11
have been most common among the
largest employers of labor. Furthermore,
the same factor explains to some extent
the fa c t that insurance companies,
which offer preferred rates in the case
of group annunity insurance, are gen
erally unwilling to issue a group an
nuity contract covering less than 5 0
lives, even though the risks would be
small in comparison with the total num
ber of lives insured by these companies.
Even large employers of labor, if they
create retirement plans, usually seek to
obtain some form of insurance or re
insurance in order to provide financial
soundness by a pooling of the risks.
An indication that the use of a small
unit for retirement purposes has some
relation to the lack of financial stability
may be gathered from the pension funds
for police and firemen. Many of these
plans are under-financed, due to a com
bination of circumstances. In addition,
the number of contributors to the indi
vidual plans is so small that great un
certainty exists as to the contingent lia
bilities of the several funds. In a fund
covering a large number of employees
much greater certainty in estimating
liabilities can be obtained, due to the
fact that mortality tables, like any av
erages, can be validly applied only to a
substantially large group.
Joint-Contributory Plans
Under the contributory systems the
cost of pensions is shared in some pro
portion by the employees and by the
governmental unit concerned. Most fre
quently the employees pay a fixed
amount according to length of service
and salary, and the employer makes up
the balance necessary to provide pen
sions. The distinguishing feature of this
plan is that there is recognized a joint
responsibility on the part of the em
ployer and the employee to provide se
curity against the hazards of superan
nuation and disability.
The specific advantages claimed for
the contributory plan are that: (1 ) it is
easier to establish and maintain because
the financial burden is divided, (2) it
may check extravagant demands on the
part of the employees, since it is clear
that a part of the cost will be borne by
them, and (3 ) it is in accord with the
theory that, since the faculties of the
employee are being used both in the
service of the governmental unit and
in his personal pursuits, a joint respon
sibility rests upon the governmental
service and upon the employee to pro
vide economic security for the em
ployee in his old age.
The disadvantage claimed for the
contributory system are: (1) that it
establishes claims on the part of the em
ployee that otherwise would not be the
responsibility of the government, such
as claims for benefits in the event of
death or voluntary resignation, (2)
that it is contrary to the interests of
the employees because their salaries are
already so low that they can not stand
deductions, and (3) that it necessitates
the introduction of cumbersome and
elaborate machinery to administer the
plan.
Financial Stability
The development of an actuarially
sound retirement plan may be viewed
as a problem in working out the "pre
miums” to be paid by the employer or
employee. Such "premiums” should be
graded according to some basic fac
tor, such as the annual salary earned,
so that the cumulative payments by
the employee and by the governmental
unit in his behalf will, subject to vari
ous contingencies and the compounding
of interest, provide an amount ade
quate, when the employee reaches the
retirement age, to pay the benefits
promised.
Actuarial computations of the lia
bility of a pension fund include two
two major items: (a) the reserve neces-
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