10
Factors Involved in Pension Legislation
for Public Employees
Excerpts from a Report prepared
by the Research Department of the
Illinois Legislative Council Febru
ary, 1940.
There has been a shift during recent
years in the basic concept of the pur
pose of pension legislation. Early pen
sion statutes reflect prominently a
"reward-for-service” aspect in which
pension payments were looked upon
mainly as a supplementary compensa
tion for employees who had spent many
years in the service of the government.
Today increased emphasis has been
placed upon the "security” aspect of
pensions. The new emphasis upon the
security aspect of pensions is brought
about largely by the claimed responsi
bility of the state and local govern
ments to provide a method whereby
their employees may contribute to an
accumulation of reserves which will
assure some measure of old age security.
The Federal Social Security Act ex
empts public employees from its bene
fits and responsibilities. According to
one point of view, the difficulty is con
stitutionally adjusting the Federal act
to cover state and local employees is
partly a fortunate circumstance. Thus
it has been said:
T he State can provide a satisfactory and eco
nom ically sound plan w hich will adequately
provide fo r local conditions w ith o u t in te r
ference or dictatio n from W ashington. I t is
n o t faced w ith the d ifficulties w hich, because
o f the b lanket application of Social Security
w ith o u t respect to any peculiar local circum
stances, is co n fro n tin g in d u stry . T he State
has obtained the very th in g in d u stry has
asked .fo r; nam ely, th e rig h t to provide ac
cording to existing local conditions.
The Unit for a Retirement Plan
The soundness of a retirement plan
may depend, to a large extent, upon the
size of the pension unit. Insofar as par
ticular groups of employees, the em
ploying governmental agency, and the
taxpayer all have an interest in the
pension plan, it is. desirable that re
tirement systems be sufficiently . . .
flexible to give recognition to differing
conditions and differing needs existing
as between governmental units.
Providing pensions for public em
ployees is primarily an insurance prob
lem, and, as in the case of most insur
ance problems, the necessary mathema
tical calculations become more accur
ate as the unit dealt with becomes lar
ger. That is, actuarial calculations based
on the probable life span of a few per
sons are considerably more likely to be
at error than similar estimates based
upon a large number of cases. Further
more, the financial soundness of a re
tirement plan covering but few em
ployees will be greatly affected by the
life span of a single person, while a
plan covering many persons is much
less affected by individual cases.
It may, therefore, be agreed that the
insurance features of a retirement sys
tem become sounder as the unit dealt
w ith becomes larger. For this reason,
state-wide pension systems covering the
employees of smaller governmental units
within the state offers a distinct ad
vantage from the standpoint of actuar
ial soundness over a large number of
systems operating separately. Further
more, the use of larger units in the es
tablishment of pension funds makes
possible a centralized and more adequate
administration, and makes possible the
employment of a higher type of actuar
ial, medical examining, and other neces
sary services.
This desirability, if not necessity,
of a large basic unit in order to assure
financial soundness, accounts in part
for the fact that in private employ
ment company-operated pension plans