Retirement and Insurance Plans in American Colleges 9780231889728

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RETIREMENT AND INSURANCE PLANS IN AMERICAN COLLEGES

RETIREMENT AND INSURANCE PLANS IN AMERICAN COLLEGES By William C. Greenough and Francis P. King

COLUMBIA UNIVERSITY PRESS : NEW YORK : 1959

COPYRIGHT © 1 9 5 9 COLUMBIA UNIVERSITY PRESS, N E W YORK PUBLISHED IN GREAT BRITAIN, CANADA, INDIA, AND PAKISTAN BY THE OXFORD UNIVERSITY PRESS LONDON, TORONTO, BOMBAY, AND KARACHI LIBRARY OF CONGRESS CATALOG CARD NUMBER:

59-12735

MANUFACTURED IN THE UNITED STATES OF AMERICA

FOREWORD

E V E R Y sensible college professor would do well to give thought to the soundness of the retirement and insurance benefit plans in force at his institution. They will directly affect his living standard during his retired years, and they will determine the security of his family if he should die or become sick or disabled during his working years. Though progress may at times seem discouraging, the college professor has come a long way since Andrew Carnegie became a trustee of Cornell University in 1890 and "was shocked to discover that college teachers were paid only about as much as office clerks." Over the nation as a whole, salaries for college teachers are still low— disgracefully low. But impressive progress has been made in the development of well-conceived benefit plans for faculty members. As a matter of fact, the colleges and universities have played a significant pioneering role in the development of such plans. But changing conditions will require continued innovation if college benefit plans are to serve their purpose. And even in terms of present conditions the record of colleges and universities, with respect to the adequacy of their benefit plans, is quite uneven. Some institutions have been exceedingly farsighted; others have not. Many college professors are unwilling to concern themselves with practical business matters. They would do well to make an exception when it comes to the creation and adoption of sensible benefit plans. The faculty member may have limited power to control his college's decisions concerning one or another benefit plan; but he should be sufficiently informed to know a good benefit plan from a bad one, and to be an effective advocate of the kind of plan best suited to his institution. It is my own conviction that every college

vi

FOREWORD

faculty should have a committee on retirement and insurance plans, and that this committee should have a rotating membership so that the leading faculty members would eventually be informed and discriminating judges of these matters. In any attempt to get one's bearings in the rather specialized field of college retirement and insurance plans, this book is indispensable, not only as a thorough discussion of the subject but as a handy reference book. William C. Greenough and Francis P. King are superbly equipped to prepare such a volume, and they have produced a lucid and authoritative work. An eventful decade has passed since the last comprehensive study of the retirement and insurance plans for staff members serving higher education. 1 Educational employers have had to meet the most severe challenges from business and government in attracting and retaining good people. One consequence of this has been a continual improvement of retirement and benefit plans, and a substantial increase in the number of group life insurance plans. A particularly notable event was the development in 1952 of the College Retirement Equities Fund, which makes it possible to provide new measures of protection of retirement income against the hazard of trying to meet increased living costs during retirement years with a fixed-dollar income. Equally worthy of study are the new insurance plans to meet catastrophic medical expenses and total and permanent disability. Still another significant event was the bringing of college employees under Social Security within the last decade. The book offers a brief history of college staff benefit planning, and a careful discussion of the philosophy of benefit plans appropriate to the purposes and goals of educational institutions. The structure, goals and rationale of higher education are quite different from those of many other organizations such as government or business and industrial enterprises, and it is one of the strengths of this book that it clearly recognizes these differences and consistently deals with retirement and benefit plans in terms of the unique aims of the institutions involved. It analyzes the various provisions that compose 1

William C. Greenough, College Retirement York: Columbia University Press, 1948.

and Insurance

Plans, New

FOREWORD

vii

these plans and provides statistical information on the benefit plans now in effect in American institutions of higher education. The chapter on financing and funding of retirement benefits should be of particular interest to those wishing to examine the soundness of their present retirement funding methods, which involve a considerable investment of money over a long period of time. Matters that often appear to be excessively complex are presented in clear language. The individual faculty member will find this book useful in studying the kinds of benefit plans that are generally available and in examining the tabulated descriptions of retirement plans in effect in various institutions. All of this is important information for the professor who is considering a new position. Particular attention is called to Chapter V which deals with the adequacy of retirement benefits and the arrangement of retirement provisions to take into account changing costs of living, both over the years during which funds are accumulating for the payment of retirement benefits and during the years in which retirement benefits are received. Professors, presidents, and college officers responsible for retirement plans would do well to study this chapter with care. Inflation during the retirement years can have the gravest possible effect on the adequacy of retirement income. If this is to be prevented, the retirement plan must take into account the factors at work and deal with them effectively. Both administrators and professors should read this volume with their own institution in mind and make some mental notes as to how their institution stands with respect to the excellence of its benefit plans. JOHN W . GARDNER President Carnegie Corporation of New

York

ACKNOWLEDGMENTS

THE cooperation of over 1,000 college officers made this study possible. They supplied the information and checked the descriptions of benefit plans in effect at their institutions. Thanks are also due to the executive officers of the state teacher or public employee retirement systems that cover faculty members in institutions of higher education, who supplied information and verified the descriptions of their plans. Dr. Harold J. Goldthorpe, of the U. S. Office of Education, was especially helpful in making available the institutional classifications used in the study. Special acknowledgment is also due our colleagues at TIAA. Messrs. Thomas C. Edwards, Wilmer A. Jenkins, and Robert M. Duncan read the entire manuscript and gave us many constructive suggestions from their wide background of general and technical knowledge. Mr. George F. Keane prepared the descriptions of many of the plans. We are especially indebted to Miss Nancy Gunderson, Miss Vivien Chesley, and Miss Joan Scott, who worked many hours in the preparation of the manuscript and the statistical material. WILLIAM C . FRANCIS P .

New York August

1959

GREENOUGH KING

CONTENTS

I. SCOPE OF COLLEGE STAFF BENEFIT PLANNING II. COLLEGE RETIREMENT PLANNING Objectives of a Retirement Plan Development of College Pension Philosophy Teachers Insurance and Annuity Association Federal Social Security Statement of Principles on Academic Retirement

3 8 10 14 18 21 25

III. METHODS OF ADMINISTERING RETIREMENT BENEFITS Federal Social Security A Social Program TIAA-CREF Retirement Plans College Retirement Equities Fund State Teacher and Public Employee Retirement Systems Agency Life Insurance Company Plans Church Plans Self-administered Plans

29 29 32 34 37 42 49 52 54

IV. PROVISIONS OF COLLEGE RETIREMENT PLANS Classes of Employees Covered Participation Waiting Period Retirement Age Older Persons in a New Plan Early and Late Retirement Informing Staff Members

57 58 59 61 62 67 68 69

xii

CONTENTS Income Arrangements at Retirement Vesting as a General Concept Vesting in the College World Retirement Provisions for Nonacademic Employees

69 71 73 80

V. FINANCING AND ADEQUACY OF BENEFITS Funding Current Service Benefits Annuity and Investment Principles Contribution Rates to Achieve Adequacy Other Patterns of Purchasing Benefits Sharing Annuity Contributions Past Service Benefits Supplementing Benefits

86 88 90 95 102 105 107 108

VI. LIFE INSURANCE PLANS Group Life Insurance Collective Life Insurance Group Paid-up Insurance Group Accidental Death and Dismemberment Insurance Social Security Survivor Benefits Provisions of College Life Insurance Plans

111 113 116 117 117 118 119

VII. BASIC HOSPITAL-SURGICAL-MEDICAL INSURANCE Classification of Basic Hospital-Surgical-Medical Insurance Plans Basic Medical Insurance Plans According to Type of Medical Service The Role of Basic Medical Insurance Plans Establishing a Plan VIII. MAJOR MEDICAL EXPENSE INSURANCE Extent of Major Medical Coverage in Institutions of Higher Education Balancing Benefits and Costs Features of Major Medical Expense Insurance Types of Plans

128 130 131 133 134 138 139 141 142 144

CONTENTS Single or Comprehensive Plans Ford Foundation Developmental and Financial Support General College Decisions IX. INCOME PROTECTION FOR DISABLED STAFF MEMBERS Short-term Disabilities Long-term Total Disability TIAA Total Disability Income Program Establishing a Long-term Total Disability Plan X. DESCRIPTIONS O F RETIREMENT PLANS TIAA-CREF Retirement Plans (Tabular) State Teacher and Public Employee Retirement Systems (Tabular) Agency Life Insurance Company Retirement Plans (Tabular) Self-administered Retirement Plans (Tabular) Church Retirement Plans Institutions with Retirement Plans—Description Not Available Institutions Not Having a Retirement Plan No Information Obtainable

xiii 151 153 156 160 160 163 166 168 171 176 330 380 412 424 436 439 445

BIBLIOGRAPHY

447

GENERAL INDEX

449

INDEX TO COLLEGES AND UNIVERSITIES

464

TABLES

Table 1. Table 2.

Estimated Extent of Staff Benefit Plans Usable Responses to Questionnaire as a Percentage of Four-Year Institutions of Higher Education Table 3. Retirement Provisions Covering Faculty and Administrative Officers Table 4. Retirement Provisions Covering Faculty and Administrative Officers, Universities and Liberal Arts Colleges Table 5. Cumulative Growth of TIAA Retirement Plans Table 6. Social Security Monthly Income Benefits Effective January 1, 1959 Table 7. Classes of Employees Covered by Retirement Plan Table 8. Faculty Retirement Age Table 9. Employment of Persons Retired from Other Institutions Table 10. Illustration of Benefits Provided by Various Contribution Rates Table 11. Variations in Benefits According to Age of Entry and Retirement Table 12. Life Insurance Plans Table 13. Minimum Group Life Insurance Rates Under New York State Law Table 14. Social Security Survivor Benefits Table 15. Classes of Employees Covered by Life Insurance Plans Table 16. Waiting Period Before Life Insurance Coverage Begins Table 17. Graded Insurance Pattern

4 6 8-9

10 20 31 59 64 65 98 101 111 115 119 119 121 124

xvi Table Table Table Table

TABLES 18. 19. 20. 21.

Collective Decreasing Pattern Hospital-Surgical-Medical Plans Type of Hospital-Surgical-Medical Plans Waiting Period Before Participation Begins, Hospital-Surgical-Medical Plans Table 22. Sharing of Premiums for Hospital-Surgical-Medical Plans Table 23. Group Major Medical Expense Insurance Plans Table 24. Group Major Medical Expense Insurance Plans According to Whether They Supplement a Base Plan or Are Single Plans Table 25. Classes of Employees Covered: Group Major Medical Expense Insurance Plans Table 26. Waiting Period Before Participation Begins: Group Major Medical Expense Insurance Plans Table 27. Institutions Contributing to Cost: Group Major Medical Expense Insurance Plans Table 28. Income Continuation for Faculty During Disability of Less than Six Months

125 128 129 136 136 140

148 157 158 159 162

RETIREMENT AND INSURANCE PLANS IN AMERICAN COLLEGES

CHAPTER I

SCOPE OF COLLEGE STAFF BENEFIT PLANNING

SINCE the turn of the century higher education has generally been well ahead of other employments in the provision of sound benefit plans for professional staff members. This study describes the college plans now in effect and analyzes the various alternate arrangements and provisions available, with the objective of serving as a guide to sound benefit planning. College faculties include many of the most distinguished men in America, men who like teaching and the opportunity for untrammeled thought and research. The importance of continuing to attract men of the highest caliber to college work cannot be overestimated. Although the monetary rewards of college teaching are moderate in comparison to many other professions, substantial improvements in college salary levels are now being achieved. While colleges have generally pioneered in benefit planning and while real progress is now being made in improving salary levels, much still remains to be done. Forward steps are continuing in provisions for staff benefits—retirement planning, group life insurance plans, basic hospital-surgical-medical plans, major medical expense insurance, and disability income arrangements. These college benefit plans are a strong influence in attracting and holding staff members and in solving certain of their financial problems. Benefit plans are a vital part of compensation. They can accomplish certain specific objectives of security for the staff member more effectively and more economically than can the individual acting alone. Surveys prior to the current study were made in 1939 and in 1947. During the twenty years since the original study, major advances have been made in college staff benefit planning. In 1939, 45 percent of the colleges had retirement plans and these colleges employed 70 per-

4

COLLEGE STAFF BENEFIT PLANNING

cent of the college teachers. In 1947, the percentage of institutions of higher education having plans had increased to 59 percent, employing 85 percent of the teachers. The current survey shows that 76 percent of a broader list of institutions have plans and these employ 91 percent of the college faculty members. As late as 1947 only 23 percent of the colleges had group life insurance, but these colleges employed about 44 percent of the staff members. Now 36 percent of the colleges, in the broader list, employing 56 percent of the staff members, have some form of group life insurance protection. For many years staff members at some colleges have had insurance coverage for medical expenses incurred while hospitalized. The Blue Cross idea started in the colleges; the first Blue Cross plan was installed at Baylor University in Texas in 1929. At present 76 percent of the colleges provide for group enrollment of staff members for basic hospital-surgical-medical benefits. Major medical expense insurance, a development of the 1950s, covers out-of-hospital expenses as well as those incurred during hospitalization, up to a high maximum of $10,000 or $15,000 in benefits. At the present time only 15 percent of the colleges, employing 29 percent of the staff members, are covered by it, but it is the most rapidly growing form of staff benefit insurance. Total disability income insurance on a group basis is really in its infancy; very few colleges yet provide such protection for their staff members who become disabled, but this form of protection also is spreading. Table 1 estimates the present extent of coverage under the various benefit plans. Table 1.

