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THE LIBRARY

OF

THE UNIVERSITY

OF CALIFORNIA



GIFT OF

Professor
Benjamin B.. Bernstein



fidential



THE CARNEGIE FOUNDATION
FOR THE ADVANCEMENT OF TEACHING

IP



A COMPREHENSIVE PLAN

OF INSURANCE AND ANNUITIES

FOR COLLEGE TEACHERS



1916



Confidential



THE CARNEGIE FOUNDATION
FOR THE ADVANCEMENT OF TEACHING

• •

A COMPREHENSIVE PLAN OF INSURANCE
AND ANNUITIES FOR COLLEGE TEACHERS




576 FIFTH AVENUE

NEW YORK CITY

1916



/•



^M'im^i^^



^jA^w^



GIFT



D. B. UPDIKE • THE MEREYMOUNT PRESS • BOSTON






CONTENTS

PAGE

Introduction v

Ten Years of Administration 3

Pensions and Annuities 5

The Origin of Pension Systems 6

The Social Philosophy of the Pension System 9

Is a Pension System for College Teachers Justified? 11

The Life Hazards of the College Teacher 16

Who is Responsible for the College Teacher's Protection ? 18

The Function of Life Insurance and its Possibilities 22

The Cost of an Old Age Annuity 28

Illustrations from the Lives of Representative Teachers 31

Are Pensions Wages? 34

Teachers' Investments 35

The Financial Load upon the College 37

The Accrued Liabilities 41

The Risk of Disability 43

The Teacher's Cooperation 45
The Cooperation of the College, the Teacher, and the Carnegie Foundation 48

The Present Pension System of the Carnegie Foundation 52

The Desires of Teachers 58

The Opinions of Retired Teachers 59



574



INTRODUCTION

The paper which follows is a confidential report to the trustees of the Carnegie Foun-
dation and to the teachers of the colleges and universities associated with the Founda-
tion. It is here offered for critical study and discussion and to invite a full expression
of opinion upon the questions involved.

This study is the result of ten years of experience in the administration of the
existing pension system and of the examination of pension systems throughout the
world. It is founded upon exhaustive actuarial computation.

The reason for the existence of such a report lies in the desire to correct the weak-
nesses of the present system as experience has revealed them, and to create a feasible
and sound pension system available not only to the colleges at present associated with
the Foundation, but available also to the great body of college teachers.

The chief weaknesses of the existing system of pensions maintained by the Carnegie
Foundation are these:

1. Under the present rules, a teacher acquires protection for himself and his fam-
ily only after twenty-five years of service as a professor or thirty years of service as
professor and instructor. He is nearly sixty years of age before the pension system
affords him protection even against disability. Of the teachers who begin as instruc-
tors at the age of thirty, nearly half will die before reaching a pensionable age. Dur-
ing the period of their productive life, their families receive no relief from the pension
system. It is precisely at this period that some form of protection against the hazard
of the loss of the bread-winner is needed. The most pathetic cases presented to the
Carnegie Foundation — cases which unfortunately lie without its rules — are those
in which a wife with young children is left helpless by the death of her husband. A
considerable proportion of college teachers cany no insurance ; and, at the cost of
insurance as now accessible to them, the average teacher is able to carry an amount
quite inadequate as a protection to his wife and childrcn.

2. Quite naturally the Founder and trustees approached the question of pensions
from the standpoint of the man about to leave the service. It is now clear that if tl^
pension system is to provide some security for the great body of teachers and for their
families against the hazards of death, of disability, and of helplessness in old age, the
problem must be approached from the standpoint of the teacher entering the service.

3. The endowment placed in the hands of the trustees was given in a most generous
spirit, and was intended to pay pensions for college teachers under rules such as the
trustees might consider wise. There is no reason why the most high-spirited and sen-
sitive teacher should not accept a pension given in accordance with the present rules.
These pensions have been accepted by American teachers in this spirit.

When the study of the pension system is approached, however, from the standpoint
of the man entering the service, a true social philosophy no less than sound economic
reason points to a system to which both the teacher and the institution which he



vi INTRODUCTION

serves contribute. The history of pensions also makes it clear that i t is to the finan-
cial interest of the teachers that the payment of pensions be separated from the ques-
tion of salary. A large correspondence with teachers in the associated colleges makes
it clear, moreover, that they would prefer to bear a share in a sound insurance and
pension system if a plan within their means can be devised and assured.

4. From the beginning it has been pointed out in the reports of the president that
any pension system resting upon a fixed endowment must inevitably reach its limit,
and that the resources of the Foundation, and any addition likely to be made to them,
would provide a pension system in only a limited number of institutions. Seventy-
three universities and colleges in the United States and Canada at present share in
the benefits of the pension endowment. The total income available for pensions is
approximately $799,000. Last year, the cost of the pension system in these seventy-
three institutions amounted to $554,000. It is pointed out later that the moi*tality
experience of the Foundation during these ten years has been far below the most
conservative tables, and the cost correspondingly greater.

