Image provided by: SEIU Local 503; Salem, OR
About The Oregon state employee. (Salem, Oregon.) 1944-195? | View Entire Issue (Oct. 1, 1944)
9 who have been in the service for a long period of years or who are close to the retirement age there has been no op portunity to accumulate funds to their credit prior to the beginning of the pension system. It is an injustice to these employees either to omit them from eligibility under the pension law and begin the payment of benefits at some distant date, or to expect of them the payment of contributions, during the few remaining years of their em ployment, in amounts sufficient to pay the costs of their retirement. The fi nancial difficulty is substantially the same as would be involved in attem pt ing to purchase annuity insurance at age 65 for benefits to begin at age 67. Such purchase could be made, but the costs would be prohibitive to the an nuitants. On the other hand, failure to make provisions for past service nullified one of the most important advantages to the governmental unit of establish ing a pension plan; namely, the im provement of the service by removal of superannuated employees. It is rea sonable to assess upon the employee a part of the cost for prior service by graduating the contribution rate ac cording to the age of entrance into the service, but employee groups generally insist that the larger portion of this .burden must be met by the employing unit. Customarily, both in private and public pension plans, the employer as sumes all or the largest part of the bur den of financing benefits based on ser vice prior to the adoption of the pen sion act. Accordingly, every pension plan normally begins with a large lia bility on account of prior service, which the employer is abligated to liquidate. This obligation for prior service may be met in one of several ways. It is, of course, possible to appropriate immedi ately the entire amount needed to fund this prior service liability, but this is seldom done because of the large sums invilved. Second, it is possible to make no provision for funding the pr or ser vice liability, and to pay benefits for prior service out of current revenues, as is done under cash disbursement plans. Third, it is possible to liquidate the liability over a period of years by making annual contributions on ac count of prior service in addition to the contributions on account of current service. Finally, in a large public re tirement plan it may be considered feasible simply to recognize this prior service liability and to maintain modi fied reserves adequate to pay obliga tions as they fall due, but without cre ating the large reserve that would be necessary to liquidate the prior service liability. This last alternative, the maintenance of modified or limited reserves, may take several forms. Either the reserve may be a fraction of the total liability, or the reserve may be almost non-exist ent insofar as' the employer’s contribu tions are concerned, being replaced by annual contributions in the nature of interest on the admitted liability. Such a limited reserve basis, whether for prior or current service or both, has many advantages. The smaller reserve reduces the possible losses from invest ment risks and diversion of funds, while still furnishing a reasonable safeguard against the necessity for greatly in creased public contributions in some years. Then, too, the costs under this plan are less in the early years than would be the case under the full re serve basis. It should be noted, how ever, that most actuaries would sup port the maintenance of limited -re serves only in the case of those tax- supported pension systems which are of a substantial size. - The extent of the governmental unit’s obligation for prior service and the size of the benefits which can be (Continued on page 22)