ESTIMATED EXTENT OF STAFF BENEFIT PLANS, FOUR-

YEAR INSTITUTIONS OF HIGHER EDUCATION (JANUARY, 1959)

Totals of Institutions and Teachers Type of Plan Retirement Life Insurance Basic Hospital-Surgical-Medical Major Medical Expense

Institutions 1,377

Percent 100

Teachers Employed (Approx.) 212,876

1,051 500 1,054 209

76 36 76 15

193,265 118,270 174,331 60,790

Percent 100 91 56 82 29

5

COLLEGE STAFF BENEFIT PLANNING

Federal Social Security now gives some protection against three of the major income destroyers—retirement, early death, and total disability of the breadwinner. The federal plan was extended to private educational institutions in 1951 and to most public institutions beginning in 1955. The present survey shows that 97 percent of the private colleges and universities and 84 percent of those that are publicly supported now have Social Security coverage. BENEFIT PLANNING IN INDUSTRY. It is obvious that industry, business, and government will be competing more and more during coming years for much the same sort of brainpower as that needed by colleges. And today the competition from industry and business includes widespread staff benefit plans. In 1940, some 350 institutions of higher education had formal retirement plans, and there were only about 1,500 such plans in all of business and industry. Now over 1,000 educational institutions have plans, and as an almost unbelievable contrast to the figure of 1,500, there are now close to 45,000 "qualified" pension, profit-sharing, and stock-bonus plans in industry. While these figures give some indication of the lead the colleges have had in benefit planning, they also demonstrate how rapidly the gap has been narrowed and the fact that competitive employments can now offer far greater total security than ever before. STUDY METHOD This book brings up to date and extends the earlier study giving data on college retirement and life insurance plans published in 1948. 1 The 1939 study covered only college retirement plans.2 This survey includes the four major areas of insured staff benefit plans—retirement, life insurance, medical expense insurance, and disability income insurance. For the present study, questionnaires regarding retirement and insurance plans were sent to the 1,377 four-year United 1 William C. Greenough, College Retirement and Insurance York: Columbia University Press, 1948). 2 Rainard B. Robbins, College Plans for Retirement Income Columbia University Press, 1940).

Plans

(New

(New Y o r k :

6

COLLEGE STAFF BENEFIT PLANNING

States institutions of higher education listed in the 1956-57 Education Directory.3 These institutions, offering at least the bachelor's or first professional degree, include all universities, liberal arts colleges, teachers colleges, and institutions classified by the United States Office of Education as independent technological and professional schools, technical institutes, and theological and religious schools. Information as to approximate numbers of faculty members employed at institutions of higher education was obtained principally from figures published by the Office of Education or, secondarily, from The College Blue Book or The World Almanac.* From the 1,377 institutions, numbers of usable responses varied according to sections of the questionnaire: retirement, life insurance, basic hospital-surgical-medical insurance, major medical expense insurance, and disability income benefits. Usable responses ranged from 70 to 80 percent by numbers of institutions and from 82 to 92 percent as measured by approximate numbers of faculty members employed. Table 2 shows the numbers of usable responses to the main sections of the inquiry. Table 2.

USABLE RESPONSES TO QUESTIONNAIRE AS A PERCENT-

AGE OF FOUR-YEAR INSTITUTIONS OF HIGHER EDUCATION

Section of Responding Questionnaire Institutions Retirement 1,096 Life Insurance 980 Basic Hospital-Surgical971 Medical 962 Major Medical Expense Disability Benefits 983

Percent of Total Institutions (1,377) 80 71 70 70 71

Teachers Employed (Approx.) 195,171 176,300

Percent of Total Teachers (212,876) 92 83

176,593 175,115 177,325

83 82 83

3 Education Directory, 1956-1957, Part 3, Higher Education (Washington, D. C.: U. S. Government Printing Office). 4 U. S. Office of Education, Circular 504, Faculty in Institutions of Higher Education, November, 1955 (May, 1957). The College Blue Book, ed. by Christian E. Burckel (New York: 1956). The World Almanac and Book of Facts for 1958 (New York World-Telegram and Sun, 1959).

COLLEGE STAFF BENEFIT PLANNING

7

Each institution was asked to supply a description of its retirement plan covering faculty and administrative officers. A summary of the plan was prepared for the tabular description of retirement plans beginning on page 176. For this section, information in addition to that obtained through questionnaire responses was used whenever available.5 Special attention is given to the description of each retirement plan because of the primary importance of sound retirement provisions, lasting as they must over the many working years of a staff member's career and throughout the retirement years. Information and statistics collected during 1958 have been brought up to date to include changes made through January 1, 1959. The 281 institutions not responding to at least one section of the questionnaire employ about 10 percent of total faculty members working in higher education in the United States. A postcard follow-up study was made of this group of non-respondents; each institution was asked to provide a "yes" or "no" answer as to the types of benefit plans covering staff members. Forty-four percent replied. The results of the follow-up were used as a sample in arriving at estimates of the extent of coverage of benefit plans for all four-year institutions (Table 1). 5

A number of the non-responding institutions participate in a public, state teachers', or church retirement plan for which information was obtained from the appropriate retirement board. It has therefore been possible to list certain institutions as participating in a given retirement plan (beginning o n page 3 3 0 ) even though the institution itself supplied no information.

CHAPTER II

COLLEGE RETIREMENT PLANNING T H E retirement plan is by far the most significant staff benefit plan. It undoubtedly has more long-range influence on the institution, its educational objectives, the morale of its staff members, and the ability to attract the level of talent to which it aspires, than all the other benefit plans put together. Because of the comprehensive nature of a college retirement plan and the provisions that should be incorporated in it, it should greatly influence the design of the other plans, such as life insurance and disability income insurance. For these reasons a substantial part of this book will be given over to retirement planning in its various aspects. Table 3.

R E T I R E M E N T PROVISIONS COVERING FACULTY A N D ADMINISTRA Total

Type of Plan TIAA-CREF

Universities

Teachers Employee (Approx.

Institutions

Percent

Teachers Employed (Approx.)

Percent

Private

Teachers Employed (Approx.)

Public

474

49.6

86,813

45.4

46

34,799

20

15,394 19,866

State Teachers

185

19.4

35,335

18.4

27

Public Employees

114

11.9

33,747

17.6

27

24,010

Church

59

6.2

4,509

2.4

2

1,244

Agency Company

70

7.3

11,063

5.8

8

5,389

2

574

Self-Administered

26

2.7

15,882

8.3

4

3,710

7

9,977

No Answer as to Type

28

2.9

4,044

2.1

1

520

2

2,126

^56 - 15

100.0

191,393 -5,033

100.0

Total Duplicates Total

941

186,360

9

COLLEGE RETIREMENT PLANNING

E X T E N T OF RETIREMENT PLANNING. Of the 1,096 responding United States institutions, 941 (85 percent) indicated that they have retirement plans in effect for one or more employee groups, including faculty members and administrative officers, and 155 (15 percent) indicated no retirement plan was in effect. The chapters on retirement planning will be concerned with the 941 institutions with retirement plans out of the 1,096 institutions which responded to the study with usable information, rather than with the total number of 1,377 for which retirement coverage estimates are made in Chapter I. The responding institutions represent 92 percent of the total number of teachers employed in four-year institutions of higher education. Table 3 shows retirement plans in United States colleges and universities and other four-year institutions of higher education according to type of institution and type of retirement plan. Of the re-

TVE OFFICERS, ALL FOUR-YEAR INSTITUTIONS OF HIGHER EDUCATION Liberal Arts Colleges

Teachers "ri- Employed date (Approx.) 542

29,130

...

Teachers Pub- Employed lic (Approx.)

Teachers Colleges

Other *

Public and Teachers Pri- Employed vate (Approx.)

Public and Teachers Pri- Employed vate (Approx.)

Type of Plan

4

538

11

1,357

51

5,595

TIAA-CREF

34

6,103

107

7,729

17

1,637

State Teachers

18

3,868

65

5,447

4

422

1

41

28

1,363

Public Employees Church

28

1,861

38

3,267

2

78

19

1,436

Agency Company

7

588

2

287

6

1,320

Self-Administered

14

1,039

1

68

10

291

N o Answer as to Type

1

319

• Includes Independent Professional and Technological Schools, Technical Institutes, and rheological and Religious Schools. Classifications as to type of educational institution are hose of the United States Office of Education.

10

COLLEGE RETIREMENT PLANNING

sponding institutions stating that a retirement plan was in effect, one-half are covered by Teachers Insurance and Annuity Association and College Retirement Equities Fund plans, one-fifth by state teacher retirement systems, one-tenth by public employee plans, and the remaining one-fifth are distributed among church plans, agency life insurance company plans, self-administered plans and those for which no information on type of plan was available. Coverage for state teachers colleges is heavily concentrated in public plans, especially those applying to the public school teachers of the state. Likewise in the "Other" group there is concentration according to the type of institution; for instance theological and religious schools frequently are covered by church plans. Retirement plan coverage for universities and liberal arts colleges is presented in Table 4. Two-thirds of the plans are TIAA-CREF, with little concentration in any one of the other types, each in effect in less than one-tenth of the institutions. The rapid growth in size that has occurred in public institutions is reflected in the substantial number of staff members covered by public plans. Table 4.

RETIREMENT

PROVISIONS

COVERING

FACULTY

AND

ADMINISTRATIVE OFFICERS, UNIVERSITIES A N D LIBERAL ARTS COLLEGES

Type of Plan Institutions TIAA-CREF 412 State Teachers' Plans 61 Public Employees' Plans 45 Church Plans 30 Agency Company Plans 49 Self-Administered Plans 18 No Answer as to Type 17 Total 632

Percent 65.2 9.7 7.1 4.7 7.8 2.8 2.7 100.0

Teachers Employed (Approx.) 79,861 25,969 27,878 3,105 9,594 14,305 3,685 164,397

Percent 48.6 15.8 17.0 1.9 5.8 8.7 2.2 100.0

OBJECTIVES OF A RETIREMENT PLAN A college's retirement plan can help or hinder the achievement of the institution's educational objectives. If the plan is to help, it must be

COLLEGE RETIREMENT PLANNING

11

based on a philosophy that encompasses the educational aims of the institution. In order to make certain that the retirement plan and its provisions make a positive contribution to the educational objectives of the college, there needs to be a clear understanding of the many things a retirement plan can accomplish for the institution, for its staff members, and for higher education as a whole. This requires a guiding philosophy of retirement planning. College boards of trustees and administrative officers repeatedly indicate that well-designed retirement plans help them achieve vital educational objectives. The functions of a good plan in helping to meet the objectives are: 1. To effect the orderly retirement of superannuated employees with an income sufficient to meet their future needs. 2. To elevate and maintain the professional attitude of the staff. 3. To attract promising new talent. 4. To retain above-average staff members. 5. To part more easily before retirement with those who are not measuring up to the college's standards. RETIREMENT INCOME. Many more people seek independence in old age than ever achieve it. Freedom from financial worries, freedom from dependence on other people, freedom to throw off the harness of work when infirmities make it burdensome, freedom to pursue hobbies and studies—all of these and more contribute to the desire for independence in old age. The manner in which a college helps its staff members look forward to security during retirement influences their loyalty and efficiency during working years. Barring earlier death or departure, almost all employees outlive their periods of usefulness to the college. In the absence of a retirement plan, a college is faced with keeping elderly persons in classrooms, research laboratories, and administrative positions to the detriment of students and the dissatisfaction of younger colleagues. There are many disadvantages in retaining people in teaching and administrative positions when they can no longer fill them competently. Maintenance and service employees often may be moved into successively easier jobs as advancing age impairs their efficiency, although this may be uneconomical. But faculty members and ad-

12

C O L L E G E R E T I R E M E N T PLANNING

ministrative officers cannot so easily be shifted. A teacher who has endeared himself to his classes for thirty years usually continues to teach as long as he is retained on the college budget. If he happens also to be a department head, he may hold that title long past his period of major usefulness if no retirement plan exists. The main purpose of a retirement plan, then, is to provide during each individual's retirement an income sufficient to maintain an appropriate standard of living for him. But a good plan should accomplish far more than this; it should have, through the sense of security it gives, a positive effect throughout the individual's working years. This is accomplished by a plan under which the individual knows that funds are actually being set aside for each year of service, and are being invested astutely to support his benefits, and that he owns those funds, i.e., both his and his employer's contributions are fully "vested" in him. ATTRACTING AND HOLDING ABLE MEN. In seeking able men for teaching, research, and administrative positions, colleges are in constant competition, not only with other colleges, but with financial and industrial employment and government. The monetary returns from college employment are modest in comparison with those from some of the other areas of economic life. Yet colleges have the services of many of America's outstanding men and women. Income, though moderate, is relatively assured. When satisfactory provision for retirement is available, the college staff member is assured of reasonable security throughout his life. Security is the only balance of a material sort that teachers can set against the monetary prizes of some other employments. Professional men, both promising and eminent, have declined offers of otherwise attractive positions because of unsatisfactory provisions for retirement benefits. Many who turn down such offers are considering not only their own retirement income, but also the fact that during their working years they want to be associated with enterprising, progressive leaders and thinkers in their profession, in an atmosphere congenial to the greatest development of each individual. For many years fully vested college retirement plans have been considered advantageous in attracting such superior staff members, since