Mr. Carnegie has placed behind the institutions he has founded a great corpora-
tion with an income far beyond the load which would be imposed by the present pen-
sion system. It is, however, clear that the Carnegie Foundation would not be justi-
fied in asking this corporation to carry for an indefinite future a continually growing
financial load for a pension system available to a very limited number of institutions.
A fiscal policy must be evolved under which the Foundation shall be able to conduct
a pension system financially sound, within its own resources, and offering a security
to teachers equivalent to that of an insurance policy in a sound company. The col-
lege teacher who looks ten, twenty, or thirty years ahead to the benefits of a pension
system will be satisfactorily protected only w;hen he has a contract. The existing
pension system cannot offer this.

5. The maintenance of a free pension system in a limited number of colleges tends
to restrict the migration of teachers from one college to another. It is in the interest
of education that such migrations be free, and that no tariff" wall be put in the way of
the transfer of a teacher from one college to another. It is clear also in the light of
ten years' experience that the selection of a small group upon which to confer free
pensions to the exclusion of others involves many other difficulties. In a given state
or province, for example, no conclusive reason can be offered in some cases for dis-
criminating in the matter of pensions between college A and college B. A compre-
hensive pension system admitting the teachers of all institutions of recognized stand-
ing, and offering a fair opportunity to the individual teacher as well, is clearly in the
interest of the great body of teachers.

6. In view of these considerations, the important question arises : Can a contribu-
tory system be devised in which the teacher, his college, and the Carnegie Founda-
tion may cooperate; which shall rest upon a true social philosophy and upon a sound
financial basis; which shall offer a fair measure of protection to the teacher and his



INTRODUCTION vii

family during his entire academic career; which shall be capable of extension to the
great mass of college teachers, and shall with all this lie within the financial ability
of the teacher and his college? It is this fundamental and far-reaching question which
the report and the ten years'" study that lie back of it have undertaken to answer.

7. A system of protection for college teachers is here proposed within the reach
of the teacher^s financial ability and comparable in many cases with the sum now
paid out by teachers for inadequate insurance. Theplan^is based upon a combination
of low-priced insurance with an annuity. To carry out the plan will require the estab-
lishment of a sub-agency of the Foundation with sufficient capital to issue such in-
surance and annuity policies. The plan is worked out in detail in the report which
follows. It offers a solution of the pension question which is believed to be just, ade-
quate, and available to the great body of American teachers. The fundamental prin-
ciples adopted here are the following, and are applicable to any relief system main-
tained for groups of the body politic, whether they be industrial workers or college
teachers :

|i I. A definite estimate of the life hazards against which protection is sought must

* form the first step in determining the pension or relief system to be adopted.

II. The system must be constructed from the point of view of the man or woman
entering the service rather than from the point of view of the one leaving it.

III. A solution, to be complete, must rest upon some combination of low-priced
insurance with an annuity, and must offer to the participant a contract.

IV. As our social order is now organized, the responsibility for a system of
protection for men and women on fixed pay rests jointly upon employee and
employer.

V. So far as pensions for college teachers are concerned, the Carnegie Foundation
has a direct responsibility, and will discharge that responsibility best if it is able
to inaugurate a system of protection for college teachers against the capital haz-
ards of their professional life, which is not only socially just and economically
feasible, but which will be available to the great body of college teachers.

8. This plan, if adopted, would substitute for the present system an entirely dif-
ferent one. The substitution of the one system for the other involves a complete re-
adjustment. At the inauguration of the Foundation, it was assumed that experience
and larger knowledge of the pension question would in the future make changes neces-
sary. It was in view of this conviction that the following statement was incorporated
among the rules for the granting of retiring allowances:

" The Carnegie Foundation for the Advancement of Teaching retains the power
to alter these rules in such manner as experience may indicate as desirable for
the benefit of the whole body of teachers.""

It goes without saying that the trustees will meet to the utmost of their power
the expectations created by the present rules among the teachers in the associated



viii INTRODUCTION

institutions. It will require a number of years to change from the one system to the
other. The actuaries have suggested that men below the age of forty-five could to
their own advantage transfer from one system to the other. Whether twenty years is
a reasonable notification of a change in the rules is a matter which will be considered
in the most serious and conscientious manner by the trustees.

At their annual meeting, on November 17, 1915, the trustees received and dis-
cussed this report, but took no action concerning it except to pass the following reso-
lution :

Whereas, The benefit of the present pension system of the Carnegie Foundation
is necessarily confined to a limited number of institutions and does not furnish
to the teachers in those institutions adequate protection for themselves and their
families; and

Whereas, This system and any other non-contributing pension system involves
constantly growing financial burdens, increasing the discrimination between
associated and non-associated institutions, and creating an annual charge which
may ultimately become too great for the fund to bear.

