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)