From the Roman Empire to the rise of the early-modern nation state, rulers and legislatures have provided pensions for the workers who administered public programs.
Military pensions, in particular, have a long history, and they have often been used as a key element to attract, retain, and motivate military personnel. In the United States, pensions for disabled and retired military personnel predate the signing of the U.
Like military pensions, pensions for loyal civil servants date back centuries. Prior to the nineteenth century, however, these pensions were typically handed out on a case-by-case basis; except for the military, there were few if any retirement plans or systems with well-defined rules for qualification, contributions, funding, and so forth.
Most European countries maintained some type of formal pension system for their public sector workers by the late nineteenth century.
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Although a few U. Teachers, firefighters, and police officers were typically the first non-military workers to receive a retirement plan as part of their compensation. Bypension coverage in the public sector was relatively widespread in the United States, with all federal workers being covered by a pension and an increasing share of state and local employees included in pension plans. In contrast, pension coverage in the private sector during the first three decades of the twentieth century remained very low, perhaps as low as 10 to 12 percent of the labor force Clark, Craig, and Wilson Even today, pension coverage is much higher in the public sector than it is in the private sector.
Over 90 percent of public sector workers are covered by an employer-provided pension plan, whereas only about half of the private sector work force is covered Employee Benefit Research Institute In the United States, for example, the initial army and navy pension systems were primarily disability plans.
However, disability was often liberally defined and included superannuation or the inability to perform regular duties due to infirmities associated with old age.
In fact, every disability plan created for U. Almost from its founding, the Roman Republic offered pensions to its successful military personnel; however, these payments, which often took the form of land or special appropriations, were generally ad hoc and typically based on the machinations of influential political cliques. As a result, on more than one occasion, a pension served as little more than a bribe to incite soldiers to serve as the personal troops of the politicians who secured the pension.
After establishing the Empire, Augustus, who knew a thing or two about the politics and economics of military issues, created a formal pension plan 13 BC: Veteran legionnaires were to receive a pension upon the completion of sixteen years in a legion and four years in the military reserves. Although the length of service was also increased from sixteen years on active duty to twenty and five years in the reservesthe pension system was explicitly funded through a five percent tax on inheritances and a one percent tax on all transactions conducted through auctions — essentially a sales tax.
Retiring legionnaires were to receive 3, denarii; centurions received considerably larger stipends Crook In the first century AD, a lump-sum payment of 3, denarii would have represented a substantial amount of money — at least by working class standards. Curiously, the basic parameters of the Augustan pension system look much like those of modern public sector pension plans.
Early-modern Europe The Roman pension system collapsed, or perhaps withered away is the better term, with Rome itself, and for nearly a thousand years military service throughout Western Civilization was based on personal allegiance within a feudal hierarchy. During the Middle Ages, there were no military pensions strictly comparable to the Roman system, but with the establishment of the nation state came the reemergence of standing armies led by professional soldiers.
Like the legions of Imperial Rome, these armies owed their allegiance to a state rather than to a person. The establishment of standardized systems of military pensions followed very shortly thereafter, beginning as early as the sixteenth century in England. These pensions were nominally disability payments not retirement pensions, though governments often awarded the latter on a case-by-case basis, and by the eighteenth century all of the other early-modern Great Powers — France, Austria, Spain, and Prussia — maintained some type of military pensions for their officer castes.
These public pensions were not universally popular.
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Indeed, they were often viewed as little more than spoils. By the early nineteenth century, Britain, France, Prussia, and Spain all had formal retirement plans for their military personnel. This was fairly lucrative compared to the annuities received by their continental counterparts. During the Revolutionary War the colonies extended this coverage to the members of their militias. Several colonies maintained navies, and they also offered pensions to their naval personnel.
Independent of the actions of the colonial legislatures, the Continental Congress established pensions for its army and naval forces Revolutionary War Era Although initially these were all strictly disability plans, in order to keep the troops in the field during the crucial months leading up to the Battle of YorktownCongress authorized the payment of a life annuity, equal to one-half base pay, to all officers remaining in the service for the duration of the Revolution.
Ultimately, the leaders of the disgruntled officers met at Newburgh, New York and pressed their demands on Congress, and in the spring ofCongress converted the life annuities to a fixed-term payment equal to full pay for five years. Even these more limited obligations were not fully paid to qualifying veterans, and only the direct intervention of George Washington defused a potential coup Ferguson ; Middlekauff The Treaty of Paris was signed in September ofand the Continental Army was furloughed shortly thereafter.
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Although every one of those plans was initially a disability plan, they were all eventually converted into an old-age pension plan — though this conversion often took a long time. The Revolutionary War plan became a general retirement plan in — 49 years after the Treaty of Paris ended the war. At that time every surviving veteran of the Revolutionary War received a pension equal to percent of his base pay at the end of the war.
Similarly, it was 56 years after the War ofbefore survivors of that war were given retirement pensions. This was substantially less than a prime farmhand could expect to earn and a pittance compared to that of, say, a British officer.
Prior to the onset of the War ofCongress supplemented these disability and severance packages with a type of retirement pension. If he was killed in action or died in the service, his widow or heir s would receive the same benefit.
