8
Factors Involved in Pension Legislation
For Governmental Employees
Excerpts from a Report Prepared by
the Research Department of the Illinois
Legislative Council, February, 1940.
I nstallment N o .
2
Contribution
The joint contributory basis for pub
lic pension systems seems to be firmly
established. A plan financed entirely by
the governmental unit may tend to de
press salaries or to delay salary in
creases so that in actual effect the em
ployee is making indirect contributions
to the retirement plan. Finally, a plan
classified as being non-contributory
may be viewed as contributory if the
salaries paid employees are said to con
sist of the cash compensation plus an
amount "withheld” for retirement
benefits.
Contributions for Current Service
In contributory retirement systems
the allocation of costs between the
governmental unit and the employees
is one of the important considerations
to be determined. The simplest method
and one widely used is an equal con
tribution on the part of the employer
and the employee. This method assumes
th at' the interest of the employer and
of the employee are substantially the
same in the long run, although either
may have a greater interest in or re
sponsibility for certain features of the
system. In the payment of retirement
benefits and disability benefits direct
advantages accrue both to the employer
and to the employee; to the employee
in the form of security for the future,
and to the employer in the form of im
provement of the service by the elim
ination of superannuated and disabled
employees. Contributions for retirement
and disability benefits are in the inter
est of both, and the extent of the in
terest of each may be assumed to be
fairly equal. Contributions for death
benefits generally and for benefits on
account of withdrawal from the ser
vice are more in the interest of the
employee, while contributions for death
benefits to widows and other depend
ents on account of accidental death in
the line of duty are primarly the re
sponsibility of the governmental unit.
Costs of administration are generally
treated in Illinois as a joint responsibil
ity of the governmental unit and of the
employee. However, the administrative
costs are normally low, so that pension
plans sometimes provide that the gov
ernmental unit may defray all or a
large part of the administrative costs
in order to avoid the necessity for as
signing proportionate parts of such
costs to the many individual accounts
and in order that employees who w ith
draw from the service prior to attain
ing the retirement age may receive a
full refund of their contributions. The
sum total of these various interests in
pension plans are somewhat equal, and
accordingly, the contributions of the
employer may be expected to equal at
least half of the total costs.
A concealed factor in the division of
costs is the interest factor. Some early
plans guarantee four per cent interest,
and if a lesser amount is actually earn
ed, the difference is in effect a gov
ernmental subsidy. The newer plans
guarantee no stated interest.
Prior Service
The installation of a retirement sys
tem is complicated, as is the financial
position of the fund once it is estab
lished, by the problem of providing re
tirement benefits for those who have
been in the public service for a period
of years at the time the pension sys
tem is inaugurated. For those employees