COLLEGE RETIREMENT PLANNING

13

these plans recognize the fact that some of the most able men in higher education and in research may, during their lifetime, serve in a number of positions in different colleges, universities, research organizations, or foundations. Industrial type pension plans that provide no vested benefits, or no vesting of benefits until ten or twenty years of service, or until some such age as 50, incorporate either the hazard of insecurity in case the individual accepts another position before meeting the service requirement, or the alternative of reluctantly remaining with a particular employer so as not to forfeit benefits, which has been called "economic peonage." Both alternatives are anathema to a college professor. The factors that help a college to attract good men also help to hold them. It is the legitimate hope of the young man who has already shown ability in a scholarly field to become an authority in his specialty and perhaps to assume responsibility for leading a group of able and progressive associates. In deciding whether he will stay with a particular college, he will usually consider whether he can expect to grow in eminence and responsibility at that institution and whether the positions above him will be cleared through a regular and definite retirement procedure. Certainly a good retirement plan will help ease his mind on these two points. PARTING B E F O R E R E T I R E M E N T . From time to time there are individuals whose professional growth in a particular atmosphere becomes inhibited. For any one of a variety of causes a promising beginner may later fail to live up to his excellent prospects: his inherent capacities may have been misjudged, there may have been a lack of opportunity for advancement in the special fields in which he has become interested, or perhaps there may be conflicting personalities among his associates or with others and these conflicts may interfere with his progress. Where such situations develop, it is often mutually advantageous for the person and the college that he move on to other employment. But individuals employed by colleges with forfeiture retirement plans have often said quite frankly that they could not afford at their age to sacrifice their accrued retirement benefits by leaving the college. So they serve out their time, perhaps con-

14

COLLEGE RETIREMENT PLANNING

scious that their own advancement and the health of the college would have been aided by a change. An outstanding man usually can command enough salary in another position to make it worth his while to leave if he so wishes, despite forfeiture. Therefore the forfeiture plan will not of itself hold him. But it will tend to hold the person whose capacities are limited and who, if he can get any other job, may find that its advantages do not compensate for the loss of retirement benefits. DEVELOPMENT O F COLLEGE PENSION PHILOSOPHY It is worth while to trace the historical development of the provisions of college retirement income planning that contribute to the educational objectives just outlined. Most of this development grew out of the experience of the free pension system of the Carnegie Foundation for the Advancement of Teaching, which was established in 1905. Before that date, only a handful of the colleges had formal retirement arrangements, and these were only for staff members of long service who remained at the institution until retirement. Columbia, Yale, and Harvard formalized the retirement of faculty members before the end of the nineteenth century. In 1892 Columbia provided that a 65-year-old professor with fifteen years of service might be retired at half pay at his request or that of the trustees. In 1897 Yale provided half pay for those who retired at age 65 and who had served twenty-five years in a rank higher than that of assistant professor. Harvard in 1899 established a plan under which a person aged 60 with twenty years as assistant professor or higher might retire at a pension of one-sixtieth of his last year's salary for each year of accredited service, the pension not to exceed two-thirds of salary, and the university could require retirement at age 66. None of these plans required contributions from faculty members. By 1905 pension or deferred savings plans had been established in three other institutions in the United States: Cornell University, the University of California, and Randolph-Macon Woman's College.

COLLEGE RETIREMENT PLANNING

15

THE CARNEGIE FOUNDATION FOR THE ADVANCEMENT OF TEACHING.

When Andrew Carnegie became a university trustee in 1890 he was shocked, he later wrote in his autobiography, "to find how small were the salaries of the professors," and concluded that for a professor to save for his old age was next to impossible. The problem made a deep impression on him. A dozen years later Henry S. Pritchett, then president of Massachusetts Institute of Technology, visited Mr. Carnegie at his summer home, Skibo Castle, in Scotland. Mr. Carnegie asked Dr. Pritchett what his mission in Europe was and the latter replied: "I am searching for a $25,000 professor at a $7,500 salary." The two men talked about ways to improve the economic standing of college teachers and of the importance to teachers and to higher education of old age provisions. Mr. Carnegie had retired a few years before, sold his steel business, and was now engaged in distributing his fortune. He knew that all his millions could not greatly raise teachers' salaries, but he believed he might help education by providing retirement allowances for teachers in leading colleges and universities. The result of his thought and action was the establishment in 1905 of the Carnegie Foundation "to provide retiring pensions for the teachers of Universities, Colleges and Technical Schools" in the United States, Canada, and Newfoundland. Dr. Pritchett left the presidency of M. I. T. to become the first president of the Foundation. The Carnegie Foundation for the Advancement of Teaching was incorporated by an act of the Congress of the United States. The officers of the Foundation proceeded to establish a list of private colleges and universities that met certain standards of stature and qualifications. Sectarian colleges were excluded and a number of them abandoned that status in order to become eligible. A gift of $10,000,000 had established the Foundation; this was later increased to $15,000,000 in order that professors in state universities might be included in the pension fund. The pensions were initially quite liberal—$400 more than half of average salary for the last five years of service for those who at-

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tained age 65 after having held the rank of professor for fifteen years. The inducement to a college to qualify for the accepted list was therefore very great. Ultimately, ninety-five public and private colleges and universities in twenty-six states and Canada were included in the plan. Within a decade after the Foundation was established, it became apparent that no gift of practicable size would be sufficient to provide free pensions for the growing numbers of college teachers. The rising salaries after World War I magnified the problem and made necessary several limitations on the generosity of the original scale of benefits. In November, 1915 the rules of the Foundation were revised so that only teachers then in service would, in addition to those already receiving benefits, be eligible for pension payments. Teachers employed after that date would soon have available the new annuity system then being developed by the Foundation. Through December 31, 1958 the Carnegie Foundation had paid out more than $71,300,000 in free pensions to 5,705 retired faculty members and their widows. Over 1,880 retired faculty members and widows were receiving benefits under the free pension system at that time. There were only 38 college teachers with Carnegie pension expectations who had not yet retired. CARNEGIE INFLUENCE ON COLLEGE PENSIONS. The activities of the Carnegie Foundation have done much to advance the development of retirement plans in institutions of higher education. As compared with similar planning for various other classes of employment, this development took place early and has been unique, perhaps to no small extent because no other professional group was encouraged by such a large gratuitous source of pension support. Unquestionably the greatest single contribution to pension philosophy by the Carnegie free pensions was the concept of transferability. To qualify for a retiring allowance under the Foundation's rules it was not necessary that a teacher spend any specified length of time in any particular one of the associated institutions. This gave free mobility of academic talent among the associated institutions. In 1918 this concept of mobility was carried over to the much broader TIAA plan, operating within the college world. Then in 1935, thirty

COLLEGE RETIREMENT PLANNING

17

years after the Foundation was organized, the federal Social Security Act was established on a basis providing transferable benefits for most of the American working force. DEFECTS OF CARNEGIE SYSTEM. During the first ten years of the Carnegie Foundation's existence it became apparent that there were defects in the financing of the new system. It was soon recognized that the fixed endowment placed narrow limitations on the size of the professional group that the Foundation could serve. Pritchett also saw certain undesirable effects of free pensions as contrasted with benefits supported jointly by the colleges and their staff members. He became convinced that whatever the Carnegie Foundation could do to promote sound pension systems for colleges in general would be a far more valuable service than merely limiting its activities to support of liberal free pensions at a limited group of colleges. THE COMMISSION ON INSURANCE AND ANNUITIES (1916). As the defects of the Carnegie Foundation for the Advancement of Teaching program became more apparent, a broader concept was sought for future college retirement plans. The Foundation undertook extensive pension studies and, in 1916, organized an independent study commission, the Commission on Insurance and Annuities.1 Represented on this Commission were the American Association of University Professors, the Association of American Universities, the National Association of State Universities, and the Association of American Colleges. Technical advice was secured from The Actuarial Society of America and the American Institute of Actuaries. The Commission on Insurance and Annuities concluded that: 2 A college retirement system should rest upon the cooperation and mutual contributions of the colleges and the teachers. For the assurance of the annuity there must be set aside, year by year, enough to build up a reserve adequate to meet the ultimate benefit payments. 1

The Foundation's pension studies were of great importance in the development of college pension theory and, indeed, of all pension theory. 2 These conclusions are summarized from "The Report of the Commission on Insurance and Annuities," Twelfth Annual Report of the President and of the Treasurer, Carnegie Foundation for the Advancement of Teaching (New York: 1917).

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The arrangement with the teacher should be put on a contractual basis. Inasmuch as the annuities were to originate with colleges that were ready to install retirement systems as a matter of institutional policy, the cost of the annuities could and ought to be reduced by eliminating the element of agents' commissions from the premium schedule. The greatest freedom of movement of the college teacher from one college to another should be provided for. TEACHERS INSURANCE A N D ANNUITY ASSOCIATION The studies conducted and sponsored by the Carnegie Foundation led to the organization in 1918 of a system whereby the college and its staff members would join in contributing toward individual annuity policies wholly owned by staff members. A separate life insurance company, Teachers Insurance and Annuity Association of America ( T I A A ) , was established to pool provisions for retirement income and life insurance through contracts available to staff members in all colleges and universities and certain other nonprofit educational institutions. TIAA was thus an extension of the philanthropic ventures of Andrew Carnegie. It was organized on the initiative of the Carnegie Foundation and was endowed originally by the Carnegie Corporation of New York with $1,000,000, half of which was for capital stock and the other half for initial surplus. For some years TIAA was operated as if it were a department of the Carnegie Foundation, with the stock held and voted by the Carnegie Corporation as a trust for the college world and with all expenses paid by grants from the Corporation and the Foundation. The first president, Henry S. Pritchett, had been president of the Carnegie Foundation since 1905; he continued to hold both positions, accepting only a nominal salary from the new company. In 1931 the Foundation turned over to TIAA its research activities in the field of pension planning and staff benefits. Beginning in 1935, the Carnegie Corporation voted several grants to TIAA to increase reserves on annuity contracts issued between 1918 and December 31, 1935, to defray future expenses on these contracts for which the participant paid no expense charge, and for

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19

general surplus purposes. Since 1918 a total of $17,660,000, including the initial endowment of $1,000,000, has been granted TIAA by the Carnegie Corporation and the Carnegie Foundation. Since January 1, 1936 the contracts issued by TIAA have been self-supporting. In 1938 the Carnegie Corporation transferred the stock of the Association to an independent board designated as Trustees of TIAA Stock, a membership corporation created by a special act of the New York State Legislature. The primary duty of the Trustees of TIAA Stock is to elect trustees of the Association, one of whom is nominated each year by policyholders. The charter of the Association outlines the limited area of education within which it operates and provides explicitly that its business shall be done without profit to stockholders. The charter states TIAA's purpose as follows: The purpose of the corporation is to aid and strengthen nonproprietary and nonprofit-making colleges, universities and other institutions engaged primarily in education or research by providing annuities, life insurance, and sickness and accident benefits suited to the needs of such institutions and of the teachers and other persons employed by them on terms as advantageous to the holders and beneficiaries of such contracts and policies as shall be practicable, and by counselling such institutions and their employees concerning pension plans or other measures of security, all without profit to the corporation or its stockholders. The corporation may receive gifts and bequests to aid it in performing such services. The Carnegie Foundation and the members of the Commission on Insurance and Annuities had emphasized the development of an annuity contract that would advance the cause of education as a whole. No method then in existence of funding pension plans seemed wholly satisfactory for the college plans envisioned. After a suitable contract was developed, a survey of life insurance companies disclosed no contract with the desired attributes, and it did not seem feasible for an agency company to issue the special contract desired without the costs of agency organization and commissions. It was only then that a separate company was organized to provide contracts through which ( 1 ) educational institutions could fund their retirement plans on a mutually advantageous basis, and (2) educational personnel could obtain life insurance and retirement annuities at unusually low cost.

