or human life; that it is as equally unjust and improvident for an industry to turn adrift its wornout and aged employees, to be taken up and housed at public expense in almshouses, as it is for the employee himself to stop work and become a tramp or vagrant."

x Lee Welling Squier. "Old Age Dependency in the United States," pp. 272-3.

A similar viewpoint has been expressed by many other writers on the pension problem.

In an effort to assemble further opinion upon this question, an inquiry was submitted to a considerable number of economists, publicists, and social workers of the country, in the following form:

"What is the moral obligation, if any, of the industrial employer towards his employees with respect to support in their old age?"

A representative selection of the views thus obtained is presented herewith.

Affirmative opinions. An affirmative position on this question was taken by John R. Commons, of the University of Wisconsin, as follows:

"On the whole, I do not think that wage earners, under existing conditions, can be expected to provide for old age. This is on account of the great uncertainties and insecurity of their work and the fact that they should be expected to support their children and give them an education, etc.

"Considering these matters, I should say that there is a moral obligation on the individual employer consisting in making some provision for his employees in old age, increasing with their length of service, but that there are limits to this obligation in individual cases and that the total obligation is a joint obligation upon industry and upon the public which cannot be met except by legislation."

Frank A. Fetter, of Princeton University:

"If the old age of wage-earners is not otherwise provided for, the moral sense of our time surely recognizes that the obligation of the employer has not been fully met in the case of workers who have grown old in his service."

Several of those who took the ground that there was a moral obligation to provide for the superannuation of industrial workers argued that the obligation could not fairly be placed upon the individual employer but, rather, fell upon Industry as a whole. Thus, Franklin H. Giddings, of Columbia University, said:

"I cannot see that the individual employer is under any moral obligation to support his employees in their old age by pension or otherwise. But I do think that the industry as a whole should for many reasons, many of them mere expediencies, assume the obligation. By this I mean that the charge which the industry makes upon the public in the prices of goods should in the long run provide for the old age of employees who have been long connected with it and whose service has been faithful."

William M. Leiserson, Chairman of the Labor Adjustment Board of the Rochester Clothing Industry, likewise, held that "there must be considerable doubt as to the moral obligation of an individual employer toward his superannuated employees; but there can be no doubt whatever that an industry has a distinct moral obligation not to throw on the scrap-heap men who have devoted their lives to the industry and have worn themselves out in its service." He suggested that the burden of a pension system might be too great for a small employer, but that in such cases an association of small employers in a given industry might distribute the burden in such a way as to make a pension system practicable. He contended, however, that "a large employer whose business forms a substantial portion of the industry as a whole owes it to the workers whom he has drawn into the industry and who have dedicated their lives to it, that they shall be taken care of in their old age."

Rev. John A. Ryan, D.D., Director of the National Catholic Welfare Council:

"It is quite clear to me that industry, as a whole, is morally bound to provide the workers as a whole with sufficient income to meet not only present needs, but all the normal contingencies of life, including disability and old age. Whether this provision should all be made in the form of wages, leaving the employee to insure himself against all these contingencies, or whether the current wages should merely meet current living costs, insurance to be provided by the industry, is a question of method rather than principle.

"All this refers to industry as a whole. What the obligation of an individual concern is toward those persons that it has at any given time in its employ, is a more complex and difficult question, inasmuch as many of these employees have spent a greater or less portion of their working life in the employ of other concerns. Therefore, their present employer cannot fairly be required to make the whole provision for their future. The general principle seems to me clear enough, that the employer is under obligation to provide each of his employees during a given period, say, a year, with that amount of insurance for old age which is proportionate to the total amount of such necessary provision. For example, if the total working period of an employee is forty years, then the employer ought to provide onefortieth of the total necessary old age pension every year."

The various statements above given clearly contain a suggestion that the industrial employer or, at least, Industry as a whole, is under a moral obligation to provide for the support of superannuated employees. It should be noted that some of the opinions to this effect are qualified.