This was an ungenerous settlement by almost any standard. Of course in a nation of small farmers, a acres might have represented a good start for a young cash-poor farmhand just out of the army. Seeking the power to cull the active list of officers, the Lincoln administration persuaded Congress to pass the first general army retirement law. All officers could apply for retirement after 40 years of service, and a formal retirement board could retire any officer after 40 years of service who was deemed incapable of field service.
There was a limit put on the number of officers who could be retired in this manner. Congress amended the law several times over the next few decades, with the key changes coming in and Taken together, these acts established 30 years as the minimum service requirement, 75 percent of base pay as the standard pension, and age 64 as the mandatory retirement age. As such, he was to receive a retirement benefit equal to 2. Although the maximum was reduced to 60 percent init was subsequently increased back to 75 percent, and the service requirement was reduced to 20 years.
As such, this remains the basic plan for military personnel to this day Hustead and Hustead Except for the disability plans that were eventually converted to old-page pensions, prior to the army retirement plan was only available to commissioned officers; however, in that year Congress created the first systematic retirement plan for enlisted personnel in the U.
With the subsequent reduction in the minimum service requirement to 20 years, the enlisted plan merged with that for officers. Naval Pensions Until after World War I, the army and the navy maintained separate pension plans for their officers.
The Continental Navy created a pension plan for its officers and seamen ineven before an army plan was established. In the following year the navy plan was merged with the first army pension plan, and it too was eventually converted to a retirement plan for surviving veterans in Except for the eventual conversion of the war pensions to retirement plans, there was no formal retirement plan for naval personnel until In that year Congress created a review board composed of five officers from each of the following ranks: The board was to identify superannuated officers or those generally found to be unfit for service, and at the discretion of the Secretary of the Navy, the officers were to be placed on the reserve list at half-pay subject to the approval of the President.
Before the plan had much impact the Civil War intervened, and in Congress established the essential features of the navy retirement plan, which were to remain in effect throughout the rest of the century. Like the army plan, retirement could occur through one of two ways: Either a retirement board could find the officer incapable of continuing on active duty, or after 40 years of service an officer could apply for retirement.
In either case, officers on the retired list remained subject to recall; they were entitled to wear their uniforms; they were subject to the Articles of War and courts-martial; and they received 75 percent of their base pay.
However, just as with the army certain constraints on the length of the retired list limited the effectiveness of the act. Inlargely at the urging of then Assistant Secretary of the Navy Theodore Roosevelt, the navy adopted a rather Byzantine scheme for identifying and forcibly retiring officers deemed unfit to continue on active duty. Officers could avoid the ignominy of forced retirement by volunteering to retire, and there was a ceiling on the number who could be retired by the boards.
In addition, all officers retired under this plan were to receive 75 percent of the sea pay of the next rank above that which they held at the time of retirement. This last feature was amended inand officers simply received three-fourths of the pay of the rank in which they retired. Still, the navy continued to struggle with its superannuated officers.
InCongress finally granted naval officers the right to retire voluntarily at 75 percent of the active-duty pay upon the completion of 30 years of service.
There were four basic components that differentiated the new navy pension plan from earlier ones. First, promotion to the ranks of rear admiral, captain, and commander were based on the recommendations of a promotion board. Prior to that time, promotions were based solely on seniority. Second, the officers on the active list were to be distributed among the ranks according to percentages that were not to exceed certain limits; thus, there was a limit placed on the number of officers who could be promoted to a certain rank.
Third, age limits were placed on officers in each grade. Officers who obtained a certain age in a certain rank were retired with their pay equal to 2. For example, a commander who reached age 50 and who had not been selected for promotion to captain, would be placed on the retired list. If he had served 25 years, then he would receive Finally, the act also imposed the same mandatory retirement provision on naval personnel as the amended in act imposed on army personnel, with age 64 being established as the universal age of retirement in the armed forces of the United States.
These plans applied to naval officers only; however, in Congress authorized the retirement of seamen and marines who had served 20 or more years and who had become infirm as a result of old-age.
These veterans would receive one-half their base pay for life. Inthe retirement act ofwhich covered enlisted army personnel, was extended to enlisted navy personnel, with a few minor differences, which were eliminated in Military Pensions The history of pensions, particularly public sector pensions, cannot be easily separated from the history of pension finance. The creation of a pension plan coincides with the simultaneous creation of pension liabilities, and the parameters of the plan establish the size and the timing of those liabilities.
Thus army pensions have always been simply one more liability of the federal government. Despite the occasional accounting gimmick, the general revenues and obligations of the federal government are highly fungible, and so discussing the actuarial properties of the U. Army pension plan is like discussing the actuarial properties of the Department of Agriculture or the salaries of F.
However, until well into the twentieth century, this was not the case with navy pensions. To manage these monies, the Continental Congress and later the U. Congress established the navy pension fund and allowed the trustees of this fund to invest the monies in a wide range of assets, including private equities. The history of the management of this pension fund illustrates many of the problems that can arise when public pension monies are used to purchase private assets.
In addition there is evidence of gross malfeasance on the part of the agents of the fund, including trading on their on accounts, insider trading, and outright fraud. Excluding a brief interlude just prior to the Civil War, the navy pension fund had a colorful history, lasting nearly one hundred and fifty years. Between its establishment in andit went bankrupt no less than three times, being bailed out by Congress each time.
Bythere was little opportunity to continue to replenish the fund with fresh prize monies, and Congress, temporarily as it turned out, converted the navy pensions to a pay-as-you-go system, like army pensions.