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The organization of the Association, with the backing of the Carnegie Foundation and the Carnegie Corporation, the attention given to the subject in the annual reports of the Carnegie Foundation, and the widespread cooperation of college organizations and professional actuarial associations, all helped to give an impetus to the development of college retirement plans and adoption of the contractual method of financing them. The growth by decades in the number of colleges, universities, and other educational organizations funding their retirement plans through the use of TIAA contracts is shown in Table 5. By 1928 the AssoTable 5. CUMULATIVE GROWTH OF TIAA RETIREMENT PLANS Colleges and Year Universities Othera Total 1928 139 60 199 1938 175 89 264 1948 351 195 546 1958 474 397 871 * Nonprofit junior colleges, independent schools, scientific and research organizations, and foundations.

ciation was serving 9,200 policyholders; in 1958, 120,000 policyholders. The cumulative total of benefits paid to policyholders and beneficiaries by December 31, 1958, was over $192,000,000 and benefits paid in the year 1958 exceeded $22,000,000. Total assets of TIAA at the end of 1958 were $584,000,000, and assets of its companion organization, College Retirement Equities Fund (CREF), were $90,000,000. These figures indicate the tremendous growth from the original Carnegie "seed money" granted to establish a specialized company for college staff members. THE ANNUITY CONTRACT. The importance of an appropriate contract for use in college retirement plans cannot be overemphasized. When the special contract to be issued by TIAA was introduced in 1918, it was unique in many of its provisions, e.g., fully vested, noncashable, and allowing variations in premium amounts and maturity dates. The ensuing forty years of experience have resulted in a number of changes in detail, but no changes have seemed necessary or desirable in the general objectives of pension philosophy incor-

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21

porated in the contract. All of these concepts were carried over intact to CREF; here the only things that are changed are the type of assets in which part of the retirement savings are invested and the manner in which the investment performance is made available to the participant as retirement income. The college resolution establishing a TIAA retirement system can make CREF participation available to staff members merely by so indicating in the resolution. A description of CREF, the variable annuity it issues, its performance to date, and its place in college retirement planning appears on pages 37 to 42. Use of these annuity contracts relieves the college of annuity risks, risks not compatible with college organization and function. With the objective of making the staff member independent after retirement, the institution assumes the obligation of contributing to the cost of the annuity contract during working years. When retirement age is reached, employment ceases, and the individual's income is shifted from compensation for college service to annuity payments from TIAA and CREF. As for the employee, his rights are contractual and are independent of his relationship with a particular employer. His contributions, as well as those made on his behalf by the college, are protected by his own contractual arrangement with a third party, organized to invest funds and provide annuities under the supervision of insurance laws and regulations. Although the individual owns the contracts and can take them with him if he leaves, the college is assured that its contributions cannot be liquidated or mortgaged. The individual can use his contracts only for their original purpose—to provide a retirement income. Furthermore, flexibilities with respect to premium payments, selection of retirement date, selection of type of income settlement on retirement, and the like, allow the college and the individual wide latitude in adjusting the contracts to fit differing situations. FEDERAL SOCIAL SECURITY For fifteen years after the passage of the Social Security Act of 1935, college and university staff members were not eligible for coverage

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under it. January 1, 1951 was the first date on which college and university employees became eligible for coverage generally available to the employees of business and industry. Even then college staff members who were already members of public employee retirement systems did not become eligible. This group had to wait until 1955. EARLY OPPOSITION. When Social Security legislation was first considered in the early 1930s, there was strong opposition to proposals to extend the program to nonprofit educational, charitable, and religious organizations. A witness representing the American Council on Education before the Senate Committee on Finance voiced a feeling of college people against the program. 3 He cited the adequacy of existing retirement plans for college faculty, the cost of the federal program, a fear that the employers' tax on payroll would provide an unfortunate precedent with respect to the nonprofit institutions' tax exemptions. He also cited the absence of a separation in the federal program between the Old Age and Survivors Insurance and the unemployment insurance features, a separation that was later made. Some leaders in the nonprofit field also believed that an extension of Old Age and Survivors Insurance to that area might impair religious freedom, the traditional separation of church and state. Among public employees, including those of publicly controlled educational institutions, fear was expressed that the federal program would replace or weaken existing retirement plans and cause employees to lose benefits already established, or would prevent the states from going ahead with retirement systems for employees not yet covered by such plans. There was also some question of the constitutionality of the federal government's levying payroll taxes on state and local governments. CHANGING ATTITUDES. Attitudes of the colleges and universities toward Social Security gradually changed during the next fifteen years. Commencing as early as 1937 TIAA analyzed the federal Act, presented a number of suggestions as to amendments that would make 3 Hearings on Economic Security Act, U. S. Senate Committee on Finance, Seventy-fourth Congress, First Session, February 18, 1935, pp. 1071-80.

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23

it more appropriate for and acceptable to the educational world, and recommended coverage under the Old Age and Survivors provisions for educational institutions. In connection with this recommendation a vice-president of TIAA made the following observation: 4 Colleges and universities have often led in formulating social policies. Social Security legislation is now shaping our most comprehensive social movement; surely our educational institutions should be in the game rather than on the sidelines; they should be more than mildly interested spectators; they should be instrumental in determining the outcome. By the end of World War II, colleges and universities found that the war and post-war periods of full employment made many employees more discriminating in their choice of jobs. Comparatively few colleges had established retirement plans for their nonacademic employees; as these employees became more aware of the benefits provided by Social Security and as full employment allowed them to pick and choose among jobs, they became less willing to forego Social Security benefits by working for a college. During the 1949 hearings on Social Security, emphasis was placed by college officials on the problems of recruitment of nonacademic staff members from covered employment. Faculty members too were beginning to be interested in Social Security as a supplement to existing retirement prospects. The gradual shift in sentiment embraced many of the groups once opposing coverage, including the American Council on Education, the Association of American Colleges, and others. By 1950 it was accepted that there would be a number of advantages from participation by institutions of higher education in Social Security, if changes could be made to meet the objections raised. SOCIAL SECURITY AMENDMENTS OF 1950. "The Social Security Act Amendments of 1950," signed on August 28, 1950, finally made Social Security optionally available to the employees of private nonprofit educational institutions and to public employees not covered * Rainard B. Robbins, Developments in Social Security and Pension Plans, December 9, 1941. (Address before Eastern Association of College and University Business Officers, White Sulphur Springs, West Virginia.)

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by a public retirement system. In the new Act, most of the objections to participation of educational institutions had been reasonably well met. Participation was made voluntary for nonprofit organizations. The governing boards of colleges and universities had the right to decide whether they wished to have their employees brought under the federal plan. If the institution for any reason did not wish to participate it need not be involved. If the governing board decided to favor it, then the employees of these institutions had the right, through référendums, to accept or reject the federal plan. Assent of at least two-thirds of the employees was necessary before the program could be put into effect. Only the Old Age and Survivors Insurance feature of the Social Security program was offered to the colleges and universities; the unemployment insurance part of the plan did not apply to them. Although participation in the Social Security program by privately supported colleges and universities was thus on a voluntary basis, most of these institutions and their staff members elected to participate soon after the 1950 amendments. In a few instances fundamental disagreements with the basic philosophy of Social Security led trustees or staff members to turn it down. In a few other colleges serious financial situations led either to failure to approve OASI extension or to discontinuance of regular retirement arrangements after Social Security was obtained. In by far the majority of cases, however, the addition of OASI benefits resulted in improvements in existing protection so that the two systems together constituted a more attractive and beneficial program for participating and prospective staff members. The continuing opposition to participation in Social Security by representatives of employees of governments (including public school teachers) because of the fear that the federal programs would replace existing governmental retirement plans, was recognized by not extending the program in 1951 to employees of federal, state, or local governments in positions covered by public retirement programs. The exclusion of public employees participating in retirement

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25

plans continued for four more years. During that time the great majority of publicly supported institutions of higher education and of associations of college teachers and administrators expressed themselves as being in favor of the extension of OASI. SOCIAL SECURITY AMENDMENTS OF 1954. The 1954 Social Security amendments made coverage available, on a voluntary basis with a referendum, to public employees who were already members of state retirement systems. Coverage under the 1954 amendments could begin as early as January 1, 1955. If signed before 1958, the federal-state agreements bringing OASI coverage could, if desired, be made retroactive in order to permit coverage for employed persons nearing retirement and to take into account the fact that state legislatures often meet only biennially. At present, publicly supported educational institutions in all but eleven states have come under the Social Security provisions.5 STATEMENT OF PRINCIPLES ON ACADEMIC RETIREMENT Unquestionably the most important general statement of good retirement practices for the colleges is contained in the work done by the Association of American Colleges and the American Association of University Professors. In the late 1940s a Special Joint Committee of the Association of American Colleges and the American Association of University Professors undertook a thorough study and a restatement of the principles of academic retirement. The final report of the Joint Committee and its Statement of Principles on Academic Retirement were formally adopted by the annual meetings of the two associations.6 5 Publicly supported educational institutions in the following states do not have Social Security coverage for teachers: Arkansas, California, Colorado (except University of C o l o r a d o ) , Florida, Illinois, Louisiana, Maine, Massachusetts, Nevada, Ohio, and Vermont. 6 "Academic Retirement and Related Subjects," Association of American Colleges Bulletin, X X X V I , N o . 2 (May, 1950), 308-28, and American Association of University Professors Bulletin (Spring, 1950), pp. 9 7 - 1 1 7 .

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Since 1950 the Statement of Principles has been amended twice: once in 1953 to recommend that the colleges concern themselves with the purchasing power of retirement annuities as well as with the dollar amount, and once in 1957 mainly to add a section on other staff benefit plans. Since the A A U P - A A C Statement of Principles incorporates a sound and comprehensive philosophy for college benefit planning, analysis of its content is helpful to trustees, administrative officers, and teachers in institutions of higher education. Descriptions of most of the college retirement plans are found in Chapter X of this book. The reader can thus determine the respects in which his institution's retirement plan does or does not meet the recommended specifications. The Statement of Principles as adopted by the two educational associations is as follows: 7 Academic Retirement

and Insurance

Programs

Institutions of higher education are conducted for the common good and not to further the interest of either the individual teacher or administrator, or even of the individual institution. The policy of an institution for the retirement of faculty members and administrators and its plan for their insurance benefits and retirement annuities should be such as to increase the effectiveness of its services as an educational agency. Specifically, this policy and plan should be such as to attract individuals of the highest abilities to educational work, to sustain the morale of the faculty, to permit faculty members with singleness of purpose to devote their energies to serving their institution, and to make it possible in a socially acceptable manner to discontinue the services of members of the faculty when their usefulness is undermined by age. The following is recommended practice: 1. The retirement policy and annuity plan of an institution, as well as its insurance program, should be clearly defined and be well understood by both the faculty and the administration of the institution. 2. The institution should have a fixed and relatively late retirement age, the same for teachers and administrators. The length of training of college teachers, their longevity and their health generally are such that 7 "Report of the Joint Committee of the American Association of University Professors and the Association of American Colleges—1957," Association of American Colleges, Bulletin, XLIV, No. 1 (March, 1958), 145^7.

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27

in the present circumstances the desirable fixed retirement age would appear to be from sixty-seven to seventy. 3. Circumstances that may seem to justify the involuntary retirement of a teacher or administrator before the fixed retirement age should in all cases be considered by a joint faculty administration committee of the institution. This committee should preferably be a standing committee, but in the consideration of specific cases no interested person should be permitted to participate in its deliberations. (The above is not meant to indicate that the involuntary return of an administrator to teaching duties need be regarded as a retirement.) 4. The recall of teachers on retired status should be without tenure and on an annual appointment. Such recall should be used only where the services are clearly needed and where the individual is in good mental and physical health. It may be for part or for full time. Such recall should be rare where the retirement age is as late as 70. 5. The institution should provide for a system of retirement annuities. Such a system should: (a) Be financed by contributions made during the period of active service by both the individual and the institution. (b) Be participated in by all full-time faculty members who have attained a certain fixed age, not later than 30. (c) Be planned to provide in normal circumstances and in so far as possible for a retirement life annuity (including Federal Old Age and Survivors Insurance benefits) equivalent in purchasing power to approximately 50 per cent of the average salary over the last 10 years of service, if retirement is at 70, and a somewhat higher percentage if the fixed retirement age is younger. (d) Ensure that the full amount of the individual's and the institution's contribution, with the accumulations thereon, be vested in the individual, available as a benefit in case of death while in service, and with no forfeiture in case of withdrawal or dismissal from the institution. (e) Be such that the individual may not withdraw his equity in cash but only in the form of an annuity. (To avoid administrative expense, exception might be made for very small accumulations in an inactive account.) Except when they are small, death benefits to a widow should be paid in the form of an annuity. 6. When a new retirement policy or annuity plan is initiated or an old one changed, reasonable provision either by special financial arrangements or by the gradual inauguration of the new plan should be made for those adversely affected. 7. It is desirable for the insurance program of an institution to include the following:

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(a) Life insurance on a group basis, in addition to survivors' benefits under Federal Old Age and Survivors Insurance; (b) Insurance for medical expenses, including major medical (catastrophic) insurance; (c) Disability insurance, covering long-term total disability for any occupation for which the staff member is reasonably fitted, and paying half salary up to a reasonable maximum during disability before retirement as well as continuing contributions toward a retirement annuity.

CHAPTER III

METHODS OF ADMINISTERING RETIREMENT BENEFITS

T H E development of college pension planning from the turn of the century has gone through several phases, each consistent with its predecessor in basic philosophy but differing in mechanism. As discussed in Chapter II, first came the Carnegie free pension system in 1905 that provided retirement security within the limitations of funds available. Growing out of it came the much broader concept of TIAA in 1918. In the early 1950s two additional developments of prime importance occurred—the extension of Social Security coverage to colleges and universities, and the establishment of the College Retirement Equities Fund as a companion organization to TIAA to help protect retirement income against depreciation from inflation. Meanwhile pension planning was developing in governmental units and among religious denominations. The first of these trends has had important influences on retirement arrangements for educators since many public institutions now are covered by retirement plans for all public employees in a state or subdivision or by state teacher plans. A small number of church related colleges are covered by denominational plans for religious workers. Two other categories of plans comprise those written with agency life insurance companies and self-administered plans. This chapter will describe and discuss these various methods used by the colleges to provide retirement security for their staff members. F E D E R A L SOCIAL SECURITY Social Security participation has become a standard part of the retirement planning of colleges and universities. Of responding in-

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stitutions, 97 percent of the private colleges and universities and 84 percent of the public institutions are covered by the federal plan. The federal Social Security Act is a complex, detailed document; a full discussion of all its provisions would take many pages. The following material outlines only major provisions that are important in connection with staff benefit planning in the colleges. Questions as to individual eligibility, institutional eligibility, precise computation of benefits, details as to tax collections and the like can be answered by the local office of the Social Security Administration.1 BENEFITS. Social Security now provides a floor of retirement, survivor, and disability benefits for the great majority of college staff members. This floor is related to salary up to a stated maximum and is heavily weighted in favor of lower-paid persons, those first made eligible at older ages, and those with larger families. All Social Security benefits are related to the employee's "primary insurance amount" which in turn is related to his "average monthly wage." The average monthly wage for most college staff members is the total taxable wage in covered employment after 1950, divided by the total number of months elapsing after 1950, or age 21, whichever is later, and before the quarter in which a staff member reaches retirement age (65 for men, 62 for women), or dies. In calculating this average, up to five of the years of lowest or no earnings may be dropped out, and earnings after retirement age can be counted if they increase the benefit. The 1958 amendments to the Social Security Act brought the maximum primary insurance amount to $ 116 monthly for persons now receiving benefits. For persons retiring in the future, the maximum primary amount will be $127, although it will be many years before 1 Provisions of the law concerning eligibility for and payment of benefits are contained in the Social Security Act as amended. Provisions imposing federal taxes on employers and employees are contained in the Federal Insurance Contributions Act as amended. See also publications of the Department of Health, Education, and Welfare, Social Security Administration, Bureau of Old-Age and Survivors Insurance, and Teachers Insurance and Annuity Association of America Bulletins on the Social Security coverage of college staff members.