Negative opinions. As opposed to the idea of a moral obligation, but not necessarily in opposition to pension systems, the following statements may be cited:

Dr. Arthur T. Hadley of Yale University:

"The question what form the moral obligation of the employer should take regarding the pension system involves the whole question of the structure of industrial society.

"Under the old-fashioned system, where it was supposed to be each man's duty to save as far as he could, the idea prevailed in this country that the possible withholding of wages in order to provide a fund for a pension system was an unwarranted attempt to keep the employee under the guardianship of the employer; that the fullest right was done by paying the highest wages the market afforded, without any withholding; and that all disability payments, from whatever cause, should be based on the needs of each particular case, rather than claimed as a right.

"As long as most of the employees were ambitious to become capitalists, and did save money, this worked well. The fact that they fail to feel this ambition or make these savings to-day is, however, an unfortunate fact with which we have to deal; and pension systems are one of the means by which we deal with it. I find it, however, a little hard to speak of the moral obligation to adopt a pension system, when the old system, under which we did not have to pay pensions at all, was better than the new one, when we utilize them to meet an evil which we cannot deal with otherwise. I think we shall stand on clearer ground if we base our pension systems on expediency rather than on morals. "

Henry W. Farnam of Yale University:

"I do not hold that the individual employer has a moral obligation to support his employees in their old age. The mere fact that employees change so frequently in industrial establishments and that so few of them work for very many years in one place, would clearly make the obligation, if it existed, one to be borne by a number of different employers; it would certainly be unfair to expect the last employer to bear the entire charge.

"I look upon social insurance as a practical matter to be adopted in the interest of society as a whole and I therefore believe that the old age pension should be a social obligation to be financed by the worker himself, the employers as a group, and society as a whole through its taxpayers."

T. N. Carver of Harvard University:

"I have never heard or read a satisfactory argument to show that the employer was under any moral obligation whatsoever in the matter of industrial pensions. The reasons given have always seemed to me to be singularly inconclusive. I am inclined to think that the only sound reason on which to base a system of industrial pensions is a purely economic one. If the industry is likely to be permanent, or at least to outlast several generations of men, the management must decide whether they think it will pay in the long run to pension employees. If it will enable the industry to secure and maintain a superior quality of employees and keep them in a frame of mind which will increase their usefulness and productivity, that would furnish a valid ground for a pension system. That, I believe, is the one satisfactory argument in favor of pensions, or retiring allowances, for university professors. . . . This has always seemed to me a sufficient and satisfactory reason for a system of pensions, without bringing in the question of moral obligation."

Edward T. Devine, of the Association for Improving the Condition of the Poor, New York City, held that while it is desirable that Industry shall bear the burden of accidents and, to a large extent, the hazard of disability among workers, it should not be called upon to assume the burden of their support in old age. He contended that the responsibility of Industry in reference to old age lies chiefly in ensuring such conditions of work that employees will not become worn out before they should be, and in paying wages that permit the individual to make a provision against his superannuation. "Individuals who become dependent because of old age are, of course, a responsibility for the community, but should not be a charge on Industry."

Many who oppose the idea that the employer is under a moral obligation to provide for superannuated employees take the ground that the primary duty and, indeed, the full duty of the employer is to pay adequate wages and that when this is done workers may properly be required to care for themselves in old age. This viewpoint is illustrated in the following statement by W. Z. Ripley, of Harvard University:

"My predilection is all for such recognition of the workers' rights in adequate wages as shall force him to meet the problem of old age for himself. I conceive that the coddling process softens both the fiber of the employee and of the employer. It tempts the employer to seek welfare as an alternative for paying full measure of wages, and it leads the employee to lean upon a beneficent despot who shall protect him against the shocks of adversity. Consequently I personally reject the conception of moral obligation, but would substitute for it what seems to me a more virile view, that wage relationships should be established in the light of mutual respect and even apprehension upon a level which will permit the workers to take care of themselves."