Resolved, That the Board of Trustees approve the efforts of the president to de-
vise a contributory pension system which without unfairness to the just expec-
tations of institutions or individuals under the present rules shall enable the
Foundation to expand its sphere of usefulness and ensure its permanent ability
to meet all financial obligations expressed or implied;

Further Resolved, That the Board present to the associated institutions for their
careful consideration a report of the President of the Foundation upon a com-
prehensive pension system, to be applied in the future, with the request that,
if they deem it desirable, they submit alternative plans or suggestions ; and the
Board herewith announce that whatever plan is finally adopted will be devised
with scrupulous regard to the privileges and expectations which have been
created under existing rules.

In compliance with this request, a copy of this paper is sent to each trustee and to
each teacher in the associated institutions. Any suggestions made by them will be laid
before the trustees before action is taken.

It remains to be said that the reform of the Carnegie Foundation system of pen-
sions, in such wise as to make it available to the general body of college teachers
upon a broad social and economic basis, has far greater significance than the protec-
tion of a single group of professional workers, important as this object is. The question
of pensions has become in the last ten years a serious social, political, and economic
question in Great Britain, the United States, and the colonies of the British Empire.
Civil servants are seeking for pensions at the hands of the central governments or
of the separate states; public school teachers are agitating for similar favors. Old age
pensions for all needy citizens are being asked in many quarters. A widespread sen-
timent has been created that thru pension legislation something can be had for noth-
ing. The trend of this legislation is paternalistic and undemocratic, and in most cases



INTRODUCTION ix

in disregard of sound economic experience. No greater service can be accomplished at
this time, either by the trustees of the Foundation or by the teachers in American
colleges, than to set forth in clear and simple terms a conception of pension adminis-
tration which is just, sound, and feasible, and which appeals to the sense of individ-
ual responsibility and of personal independence. Lavater's dictum that he who reforms
himself does most to reform the public is quite as true of associations of men as
of individuals. The essential question is : Are the fundamental principles set forth in
the following report those upon which sound pension administration and legislation
must rest? In the determination of this question the trustees ask the cooperation of
every teacher and trustee in the institutions associated with the Foundation.

Heney S. Pkitchett.



October, 1915.



A COMPREHENSIVE PLAN OF INSURANCE AND ANNUITIES
FOR COLLEGE TEACHERS



TEN YEARS OF ADMINISTRATION

The Carnegie Foundation for the Advancement of Teaching completes with the
present year the first decade of administration of the gifts of Mr. Andrew Carnegie.
In the Seventh Annual Report I have described in detail the process by which the
trustees of the Foundation were led to adopt the existing system of pensions. In that
report were mentioned the various plans which at the beginning were considered by
the Founder and by the trustees, and the reasons which induced the trustees, with the
consent and cooperation of the Founder, to establish a pension system upon generous
terms which in the nature of the case could be extended to only a limited number of
American colleges and universities.

During these ten years the trustees have followed carefully the working of this
system of pensions, and have studied the pension systems of the world and their liter-
ature. Upon the actuarial and statistical side this literature is abundant, but there
is little in it to throw light upon the large fundamental decisions which the trustees
were called upon to make. When the Foundation was inaugurated even the actua-
rial and mortality statistics were meagre. Little was known of the vital statistics of
American college teachers. The effect of the payment of pensions from the gift of
a single donor was itself a new question in university administration. In their effort
to administer these pensions the trustees entered a field of university legislation and
administration for which there were no precedents.

At the inauguration of the Foundation the attention of the trustees and of the
Founder was focused upon the aged teacher. His service and his need called for some
humane and just method of dealing with the teacher whose usefulness had decreased
by reason of old age. All the provisions of the pension rules as determined by the
trustees looked toward the problem of the worn-out or aged teacher and his depend-
ents. Under these circumstances the effect that the establishment of a definite system of
free pensions might have upon younger men was but little considered. No harm is done
when thru private philanthropy or by means of a college endowment the old, infirm
teacher is provided with a competence during his declining years. It is, however, not
so clear what the effect will be upon the man of twenty-five or thirty or thirty-five
in holding out to him this expectation throughout his teaching career. To such a man
the protection of a pension system as at present inaugurated is postponed to the dis-
tant future. The majority of these younger men will never enter into the possession
of a pension, but the promise of it during thirty or forty years of their academic life
will affect their relations in ways not so evident ten years ago.

Mr. Carnegie, in the founding of the five institutions which bear his name, made
two provisions which involved a long look into the future.

In the first plsice he left with the boards of trustees of these institutions the widest
discretion in determining the function and work of their respective foundations. They



4 INSURANCE AND ANNUITIES FOR COLLEGE TEACHERS

have not only the power but the obligation to change completely the application of
their endowments if in time such changes seem justified.