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the average monthly wage of any individual is such that he is entitled to the maximum retirement benefit. The following table illustrates the benefits according to the 1958 amendments, at selected average monthly wages: Table 6.

SOCIAL SECURITY M O N T H L Y I N C O M E BENEFITS

E F F E C T I V E JANUARY 1, 1959 Average Monthly Wage $200 250 300 350 400

Retired Person (Primary Amount) $ 84 95 105 116 127

. Retired Couple (Wife Aged 62) (Wife Aged 65) $115.50 $126.00 130.70 142.50 144.40 157.50 159.50 174.00 174.70 190.50

Widow and Two Children Under 18 $161.60 190.10 210.20 232.00 254.10

As noted from the table, benefits in addition to the primary amount are available to a wife or widow age 62 or over of a retired worker, and a widow with children under age 18 in her care. Benefits are also available for other categories, including dependent parents, and for a disabled employee above age 50 and his eligible dependents. INSURED STATUS. Eligibility for any Social Security benefits depends on the number of quarters (three-month calendar periods) of coverage under the Act. To be fully insured a person must normally have half as many quarters of coverage as there are calendar quarters after December 31, 1950, or his age 21, whichever is later, and before the quarter in which he reaches retirement age or dies, with a minimum of six quarters of coverage required. To be currently insured a person must have at least six quarters of coverage out of the last thirteen quarters. The "disability freeze" provision makes it possible for persons who are totally disabled to preserve their insured status for old age, survivor, and disability benefits. TAXES. The present Social Security tax rate of 5 percent (2Vi percent each for employer and employee) of salary within the taxable earnings base (currently $4,800) is scheduled to be increased beginning January 1, 1960 to 6 percent. Thereafter, future tax increases are scheduled to take place every three years, the tax rates to be as

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follows: 1 9 6 3 - 6 5 , 7 percent; 1 9 6 6 - 6 8 , 8 percent; after 1968, 9 percent, half being paid by the employer. WORK TEST. The "work test" indicates the amount that can be earned in covered employment by a Social Security beneficiary without thereby losing Social Security benefits. A person can earn up to $1,200 a year without any loss of benefits. For each $80 or fraction thereof over $1,200, he loses one month's benefits, but only for months in which he earns wages of more than $ 1 0 0 or renders "substantial services" as a self-employed person. As soon as he attains age 72 Social Security benefits are payable regardless of earnings. A SOCIAL PROGRAM Social Security does not attempt to provide a benefit proportionately related to the individual's salary or to the taxes paid on the individual's behalf. It is a system of "social equity," as distinct from a system of "individual equity" under which each dollar of premium purchases a specified right to retirement or death benefits. The "social equity" objective is quite proper and important for a national program limited in scope to providing a foundation of benefits for all persons covered by the plan. The benefit on the first $ 1 1 0 of average monthly wage is nearly three times as large as on the next $100, although the tax rate is the same in both brackets. Many other "social equity" aspects are evident. Older persons initially eligible under Social Security pay substantially less in total taxes than younger persons, even though benefits as presently scheduled are practically the same. This is particularly evident in the "new start" provisions which have permitted college staff members nearing retirement in colleges newly covered by the Social Security law to pay OASDI taxes for as few as eighteen months and yet receive full benefits upon retirement. For example, there are persons who became initially covered in 1955 and paid as little as $ 2 5 2 in total OASDI taxes who are now retired and receiving benefits of $ 1 1 6 a month ( $ 1 6 0 for a couple). For about the same retirement benefits and under the present tax schedule, total taxes of $ 5 , 3 4 4 will be paid on behalf of a person entering Social Security at age 45 on the same date and $12,904 in

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33

taxes for one aged 25. The same lack of individual equity may be seen in the fact that taxes on an unmarried man or woman are the same as on a married employee even though most of the various dependent or survivor benefits are not payable. Likewise, if a person continues to work from age 65 to 72 in covered employment, taxes are payable but benefits are not if earnings exceed the work test. The social equity approach of the federal program bases its benefit amounts upon the presumed greater needs of persons with lower incomes and larger families. As a result, the benefits of Social Security are insufficient for most college staff members. For a person whose salary averages $400 a month, Social Security primary benefits now represent approximately 30 percent of average salary; for a person whose earnings average $800 a month, the primary benefits are only 15 percent of average salary. Even though the benefits are larger for a married couple, such benefits must be supplemented in order to achieve a respectable standard of living, or in some cases even a subsistence standard. The sections of this study relating to retirement benefits, life insurance benefits, and total disability benefits will indicate how the federal program can be most effectively integrated with other staff benefit plans established by the colleges. CONTINUING CONCERN OVER SOCIAL SECURITY. Before leaving the subject, a question regarding the federal program should be mentioned. One of the early concerns about the federal program has persisted strongly over the years. This has to do with the ultimate size of the program. While only a few people continue to claim that Social Security is a dangerous concept and has no place in our society, a far larger number believe that the real danger is that Social Security does not know what its place is. After the broad amendments of 1939, OASDI benefits were not increased for eleven years, but then were increased in 1950, 1952, 1954, and 1958. An overdue earnings base raise from $3,000 to $3,600 was made starting in 1951; it was then raised to $4,200 in 1955, and $4,800 in 1959. Disability benefits were added beginning in 1957. Each session of Congress receives literally hundreds of bills to add new types of coverage and to raise benefits, or both benefits and taxes by raising the earnings base. There is no widely accepted concept as to where

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the federal program should stop and where private employer-employee plans should start. It should be added that there also is no clear concept of where both these arrangements should stop and personal responsibility should start. If it were not for the ease with which the higher ultimate level of cost is passed on to the next generation rather than being paid in taxes now, it would be easier for the American public to decide intelligently how much Social Security is eventually wanted. The deferred and necessarily increasing wage taxes will sooner or later bring home the real cost of the program. But during the interim, basic decisions are being made as to level of benefits and types of coverage to be included in the program, decisions that cannot easily be reversed in the future despite their effect on costs. TIAA-CREF RETIREMENT PLANS As indicated in Chapter II, 474 colleges and universities use annuity contracts of the Teachers Insurance and Annuity Association in funding their retirement plans. In addition, 400 other nonprofit educational institutions, including junior colleges, independent schools, foundations, and scientific and research organizations use these contracts. The development of TIAA from the efforts of the Carnegie Foundation for the Advancement of Teaching is described in Chapter II. Since 1952 the College Retirement Equities Fund ( C R E F ) , operating in conjunction with TIAA, has also become an integral part of college and university retirement planning. CREF and TIAA differ as to their investments and structure of annuity income provisions, but most of their other contract provisions are identical. Any staff member of an eligible educational institution may purchase a TIAA-CREF annuity regardless of whether the college has a TIAA-CREF plan or, if it does, regardless of whether he is yet covered by it. However, the great majority of TIAA-CREF individual annuity contracts are issued to individuals becoming eligible for participation in a college retirement plan. Eligible institutions are limited to nonprofit colleges, universiPARTICIPATION IN TIAA-CREF.

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35

ties, independent schools, foundations, educational associations, and research and scientific organizations. TIAA AND CREF RETIREMENT ANNUITY CONTRACTS. In establishing a TIAA-CREF plan, the resolution passed by the college's governing board determines such things as who participates and when, the contribution rates, and the retirement age. Then, in return for the contributions paid on behalf of the participant, TIAA and CREF enter into a contractual arrangement with him specifying the payment of annuity and death benefits, the income options available, the right of the individual to pay additional premiums, the right to change the date for commencing annuity benefits, and the like. The elements of the annuity contracts that are common to both TIAA and CREF are described below. STAFF MEMBER OWNS CONTRACT. The guarantee of immediate full vesting for each participating staff member is one of the most significant features of the retirement plans using TIAA and CREF annuities. From the day the staff member's first annuity premium is paid he assumes full ownership of all retirement and survivor benefits purchased by his own and his employer's contributions. It is this ownership of the contract that gives the individual the assurance that funds are actually being set aside to support him during his retirement and that no future change of the retirement plan, differences of opinion with an employer, or other such circumstances can deprive him of retirement income already set aside for him. NO CASH OR LOAN VALUE. A S a natural corollary to full vesting, T I A A and CREF annuities do not provide cash surrender or loan values. Employers quite properly would be reluctant to contribute to a fully vested annuity contract that could be turned in for cash or mortgaged at the staff member's request. The institution is assured that the funds it contributes will be used solely for their intended purpose, that of providing retirement income or death benefits for the staff member and his family.2 NO FORFEITURE, NO PENALTIES. Benefits promised in return for premiums already paid are not affected by suspension of premium 2 Within certain rules, small-amount or short-term annuities will be "repurchased" if requested by the individual and approved by the institution.

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payments. Whether premiums are continued or not, whether the policyholder remains in academic work or not, whether the employing institution continues to share in premiums or not—none of these alternatives has any effect on benefits purchased by premiums already paid. DEATH BENEFIT. If the policyholder dies before he begins to receive annuity payments, the full accumulation in the contract is payable to the named beneficiary or to the estate; if to the former, the policyholder may choose among several income payment methods or may leave this choice to be made by the beneficiary. A single-sum payment is available if: (1) the policyholder's estate, or a corporation, association, or partnership is the beneficiary, (2) the beneficiary is other than the policyholder's wife, or (3) the beneficiary is the policyholder's wife and the policyholder dies while he is in the employ of a contributing institution which has agreed to a single-sum settlement for widows. CHOICE OF A RETIREMENT DATE. The policyholder may have annuity payments begin either earlier or later than the time chosen when the contract was issued, but normally not later than age 71. When premium payments cease on the contract or at any later time before age 71, the policyholder may ask that annuity payments begin. Annuity income usually does, but it need not, commence on the normal retirement date specified by the college. The Association's practice is to allow deferment beyond age 71 if employment continues beyond that age. CHOICE OF INCOME ARRANGEMENT. The policyholder may choose among various forms of lifetime income upon retirement—an annuity with all payments ceasing at his death; an annuity under which, if he predeceases a second annuitant, payments will continue in full or in part until the second annuitant's death; or an annuity to continue, as chosen, for ten years, or for twenty years (or, in TIAA only, until the full accumulation at the time of retirement has been paid out) and, if the policyholder is then living, continuing on to the time of his death. Selection among the options may be made at any time before income payments begin. All options provide at least a life income to the policyholder.

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37

PREMIUM PAYMENTS. Each premium on a TIAA retirement annuity purchases a definite, guaranteed annuity benefit at the rates in effect when the premium is paid. Dividends, as declared, purchase additional guaranteed annuity benefits. Each premium on a CREF retirement annuity purchases a definite number of CREF accumulation units. The participant's pro rata share of CREF dividend income purchases additional accumulation units. The total annuity premium remitted by the college for the individual may be applied to a TIAA contract, or one-fourth, one-third, or one-half may be paid to CREF and the balance to TIAA. Policyholders may, if they wish, pay additional annuity premiums to TIAA or to TIAA-CREF on their own, either periodically or as additional single premiums.