Miss Julia C. Lathrop, former Chief, Children's Bureau, U. S. Department of Labor:

"It appears to me clear that the obligation of the employer ceases when he has paid an adequate wage, by which is understood a wage permitting decent living and a reasonable margin for savings during the period of employment, except as he may be joined with the employee and the State in a system of retirement or old age

The following statement by W. E. H. Lecky, while dealing with general old age pensions, may fairly be cited in this connection: 1

"There is no real ground for the assertion that because an industrious man has failed to earn a sufficiency, he has a moral right to be rewarded for his industry out of the proceeds of a tax levied upon his neighbors, to whom he has rendered no service, or none which has not been paid for in wages."

It should be repeated that the above statements do not necessarily mean that these writers condemn pension systems. The question at the moment is whether the employer is under a moral obligation to provide for the superannuation of his employees. One may reject the concept of a moral obligation, yet advocate a pension system on other grounds.

Thus John A. Fitch, a well-known writer on labor matters, expressed the opinion that the problem of old age dependency is a "social instead of an industrial problem, and that the only

*W. E. H. Lecky. "Old Age Pensions: Collection of Short Papers," p. 103.

proper solution of the question is a government pension." Since, however, this was not likely to come in the immediate future and since, in the meantime, employers are confronted with the problem of superannuation, he held that employers were not only justified, but wise, in establishing pension systems. A particular reason for this was that when an employer "gets stability in addition to day's work, he has received a value over and above what he has paid for through the wage."

A fair summarization of these divergent views is that, on the whole, pensions are a matter of expediency rather than of moral obligation, and that in so far as an employer feels under compulsion to provide for the old age of his workers, this arises from humanitarian considerations engendered by association, rather than from the existence of a definite right on the workers' part. It will be noted that several of those who maintain that a moral obligation exists hold that this does not fall solely on the individual employer, but on Industry in general, or upon employers, employees, and the public jointly.

If the theory of a moral obligation on the part of the employer holds anywhere, it would seem obvious that it should obtain in the case of the

Government as employer. Yet most disinterested students of governmental pension systems reject the idea of obligation and base their advocacy of such systems on the practical ground of expediency. Thus, one writer on government pension systems has said:

"Sentimental arguments are sometimes advanced to prove that the Government owes some special charity to the men who have grown gray in its service. . . . They are no more entitled to public charity and benevolence than men who have grown gray in some private capacity. Public contributions to a retirement system are to be justified, not on any ground of benevolence or philanthropy, but on the ground that they are payments to improve the character of the service." *

Attitude of Labor in general toward private pension systems. Perhaps the most convincing argument on this point is found in the attitude of Labor itself. One of the significant facts of the pension problem is that the demand for pension systems comes from the employer and from the public rather than from the worker. At best, the attitude of Labor toward pensions is one of comparative indifference. It is true that employers who have inaugurated pension systems often

1 Lewis Meriam. "Principles Governing the Retirement of Public Employees," pp. 16 and 17.

have received expressions of appreciation from the recipients of the pension benefits. Replies from a large number of employers as to the attitude of their workers were secured in the course of this study. Representative statements on this point are given below:

"The plan has been well received by the employees, and that it is highly appreciated is evidenced by the many letters received from grateful beneficiaries."

"Our opinion of the plan is that it is well received and appreciated by the employees, particularly those who have been with the company for a number of years and who are approaching the age of retirement."

"We know that our employees, particularly those who are no longer young, are very favorably impressed with our pension system."

"Our pension system is very much appreciated by all classes of workers. They know it is a reward for faithful service and all apparently fully appreciate its advantages."

"We believe our annuity plan is contributing in making our personnel happy and contented, although you will, of course, realize that this plan is but one feature of our general policy."

On their face these statements indicate decided appreciation. But the fact that such appreciation is seldom reflected in a reduced labor turnover, 1 which would be its most natural expression, robs this evidence of much of its apparent significance.

At least it is certain that Labor has conducted no active campaign to secure the inauguration of private pension systems. Instead, the almost universal attitude of Labor may be found in some such slogan as "Give it to us in the pay envelope," or "Labor wants justice, not pensions."