In addition he created a great trust fund, — the Carnegie Corporation, — a major-
ity of whose trustees are the heads of these five earlier institutions. By his direction
the very large income of this fund is to be used first for the proper and reasonable
development of the institutions that he has founded, and secondly to aid those
causes which in the judgment of the tinistees make for the upbuilding of men in our
nation.

These provisions impose upon the trustees and heads of the five institutions ex-
traordinary duties and responsibilities. They are under the highest obligations to
scrutinize the policies of their respective institutions, and to seek to adapt them to
the new conditions and to the results that time and experience may confirm. The
freedom of action accorded to them by the Founder and his generous financial pro-
vision for their future appeal no less to their sense of honor than to their sense of
responsibility.

The decade of administration just completed by the Carnegie Foundation has been
rich in experience. It has been a period of unexampled activity in the creation of
pension systems on the part of institutions of learning, of the great industries, and
of the states themselves. To-day more than ever before there is needed a clear exposi-
tion of the fundamental social and economic principles upon which pension systems
ought to rest. I apprehend, therefore, that at this time the trustees of the Foundation
can do no greater service than to reexamine their own system of pensions and to meet
frankly any weaknesses which may exist.

I have sought, therefore, in the following report to deal with the question of pen-
sions in such way as to make clear the fundamental principles involved, and then to
apply these to the consideration of pensions for college teachers. Logically the dis-
cussion falls under the following heads, altho for the convenience of presentation a
formal division of the sections has not been made:

I. The Philosophy of the Pension System.
II. The Cost of the Pension System.

III. The Responsibility for the Pension System.

IV. A Cooperative System of Insurance and Pensions.
V. The Existing System of the Carnegie Foundation.

The report represents long study and the counsel of those best qualified to advise.
For the sake of brevity and clearness only such statistical tables are introduced as
seem indispensable, and references to the literature ai'e for similar reasons infrequent.



PENSIONS AND ANNUITIES

In the literature of insurance, annuities, and pensions no clear distinction is made
between a pension and an annuity. Pension is used to describe an annual payment
made to an individual, whether secured thru his cooperation or as a free gift. The
word annuity in insurance publications refers generally to an annual payment made to
an individual from moneys*contributed by himself. Ordinarily these annuities are of
two kinds. For example, an individual at the age of thirty may go to an insurance
company with, say, $10,000, and purchase outright an annuity to begin at once and
continue until his death; or he may, beginning at the age of thirty, pay a sum each
year until some later age such as sixty-five, after which time the company guarantees
him a fixed annuity throughout his remaining years. The latter form is spoken of as
a defended annuity.

The word pension in the exact sense applies to a payment made to an individual
without his cooperation. In the first edition of his famous Dictionary of the Eng-
lish Language Dr. Johnson defined a pension as "an allowance made to anyone with-
out an equivalent. In England it is generally understood to mean pay given to a state
hireling for treason to his country." "Pensioner" he defines as "one who is supported
by an allowance paid at the will of another; a dependant." These definitions were the
source of no small emban-assment to the good doctor himself a few years later when,
upon the solicitation of friends, George III conferred upon him an annual pension
of three hundred pounds. After some hesitation Dr. Johnson accepted the pension
and lived contentedly upon it to the end of his life, altho his critics never ceased to
insist that his political views had been warped by its acceptance. These definitions
reflect, no doubt, somewhat of the prejudice of the great scholar, but they reflect
also a general attitude of mind long since obsolete on the continent of Europe, but
still common in America and in England, which looks askance upon the acceptance
of a pension, both on account of the implied dependence and also on account of
the possible effect such acceptance may have upon the opinions of the beneficiary.
It was partly in view of this feeling that the pensions of the Carnegie Foundation
have been denominated retiring allowances. They are, of course, pensions in the true
sense.

The term annuity may with propriety be applied to any sum annually paid to an
individual, whether from the proceeds of his own payments or from some other source,
but in insurance contracts annuities usually refer to annual incomes secured by the
payments of the beneficiaries themselves in one of the two ways already referred to.

When, however, one comes to consider the various plans under which pensions and
annuities are paid, sometimes in combination with each other, one finds such pay-
ments referred to almost universally as pensions. Thus the old age pensions insti-
tuted in recent years by the English government are paid entirely by the govern-
ment and are pensions pure and simple. The annuities paid to industrial workers in



6 INSURANCE AND ANNUITIES FOR COLLEGE TEACHERS

Germany, affecting nearly one-third of the entire population, are made up of de-
ferred annuities paid for by the worker himself thru annual contributions extending
over a long term of years, of similar payments from his employer extending over an
equal period of time, and of a third contribution from the government. Such a sys-
tem is made up in part of a pension and in part of an annuity. So universal, how-
ever, has been the use of the term pension that both plans are referred to as pension


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