COLLEGE RETIREMENT EQUITIES FUND The development of CREF in the early 1950s revolutionized college pension planning and has already had a profound effect on pension concepts throughout the world. The revolution was occasioned by the challenge to traditional pension planning caused by rapid and farreaching economic changes during recent decades. In the years following World War I there were violent economic fluctuations, including those caused by the deepest depression in history, a second world war, and a long period of heavy expenditures for defense. These unsettling developments brought into question the assumption on which all pension planning was based, a stable currency. It became evident that disregard of the factor of inflation in pension planning means that a retired person's income may be subjected to an erosion in purchasing power that could defeat the primary purpose of a retirement program. The United States dollar is now worth less than one-third of what it was in 1900, less than half of what it was in 1940, and has declined in value by about one-sixth since 1950. There has been no period in American history in which there has not been at least one substantial inflation during the fifty- to seventy-year period normally encompassing a man's working and retired lifetime. Even so, the dollar has been one of the most stable of currencies; several curren-

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cies became valueless during the aftermath of both world wars and many depreciated substantially more than the United States dollar. It should be strongly emphasized that there also have been periods when the purchasing power of the currency increased. Such an increase took place in the United States gradually during the entire period from 1869 to 1897. Likewise, the dollar gained about 50 percent in purchasing power between 1920 and 1933. Security in retirement poses a difficult problem when it means providing not only a sufficient annuity income in dollars but also a reasonable income in current purchasing power. Traditional methods of saving for retirement have been effective in providing the dollar income; they have fallen short of the goal of providing a suitable purchasing power protection. When planning for old age income the educator, or for that matter anyone, must seek a method which has the best hope of affording him real security when he can no longer rely on his own efforts to provide a liveable income. At any one time the forces of inflation or the forces of deflation seem to be stronger. But planning for retirement income is a very long-range process. Transitory shifts in the economy are relatively unimportant; the objective must be to provide reasonable security for the retired person regardless of the direction in which the American economy moves. The development of the College Retirement Equities Fund to operate in conjunction with TIAA provides a combined annuity program incorporating this objective. THE COMBINED ANNUITY. A participant in both TIAA and CREF owns two contracts, the TIAA annuity contract providing a fixeddollar annuity income and a CREF certificate providing a variable annuity income. During the participant's working years, the total of his and his employer's annuity premiums is paid partly to TIAA and partly to CREF. The portion paid to CREF may be set at either one-fourth, one-third, or one-half of the total annuity premium. During the course of a participant's working years, the premiums paid to CREF on his behalf are applied month after month, along with the premiums received from other participants, to the purchase of common stocks at their many price levels. Through this common

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39

stock portion of his annuity investments, the individual participates in the long-term growth and experience of the American economy and purchases an annuity income that increases as stock prices and dividends increase, decreases as they decline. Concurrently, the TIAA portion of the annuity premium is invested primarily in bonds and mortgages and provides during retirement a guaranteed fixeddollar annuity income that does not change in amount from year to year, except as increased by dividends. The first three general conclusions of the economic study upon which the development of the combined program was based describe the importance of the combination of fixed and variable components in a sound retirement program: 3 1. It is unwise to commit nil of one's retirement savings to dollar obligations, since decreases in the purchasing power of the dollar can seriously reduce the value of a fixed income annuity. Increases in the purchasing power of the dollar, on the other hand, improve the status of the owner of a fixed income annuity. 2. It is equally unwise to commit all of one's retirement savings to equity investments, since variations in prices of common stocks are much too pronounced to permit full reliance on them for the stable income needed during retirement. Changes in the value of common stocks and other equities are by no means perfectly correlated with cost of living changes, but they have provided a considerably better protection against inflation than have debt obligations. 3. Contributions to a retirement plan that are invested partly in debt obligations and partly in common stocks through an Equities Fund providing lifetime unit annuities offer promise of supplying retirement income that is at once reasonably free from violent fluctuations in amount and from serious depreciation through price level changes. Premiums paid to C R E F , rather than purchasing dollars of guaranteed annuity for the participant, purchase accumulation units representing the individual's share in a broadly diversified common stock fund. The number of accumulation units purchased by each premium depends on the unit value, which is recalculated each month according to the current market ACCUMULATION UNITS.

3 William C. Greenough, A New Approach to Retirement Income (New York: Teachers Insurance and Annuity Association of America, 1951), pp. 13-14.

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price of the securities in the Fund. When common stock prices decline, unit values are lower and a given premium purchases a greater number of accumulation units; when common stock prices are higher, fewer accumulation units are purchased. Dividend income from the common stocks purchases additional accumulation units for each individual according to his proportionate share in the Fund. ANNUITY UNITS. When the participant retires, his accumulation units are converted into a lifetime income consisting of a fixed number of annuity units per month. The number of annuity units to be paid out to the participant each month is determined actuarially when he retires and remains the same as long as he lives.4 The dollar amount he receives changes, however, from year to year, reflecting primarily changes in the market prices and dividends of the common stocks owned by the Fund. Revaluation of the annuity unit occurs only once a year, so that the amount of the retired person's monthly check remains the same for a year's time. The dollar amount received is determined by multiplying the number of annuity units owned by the current value of the annuity unit. The annuity unit value has changed as follows: Annuity Year May-April

Annuity Unit Value

Initial value 1953-54 1954-55 1955-56 1956-57 1957-58 1958-59 1959-60

$10.00 9.46 10.74 14.11 18.51 16.88 16.71 22.03

INVESTMENT PRINCIPLES.

T h e participant's p r e m i u m to

CREF

and his share of dividends are invested as received in carefully selected common stocks. Regular investment of premiums in selected equities month after month, year after year, puts into effect the basic investment principle of diversification over time. Under a program of 4 Cf. Robert M. Duncan, "A Retirement System Granting Unit Annuities and Investing in Equities," Transactions of the Society of Actuaries, IV ( 1 9 5 2 ) , 317-44.

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investing premiums regularly over a staff member's working years, the level of common stock prices at any one time is relatively unimportant. As measured by the number and value of his accumulation or annuity units, this long-term investment program permits the individual to participate in developments in American business and industry that span the economic experience of many years, long after any particular premium payment is made. During retirement this direct participation in the economy continues, and continues throughout the life of a survivor as well if the individual selects a survivor annuity option, in much the manner it did during the accumulation period, except that instead of paying premiums he is receiving a lifetime income. The principle of dollar cost averaging, under which the average cost of the common shares purchased is less than the corresponding average market price per share, is made unusually effective because of the regularity of college employment and salaries, and the resulting regularity of monthly contributions over many years received by the Fund on each individual's behalf. Stock purchases are guided by standards of quality and diversification established and regularly reviewed by the Finance Committee of the CREF Board of Trustees. The industry categories in which investments are made are selected for their importance to the economy and for their better than average long-term prospects. Companies within each industry are selected for their sound management, growth in earnings and dividends, position in the industry, financial strength, research activity, and product development. The Annual Report sent to all CREF participants lists the industries and companies in which the funds are invested. A UNIQUE ORGANIZATION. CREF has been referred to as the most significant development in pension planning since the introduction of group forms of insurance more than forty years ago.6 The main purpose of the development of the combined annuity, which depends in part upon the stability of fixed-dollar investments such as bonds and 5

Joseph B. Maclean, Variable Life Income Certificates, February 26, 1955 (mimeographed). (Address before New York State Life Underwriters Association, Saratoga Springs, New York.)

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mortgages to provide a traditional fixed-dollar annuity, and in part on common stocks and other equity investments to provide the variable annuity, is to give balanced protection to the annuitant, with reasonable income in terms of purchasing power regardless of whether the American economy is experiencing inflation or deflation with resulting fluctuations of purchasing power. In addition, CREF may have another significance to college and university staff members. Unlike business and industrial organizations, colleges cannot establish profit-sharing, bonus, or stock purchase arrangements for staff members, arrangements that permit the individual to share in economic growth. But CREF, by giving the college and its staff members an opportunity to place in equity investments a substantial amount of the funds put aside for retirement, provides such an opportunity to share in the growth of the economy. It is desirable that employees of nonprofit educational organizations utilize sound means of permitting staff members to share in expected increases in the productivity and living standards of the nation. Traditional retirement programs give no such opportunities. The annuity based upon equity investments gives the college professor a unique opportunity to participate over a long period of time in these gains. STATE TEACHER AND PUBLIC EMPLOYEE RETIREMENT SYSTEMS Approximately 65 percent of the publicly supported universities in the United States cover their faculty members under a state teachers retirement system or a state employees retirement system, including municipal plans. All but a few of the state teachers colleges participate in public plans, either for state teachers or public employees. These public retirement systems are operated by agencies of the state or municipal governments. About 25 percent of publicly supported universities use TIAACREF contracts; the majority of the remaining 10 percent operate self-administered retirement plans, either of the funded or nonfunded type. Public employee and state teacher plans as they cover colleges and

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universities are described in Chapter X and the colleges participating in these plans are listed under the accompanying description. Publicly supported institutions of higher education not appearing in these lists are shown in the sections describing the TIAA-CREF or other plan in effect at the public institution for faculty and administrative officers. Of the employees participating in the broadly inclusive state teacher or public employee retirement systems, only a small proportion serve in higher education. Where a state teacher plan covers the faculty in institutions of higher education, the college faculty constitutes a minority of those covered by the plan since the great majority of the members are elementary and secondary school teachers. Where it is the state employee plan in which the college employees have been included, the great majority of members are the state civil service employees. More than one public plan may be in effect on a campus. In some states the faculty members are covered by the state teacher or TIAACREF plan and the nonacademic employees by the public employees plan. Or the teacher plan may cover both the faculty and the nonacademic groups, or it may be the public employee plan that covers all groups. In many states the teacher plan is older than the employee plan and has remained as a separate retirement system; in other states the two plans have merged into one. In a few states the incoming faculty member has an option of joining either the teacher or public employee plan or TIAA-CREF. Participation in public plans is ordinarily a condition of employment and there is usually no waiting period before membership begins. In quite a few states persons initially employed after age 55 are not permitted to join the retirement plan. The retirement date is commonly determined by an age and service formula; often there is provision for early retirement after a specified number of years of service have been completed, with the benefit reduced to account for the age at which retirement actually occurs. The normal retirement age in public plans varies from age 60 to age 72. In the majority of plans, normal retirement is at age 65. Frequently an earlier age is stated for women than for men. Provisions for extensions of service

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beyond the normal retirement age are much less frequently found in public than in private plans. All but one of the public retirement systems covering employees of colleges and universities are contributory, with the employee contribution usually stated as a percentage of salary. This percentage is usually uniform for all participants, but in about 20 percent of the plans the percentage increases for successively higher ages of entry into the plan and is higher for women than for men. As can be noted from the descriptions of the individual plans in Chapter X, many of the plans provide a very good level of retirement benefits. On the other hand, a substantial number of plans establish a ceiling on the salary on which the employee's contribution is made, state a limit to the dollar amount of the employee's annual contribution, or put a ceiling on the retirement benefit. This usually places an unrealistic limit on the retirement benefits of college and university teachers and administrators whose salary scales are usually higher than those of the groups for whom these restrictions are designed. Employer contributions under state plans are sometimes stated as an amount that will match the employee contribution. More often, however, the employer contribution is stated to be such additional contributions as are necessary to provide the benefits under the plan's benefit formula. Frequently the employer contributions necessary to provide the benefits are not actually contributed, or are only partially contributed, until benefit payments for an individual commence. A standard feature of public retirement systems provides for a choice of income arrangement by the employee. The employee may ordinarily choose among three income options: (1) a single life annuity, which provides the largest monthly income and is the amount expressed by the benefit formula; (2) a joint annuity, under which a monthly income is paid to the retired employee as long as he lives and then to a survivor, usually his widow, throughout her lifetime with payments ceasing at her death; and (3) a refund life annuity providing for payments for life to the retired employee and, if he dies before the accumulation of his own contributions has been paid out, payment of such remaining accumulation to his beneficiary.

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EARLY VESTING RARE IN PUBLIC PLANS. At the majority of institutions covered by a public employee or state teacher plan, the staff member who withdraws from service before retirement receives only his own contributions, in cash, usually with interest but occasionally without. It is this provision, limiting to his own contributions the benefit the withdrawing member receives, that causes much of the criticism of public retirement plans as they apply to staff members of colleges and universities. In the past decade a substantial number of public plans have improved somewhat upon this situation by providing an option of vesting of the full retirement accumulation after a stated period of service has been completed. Where this delayed vesting is provided for, it usually takes the form of giving the individual an option to leave his own contributions on deposit and receive a deferred annuity, based on his own and the employer's contributions, beginning not earlier than a specified age such as 55 or 60. But the most frequently stated service period, twenty years, is so long as to limit severely the advantage of this vesting provision. Five public plans have reduced the delay to five years: the Arizona State Retirement System, the California State Teachers' Retirement System, the Colorado Public Employees' Retirement System, the Employees' Retirement System of Hawaii, and the Wyoming Retirement System. The State Teachers Retirement System of Wisconsin provides for immediate full vesting on termination of employment for those who leave their own contributions in the plan and for the receipt of a deferred annuity after age 50.

Compared with the practically universal lack of vesting a decade ago, considerable improvement in vesting provisions in public retirement plans has been made in the last ten years. Despite the improvement, however, most employees who work in state or local government employment must, by and large, still expect to forfeit all employer contributions unless they serve until the date specified for early retirement, or until an age at which they are no longer likely to receive attractive opportunities for change of jobs. State teacher retirement systems provide transferability of service credit among primary and secondary schools within the state's bound-

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ary and may encompass hundreds of schools. Some also give reciprocal rights for public school employment in other states. Such transferability without loss of benefits or of "service credit" is of great advantage to each system as a whole in utilizing personnel. Likewise, it gives the public school teacher considerable freedom and flexibility in following his or her educational career. Thus most public retirement systems meet the needs of elementary and secondary public school teachers, who constitute the majority of members. At the college level, however, the transference of academic talent transcends state boundaries and takes place on a nation-wide scale, encompassing private as well as public colleges and universities and also including many nonprofit research and scientific organizations, foundations, and educational associations. Any retirement system limiting transferability in higher education to within a state's boundary can do little to place the state's publicly supported colleges in the main streams of academic talent. FUNDING OF PUBLIC PLANS. A pension plan is on a fully funded basis if reserves representing service already performed, together with amounts being contributed into the fund yearly on behalf of current service, are sufficient, according to interest, mortality, and expense calculations, to discharge the pension obligations accrued to date. In many state retirement systems, the necessary annual state appropriation to the pension reserve is and has been seriously inadequate. With no annual contributions in some years, and contributions in others below the actuarial requirements, the unfunded accrued liabilities of many state retirement plans have shown continuous increases.6 The factors chiefly responsible for this condition are: (1) benefits tied to unknown future salary levels through "final earnings" or "highest average earnings" retirement benefit formulas; (2) increases in prospective benefits and liberalization of formulas to meet economic changes without appropriate provision for required revenues; (3) upward salary adjustments to meet competitive salary scales and price level increases without corresponding provisions for 6

An excellent article on public pension funds as they cover college and university staff is A. A. Weinberg, "Proper Financing of Pensions," College and University Business, XIV, No. 3 (April, 1953), 23-27.