This attitude of Labor towards private pension systems is further illustrated by the following extract from testimony before a British Retirement Commission:

"We have a number of artisans who, about five years ago, petitioned that they might be put entirely upon trades union rate of wages and the option was given to them, either to remain under the terms they were with pensions or to go at once to trade union terms, and these four hundred men elected to have a larger immediate salary and forego all the rights to pension and sick pay and that kind of thing." 2

This feeling is, moreover, characteristic of salaried workers, as well as of wage-earners. This is indicated by the following result of a vote of

2 Sir J. McDougal, of the London County Council, testifying before the British Royal Commission of Superannuation in the Civil Service, British Parliamentary Papers, 1903, Vol. XXXIII, p. 138.

employees of the State, War, Navy, and Treasury Departments at Washington in 1911:

For immediate increase in salaries independent of any retirement or pension legislation 7,459

For immediate provision for increase in salaries accompanied by straight pensions provided wholly by the Government 1j465

For immediate provision for increase in salaries accompanied by retirement on annuities provided by compulsory savings by employees 1,067

For immediate provision for retirement on straight pension provided wholly by the department 317

For immediate provision for retirement on annuities provided by compulsory savings by employees 186

10,494

Attitude of Organized Labor. The attitude of Organized Labor toward private pension systems is, at least in many cases, not merely one of indifference, but of definite hostility. In this connection the following statement by Samuel Gompers, president of the American Federation of Labor, obtained in the course of this study, may be noted:

"Paternalism either in government or in industry is abhorrent. It takes away the initiative of the workers who should themselves prepare for old age or the proverbial 'rainy day.' Where the workers receive an adequate wage, one that will permit them to live as an American should live, they will provide their own pension system, and whatever men do for themselves increases their value as workers. It brings independence and a desire to live as men should live without fear of losing that which will protect them in their old age." 1

The head of a local labor union expressed a similar point of view as follows:

"What the workers want is a sufficient wage so that they can pay for their own protection without charity either from employers or any one else. Labor does not believe in industrial welfare work of any kind, because it is done with the direct intention of weakening the power of organized labor.

"It is not right that a man should go without the full pay he might receive unless he stays with one company.

"The cause of unrest is not the monotony of modern industrial employment, but the helplessness of the men in having no say as to how they

1 Organized Labor, however, has shown no such aversion to governmental pensions. Again, to quote Mr. Gompers:

"Until the Government itself establishes an old age pension system, labor will insist that pension systems shall be controlled by the workers themselves, without any connection whatever with the employers."

shall regulate their lives. A man should be free to go from one firm to another without jeopardizing his right to protection in his old age.

"A pension scheme with a right to withdraw the 'accrued credits' in case of separation from an employer, would meet many, but not all, the objections to pensions in general."

While these statements can be taken as representing the attitude of Organized Labor, the question may fairly be raised whether in its fundamental aspects the psychology of Organized Labor differs essentially from that of Labor in general. 1

If provision against superannuation were a definite moral obligation of the employer, it is reasonably certain that Labor would be quick to sense it and to demand its fulfillment.

For all these reasons, therefore, it seems clear

s As a further indication of the attitude of Organized Labor towards private industrial pension systems, an experience some years ago with a proposal to inaugurate a pension plan for the organized brewery workers of the country may be cited. The plan recommended was of the contributory type, under which employees would contribute only one-half of one per cent of their wages and the employers a sum equivalent to one and a half per cent. After careful consideration by the officials of the brewery workers' unions, the proposition was submitted to a referendum vote by individual unions and sections of the country, a period of one month being allowed for discussion and another month for voting. The result was the rejection of the plan by a vote of 22,936 to 12,888. (E. B. Phelps. "American Brewery-Workers' Surprising Rejection of Their Proffered Workmen's Compensation and Old Age Pensions.— A Clean-Cut Case of The Consciousness of Kind/ ")