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funding increases; (4) an unduly large proportion of assets invested in state, local, and federal bonds with consequent low interest earnings; (5) adoption of obsolete and inadequate annuitant mortality tables; and (6) increases in pensions to retired employees without reserve financing. Underfunding of public retirement systems has also been caused, in part, by the frequent governmental practice of failing to include the full pension costs of current service in the current budget. While a division or department of government includes in its budget the cost of personnel service in terms of salary, the financing of the retirement benefits promised for each year of service is passed on and must be placed in future budgets in future years after the present employees have retired and are drawing their pensions. This failure to maintain proper and adequate reserves for public retirement systems undermines the security and stability of personnel, increases the financial difficulties of responsible fiscal officers in years to come, and increases the ultimate cost of the pensions paid because of loss of investment income that otherwise would be earned. THE TAXING POWER. The power to tax and the power of legislative bodies to make appropriations to publicly supported institutions of higher education provides a source of funds for support of pension benefits that is not available generally to the private institutions. In those states that meet their obligations as they accrue year by year through substantial funding of their retirement plans, this standby taxing ability is an additional source of strength and can occasionally be used to increase benefits to persons already retired without serious implications for the long-term soundness of the pension plans. The difficulties arise when the taxing power is used as an excuse to undertax the current generation by not meeting its obligations, thereby putting the burden off to a future time when taxes then will have to be raised in order to meet the prior obligations. In recent years commissions in a number of states have given careful attention to this problem and have been shocked by its implications. The situation in the State of Illinois is certainly no worse than it is in a number of other states, but the Illinois Public Employees Pension Laws Commission which sought to introduce an orderly and

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constructive long-range pension policy designed to rehabilitate pension funds and preserve the integrity of promises made, gave an excellent statement of the problem of huge unfunded liabilities in its report in 1957: 7 The present short sighted policy of considering pension costs on a cash rather than an accrual basis, more than any other single factor, is responsible for this condition. Such a policy is unrealistic, impractical and expensive. It tends toward extravagence and substantial increases in obligations. It also encourages demands for further changes without provision for revenues which are needed to meet the ultimate cost thereof. This financial problem has reached a point where it will no longer respond to half-way solutions. Corrective action is imperative. Such measures must be based on approved financial principles for financing pension obligations. The curtailing of revenues for these funds distorts their true cost and fails to give effect to the principle of budgeting which underlies all other governmental expenditures. There is no reason to believe that benefits earned by employees of publicly supported colleges and universities participating in state employee or state teacher retirement systems will not be paid in good faith in the great majority of cases. However, some unfortunate situations developed in the depression years of the 1930s and two or three additional ones occurred at the time Social Security was extended to state and local employments. Court cases resulting from these occurrences showed clearly that most states can, under their laws and constitutions, change the rules of the pension plan so as to reduce or destroy benefit anticipations. Thus a retirement plan which depends upon future taxing power rather than on sound funding policy for its solvency is not the best assurance to the individual in providing income after retirement. In spite of unsolved problems of insufficient funding in many plans and the forfeitures inflicted on persons who leave or die before their benefits are vested, many publicly administered retirement systems have nevertheless provided good retirement benefits for faithful public employees over the decades. Likewise public employment was far ahead of most industrial and financial organizations in initially recog7 Report of the Illinois Public Employees Pension Laws Commission, 1957, p. 8.

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49

nizing the need to provide some sort of retirement benefits for those who chose the employment as a career. AGENCY LIFE INSURANCE COMPANY PLANS Seven percent of institutions of higher education, employing about six percent of total faculty, currently use agency company contracts as the means of funding their retirement plans. Of the agency plans, thirty-nine are at liberal arts colleges, nineteen are in the technical and theological school group, and twelve are in teachers colleges and public and private universities. A substantial number of the agency company plans have been established at Catholic institutions for the coverage of lay faculty members. In twenty-one of the agency company plans for faculty members the trust agreement or formal statement does not name the company. The other forty-nine plans are distributed among thirty-three companies, with one company having six plans, one having four plans, ten having two plans, and the other nineteen having one plan each. Names of the companies are listed in the plan descriptions beginning on page 380. There are two principal methods of funding retirement plans through agency insurance companies: individual contracts and group annuities. INDIVIDUAL CONTRACTS. Three-fourths of the agency company plans provide for the issuance of individual contracts and for the designation of a trustee that holds title to and possession of the individual contracts issued under the plan. This method is generally referred to as an individual contract pension trust, or simply as a pension trust. The trust function may be performed by a pension committee having permanent status and appointed by the board of trustees, or, more often, by a bank or other fiduciary institution. The provisions of the plan are usually incorporated in a trust agreement and the trustee is charged with the responsibility of administering the plan, subject to the supervision of the college. Under these plans, either the retirement annuity policy or the retirement income policy is used. The retirement annuities of agency companies are generally issued

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only in units of $10 monthly income at retirement, although a few companies provide additional units on a $5 basis. Salary increases are recognized for retirement purposes only when they are large enough to entitle the employee to an additional unit of $5 or $10 of monthly retirement income. When there have been enough increases in compensation to entitle the employee to one or more additional units of retirement income, an additional policy in the appropriate amount is purchased for the employee. Over a period of years, half a dozen or more policies may thus be purchased for an employee. A retirement income policy differs from the retirement annuity policy by incorporating an insurance element at an additional cost. The retirement income policy pays a death benefit before retirement of $1,000 for each $10 unit of monthly income, or pays the cash value— whichever is larger. The excess of the death benefit over the cash value represents the insurance element. The amount of insurance protection therefore decreases as the cash value increases and eventually declines to zero when the cash value equals or exceeds the face amount of the policy. A medical examination is required for staff members taking the retirement income policy; if the staff member is not insurable he is issued a retirement annuity policy. As to purchase of benefits, retirement plans of the colleges using individual annuity policies of agency insurance companies generally follow the money purchase pattern, the standard pattern employed by most United States colleges and universities. The retirement annuity and retirement income contracts issued under the provisions of an agreement between a college and an agency life insurance company are usually the standard contracts available to the public. While the policy provisions are the same, restrictions on the exercise of certain rights in the contract, including vesting of retirement and death benefits and restrictions on cash values, are commonly written into the trust agreement and are administered by the trustee. GROUP ANNUITIES. Under group annuity arrangements a master group contract between the college and the insurance company states the provisions of the retirement plan. The staff member is given a certificate outlining his rights, which are subject to the master con-

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tract. About one-fourth of the colleges using agency company plans have installed group annuity arrangements; group annuities are used mainly in pension plans for industrial workers where transferability among employers has not been an objective. Some educational institutions use group annuities for their nonacademic employees. OTHER PROVISIONS UNDER AGENCY PLANS. Agency companies offer a considerable diversity of retirement income policies, retirement annuity policies, and group annuity arrangements designed for marketing to the general public. There are many provisions, consequently, that do not take into account the objectives a college should incorporate in its retirement plan. Some plans with agency companies include provisions widely accepted among the colleges as sound; others do not. Most of the plans introduce inflexibilities of one kind or another. Automatic adjustment to small salary changes can be made easily under group annuities, not under the individual policies. The age at which income is to commence sometimes cannot be changed once it has been selected; if changeable, it usually can be moved only to an earlier date. Under the group annuity, selection of the income option under which the retirement benefit will be received must normally be made a number of years preceding the retirement date, and cannot be changed at the time retirement occurs without a medical examination. College needs in connection with breaks in compensation payment, such as sabbatical leaves on less than full pay, can be handled under group arrangements. Under agency company individual contracts, however, complex changes and policy reissue may be required unless full premiums are continued. The trust agreement with a fiduciary, often a part of this type of plan, is a superfluous complexity compared with the simpler resolution of the college's board of trustees used for most college plans. One of the inflexibilities affects the institution's retirement age. As can be noted from the description of the plans, several of them do not allow a person to join if he is within ten years of retirement; others will show a retirement age of 65 except for those employed above age 55, in which event retirement occurs ten years after employment. This is a result of a frequently found provision that a contract will not be issued unless it will be in force for at least ten

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years, or, in a few instances, of the use of a unit benefit formula under which costs to the college become excessively high at the older ages. Agency insurance company policies as used by educational institutions tend to follow the industrial pattern of delayed vesting, or of no vesting of accumulated benefits until retirement. The delayed vesting arrangements used in about half of these plans provide for progressive vesting of a proportion of employer contributions after a given number of years' service, often as many as twenty years. Or, after a period of ten or more years' service, vesting of employer contributions may be stated as 50 percent, with yearly 5 percent increases until 100 perccnt is reached. Approximately one-fourth of the agency company plans do not vest the employer contribution in the individual until retirement; another one-fourth vest immediately. Quite frequently the death benefit is limited to an amount approximating the employee's own contributions, with or without interest, although this limitation may be partially offset by a group life insurance plan or the insurance element of the retirement income policy. Lack of immediate vesting of death and retirement benefits is not an inherent defect of agency plans; it can be corrected and a number of colleges do provide vesting with such contracts, though careful legal arrangements are needed to control the cash values during employment and at employment's cessation. Some colleges with agency plans, in order to allow their staff members to participate in C R E F , have since 1952 offered TIAA-CREF contracts to new employees and have given present employees a choice of continuing in the agency plan or taking a paid-up agency contract and subsequently participating in TIAA-CREF. C H U R C H PLANS Approximately 6 percent of institutions of higher education, employing 2.4 percent of total faculty, use the retirement plans which have been developed by religious groups for ministers and religious workers. Most of these plans, fifty-six out of fifty-nine, are in effect in liberal arts colleges and theological schools. Use of a denomina-

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tional plan usually coincides with an unusually close association between the college and the church, existence of a long-standing retirement plan for ministers of the church, a fairly small proportion of lay staff members, or with combinations of these factors. Descriptions of each denominational retirement plan begin on page 424 and include a list of the colleges participating in each plan. Denominational retirement plans are generally administered by organizations created by authority of the parent church and operated in close association with the church. For the most part, college staff members eligible to participate in such plans constitute a relatively small group when compared with the ministers, missionaries, and other religious workers for whom the plan was established. Sometimes only the members of one department, the department of religion or theology, are covered. Church plans frequently incorporate "packages" of benefits including not only retirement and death benefits, but also survivor benefits based on the number of children, and benefits for disability that go well beyond payment of an actuarial equivalent of earned retirement benefits. Retirement benefits under some of the church plans tend to be lower than in the plans used generally by colleges, partly as a result of the wider range of benefits provided from the joint contributions. Most church plans are contributory. Likewise, they are reasonably well funded, considering the indefiniteness of some of their obligations, and some are able to call on their congregations for additional support. Upon withdrawal from denominational service before retirement, the employee normally receives only his own contributions, if any, with or without interest. Although the extension of Social Security coverage to ministers has been halting and under a diversity of rules, most ministers employed by colleges are now under the federal program. Until a dozen years ago the lay faculty members at many denominational colleges and universities were generally overlooked in retirement arrangements. As the proportion of lay staff to clergy increased, the problem became more visible, and one of the rapid postwar developments has been the installation of retirement plans for lay faculty. Sometimes they were brought under the denominational

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plan; much more frequently separate plans covering the lay staff have been set up with T I A A - C R E F , or in several instances with agency companies. Where lay staff members are eligible for the denominational plan, an option to participate in T I A A - C R E F is frequently provided. S E L F - A D M I N I S T E R E D PLANS Quite different sorts of retirement plans—fully funded, partially funded, and nonfunded—are here classified together as "self-administered" plans. It is impossible to classify each plan precisely among the various types: the soundly financed and fully funded arrangements, those partially funded, those that collect and invest only the employee contributions, those that do no funding but are systematic in payment of benefits, and the informal arrangements paying discretionary benefits out of current budget. This group of twenty-six plans, classified as self-administered, accounts for 3 percent of the retirement plans in higher education, employing 8 percent of total faculty. Publicly supported universities account for seven of these plans and 63 percent of the staff members covered, and include the state universities in California, Kansas, Kentucky, Louisiana, Missouri, and Nebraska. The two large private institutions are the Massachusetts Institute of Technology and, for part of its staff, Harvard University, which offers its faculty the choice between its own plan and participation in TIAA or in TIAA-CREF. The self-administered plans are described beginning on page 412. Under a self-funded plan, it is the employer alone, or the employer in association with a trustee, who is responsible for the investment of funds, accumulation of earnings, and payment of benefits to eligible employees. Where a trustee handles the investment and custody of funds, the payment of benefits to eligible persons, or both, the plan operates under a trust agreement between the college and the trustee. Whether or not there is a trustee, however, the college is responsible for the proper assumptions as to mortality, earnings, and expenses. SELF-FUNDED PLANS.

Few colleges have undertaken the responsibilities of self-administration. Even the largest of educational institutions cannot realisti-

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cally expect average mortality experience for its limited group of people who are actually retired when compared with the substantial groups on which mortality statistics are based. Real risks and substantial sums of money are involved; lack of predictability and fluctuations within a necessarily limited group may well influence the stability of the fund. Self-administered plans put the college in the annuity business. In addition to desiring to avoid the assumption of mortality risks for limited groups, colleges have shown themselves reluctant to add the other aspects of annuity administration to the functions of the institution. It is difficult and expensive to support a small-scale operation that is highly technical in many of its aspects— special facilities for actuarial calculations (this can be contracted for), record keeping, accounting, provision for selection and administration of settlement options, issuance of contracts, locating of beneficiaries, tax calculations, monthly check payments for benefits, and the other operations that are required. Even in the matter of investments, in which some colleges have great experience, it is generally recognized that the accumulation of funds on behalf of individual faculty members saving as a group over many working years and the pay-out of retirement income as an annuity over many years involve different investment objectives from those indicated for regular endowment funds. Each of the self-administered faculty retirement plans provides fixed-dollar, not variable, annuity benefits to participants, so it is the college, not the staff member, that participates in any advantages of common stock performance. The following statement made by a large university when it closed out its old self-funded retirement plan during the depression of the 1930s provides a clear comment on some of the problems of selffunding: [The governing board] has become firmly convinced that if the University continues to manage them (the pension reserve funds) it may subject both itself and the participants to serious loss, and that the management should be placed in the hands of an insurance company. Briefly, the risks to the University are found primarily in the fact that if, at a time when the reserves had matured in size, it was obliged by legislation or otherwise to divest itself of the management of them when its invest-

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meats were depreciated, its general funds would have to be heavily drawn upon to meet its contractual obligation to the reserves. Any administrative changes which now might be made to minimize this risk would tend to wipe out whatever advantage in interest rates may be expected to accrue from management by the University, and indirectly to emphasize the conclusion that the investment of such reserves is not an appropriate responsibility either in terms of the investment practice of the University or in terms of its corporate functions. NONFUNDED PLANS. These plans vary from informal statements of a hope to pay pensions of unstated amounts upon retirement to formalized plans holding out the expectation of a definite income at retirement even though separate funds are not held for their support. Most institutions that have nonfunded plans indicate dissatisfaction with them. The problem confronting the several state universities having such plans has been the difficulty of convincing the legislators and others that sufficient funds should be provided to permit the installation of a funded retirement arrangement. The major operational problems voiced by administrators of institutions with nonfunded plans have to do with varying budget costs, year by year, since retirements do not occur evenly and mortality fluctuations can be fairly severe. Since neither the institution nor the individual has contributed to the cost ahead of time, all interest earnings during the working years have been lost and, moreover, no funds have been accumulated from individual contributions. Some administrators discuss with obvious irritation the fact that the nonfunded plan not only requires heavy and unpredictable expenditures, but also that it arouses very little appreciation from prospective or present staff members. Such a plan is not taken too seriously by prospective pension recipients, partly because they must remain at the college until retirement if any benefit is to be received, partly because they realize that financial changes in the college budget or attitudes in the legislature might cause discontinuance or revision of the plan, and partly because under a few plans the amounts to be paid upon retirement are indefinite. While the costs of transition have delayed some institutions in moving toward funding, many have made the step during the last ten years as is shown by the decreasing number of nonfunded plans.

CHAPTER IV

PROVISIONS OF COLLEGE RETIREMENT PLANS

PLANNING a college retirement system requires careful thought by college officials, representative members of the faculty, and the college board of trustees, who are acquainted with the educational objectives of the institution and with the system of higher education as a whole. The half-dozen important decisions to be made by the college as to provisions of the plan are not of a highly technical nature. A knowledge of the niceties of actuarial science and annuities is not necessary. The decisions have to do with college objectives and administration, and should be made by the college itself. A list of the provisions regarding which decisions must be made will illustrate: 1. 2. 3. 4.

Who shall participate in the plan. When shall participation begin. When shall retirement occur. How much shall be contributed toward the plan by the participant and the institution. 5. What benefits should be established in recognition of service performed prior to establishment of the plan. The first three provisions and vesting of benefits are discussed in this chapter and adequate benefits and methods of financing them are discussed in Chapter V. These provisions are not merely incidental to the goal of assuring a satisfactory retirement income; they are essentials in that purpose and in the broader objective of contributing to the welfare of the college, its staff members, and its students. The plan will provide greatest advantages if decisions are made carefully and, once made, are reviewed and reconsidered from time to time. Some one person

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or group of persons—the president, the business officer, or a committee of the faculty or board of trustees—should accept continuing responsibility for analyzing the objectives of the college and fitting the retirement plan to changing needs. It is interesting to note that one-fourth of the colleges indicated on the current questionnaire that a committee or group was currently studying some revision or other in the retirement plan. In making these important decisions some institutions have accepted, without due consideration, the advice of an insurance agent, pension consultant, or consulting actuary. Though acting in good faith, these specialists may well do much more harm than good if they recommend provisions borrowed from types of plans that are inappropriate for colleges. Their experience with respect to industrial plans often makes difficult a clear view of the differing objectives that must be applied to college plans. On the other hand, many consulting actuaries and insurance men, especially those who are members of college boards, press most strongly for plans providing free mobility of academic talent and for the other essentials of a good college plan. It requires tact and discretion for a college officer, a faculty committee, and members of the board of trustees to determine whether interested persons are acting from selfish motives, lack of understanding of the factors involved in college plans, or from a full comprehension and a sincere desire to improve educational standards. Enough has been said to illustrate the fact that a college's retirement system must be carefully constructed if it is to operate to the greatest advantage of the college. Unfortunate indeed is the college that finds itself handicapped in attracting and holding competent men and women and unable to get rid of mediocre ones simply because it paid too little attention to the provisions of its retirement system. CLASSES OF EMPLOYEES COVERED. All persons for whom the institution may reasonably feel a responsibility in retirement should be covered by a retirement plan. In early college retirement plans, faculty and administrative officers were normally the only employees included. As indicated in Table 7, over half of the institutions today include substantially all employees in their retirement plans.

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Table 7. CLASSES OF EMPLOYEES COVERED BY RETIREMENT PLAN, FOUR-YEAR INSTITUTIONS OF HIGHER EDUCATION Substantially All Employees Faculty, Administrative Officers, Clerical and Secretarial Faculty and Administrative Officers Faculty Only No Answer as to Classes Covered Total

Institutions 501

Percent 53.3

115 246 63 16

12.2 26.1 6.7 1.7

941

100.0

Since the patterns of employment for nonacademic personnel are not the same as those of the professional personnel, certain special provisions in retirement planning for nonacademic staff members usually take account of this fact. Professional staff members are recruited from other educational institutions, government, research organizations, business, and from graduate schools throughout the the country, while the nonacademic employees generally come from the local labor market. A separate section at the end of this chapter is devoted to discussion of retirement provisions adapted to nonacademic employment. Most colleges exclude part-time and definitely temporary employees. There is little reason for including temporary employees unless some are so classified for too long a period. Whether to include part-time employees depends largely on their permanence and on the local situation. PARTICIPATION. During a major portion of an individual's working years participation in a retirement plan should be a condition of employment. Participation may be optional at ages under 30, and during a stated initial service period of from one to three years. A college may also wish to make participation optional for all those in service when a plan is first established. Except for these modifications, participation should be compulsory. The experience of colleges with no retirement plans or with voluntary plans has shown that it is wishful thinking to believe that all or even a substantial portion of college staff members will make adequate provision for their old age if left to their own devices. Few

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people realize the large sums of money that must be saved during working years in order to provide an adequate income during the rather considerable number of retirement years that lie ahead. Perhaps some only remember the frequently repeated statement that the life span from birth in America is now about 67 years for men and 74 years for women. They are not so often told that men who have already reached age 65 have a life expectancy of some 15 years beyond that age, women about 19 years, and that either could live to well over age 90. Under present annuity rates a capital sum of almost $33,000 is needed at age 65 to purchase an annuity income of $200 a month for the rest of a man's life. It takes about $39,000 to provide the same benefit for a woman. The size of the sum necessary to provide a $200 monthly annuity is not generally appreciated, nor is the improbability of saving an adequate amount independently out of college salaries usually comprehended by the individual, particularly at the younger ages. If interest alone is to be used to provide an income of $200 a month, then a capital sum of $80,000 is needed, assuming a 3 percent rate of interest. Nor will a specified number of dollars saved by the time of retirement necessarily do the job. The purchasing power of a dollar 30 years or so in the future is difficult to predict, but substantial inflation or even a small annual inflation over a long period could seriously diminish the anticipated real value of funds set aside for retirement. Combining fixed-dollar and equity investments to provide an income giving satisfactory purchasing power over retired years is a task to be accomplished within the retirement plan, not one the college can leave to the individual. The employing institution has a stronger interest in sound provisions for participation in the retirement plan than does any individual staff member. The college undertakes to pay premiums on annuities in the assurance that its employees will do likewise, and that when retirement age arrives a change to an adequate annuity income may be made easily. Under a voluntary retirement plan, in which the staff member can join or stay out, as he wishes, a college may make substantial outlays and yet may not solve the re-

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tirement problem. It is not merely theory that the very persons who lack the determination to save are among the ones who will not join a voluntary plan. Staff members who may be the most valuable to the college during their productive years, well liked and highly regarded by students, alumni, and faculty, may, if left to their own devices, reach retirement age without funds. The college may find itself accused of cruelty if it parts with them at retirement without providing them an income during their remaining years. Yet to keep a staff member in service after he should be retired is a hindrance to students and colleagues, and is unfair to those who do participate in the plan and are retired at the expected age. If an emergency free pension is granted to the improvident staff member, it may relieve his problems, but it again is unfair to persons who have over the years shared the cost of their retirement plan with the college, and it establishes an unfortunate precedent. Does a signed waiver for the record protect the college from the gaps in its retirement planning created by those who fail to participate under a voluntary plan? College officials who have had experience with this say that a waiver signed many years before provides scant surcease from embarrassment on the part of the college when a staff member must be retired without adequate income. When a new plan is installed, it may be considered impractical to require participation of employees who have worked at the college for some years and whose employment understanding has never included participation in a retirement plan. In this event, it is sometimes provided that participation will be required as soon as they receive an increase either in rank or salary. Or participation is made voluntary until a certain date in the future, usually one or two years after the inauguration of the plan, after which date all eligible persons must participate. If past service benefits are being provided they are sometimes made contingent on participation in the new plan providing the current service benefits. WAITING PERIOD. Participation in the retirement plan should begin at about the same time the individual is really launched on his career. Most college retirement plans, except public employee and

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state teacher systems, specify a waiting period before participation begins, usually one, two, or three years of employment with the college. In many institutions there is an additional provision that the individual must also have attained the age of 30. The AAUP-AAC Statement of Principles recommends that the age fixed for participation be not later than 30. The waiting period allows for the fact that the first year or two of service, or employment before age 30, covers the years when newly hired staff members are on probation and are making some tentative decisions regarding their career and the type of employer they wish to work for. Likewise, the college is looking them over to see whether to encourage them to stay. A number of institutions provide for voluntary participation in the plan before the individual has completed the waiting period. An opportunity for early voluntary participation seems to result generally in participation being chosen only by those who have a professional attitude toward college employment and a farsighted one regarding their own affairs, and these are likely to be the persons the employer is most anxious to develop. Regardless of the established waiting period, many colleges have found it advantageous to permit immediate participation for staff members employed at ranks above that of instructor, for those who are over the age of 30, and for those who bring with them approved annuity contracts started elsewhere. A waiting period should not be so long as to unduly delay entrance into the plan. It is important that those who have reached an age at which their academic career has definitely begun should participate in the retirement plan as early as practicable in order to spread the cost of accumulating retirement income for them and to take the maximum advantage of the interest earnings and the performance of investments represented in the accumulation. R E T I R E M E N T AGE. At what age should a college retire its staff members? As in other matters of human relations, there is no formula that will deal equitably with all persons concerned. Perhaps sometime we shall have developed yardsticks to measure physiological age as nicely as we now measure chronological age, to measure

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the intangibles of mental elasticity, artistic and scientific awareness, sensitivity to the problems of youth, and the variety of capacities that make up the good teacher; but as yet we have no such tests as criteria for retirement. The judgment of the staff member about his own capacities will often differ from that of his students, colleagues, or superiors. While this tends to be true at any age, it seems to be an especially critical problem at the upper ages. All of us can think of exceptional men and women in public life and among our own friends who have retained striking intellectual vigor well beyond the age of normal retirement. Perhaps, however, the conspicuousness of these exceptions merely supports the generally held conclusion that the ravages of time take their toll of most men in their middle 60s or early 70s. In recent years a great deal has appeared in the public press in criticism of compulsory retirement ages. Reference is made to the losses in productive manpower, both mental and physical, occasioned by fixed retirement ages. The emphasis of most of this material is that a man ought to be allowed to draw his full pay check as long as he wants to do so. Little attention is given to the needs and the problems of the employer and to the broader public to whom the employer looks for general support and to whom he is responsible. The question of a proper age for retirement at colleges and universities actually seems to span only about five years. As is noted in Table 8 the vast majority of colleges uses some age from 65 to 70. While 60 percent of the colleges use age 65 as the normal retirement age, four-fifths of these permit extensions in service, mostly to age 70. In all the colleges for which retirement ages were given, 80 percent permit extensions to some higher age, thus showing a rather considerable flexibility. About three-fourths of the institutions permitting extensions continue the retirement annuity contributions during the period of extended service. To this flexibility through extensions of service should be added an effort in the college world that is rarely found in other employments. This is the willingness to employ persons retired from other institutions. About half of the responding institutions make a practice of employing retired people. Table 9 shows their distribution accord-

RETIREMENT PROVISIONS

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