a net return to the government. How much, then, can the government earn on these loans to it? If at any time the government does not need to borrow these sums, or any part of them, how can it be said to have any use whatever for them? Even assuming that the government should need to borrow these amounts of money, it can only save what it would have to pay, were it to borrow equal amounts on its bonds in the open market. In other words, it can afford to pay as much interest to its employees as to other lenders. The proposed plan, once inaugurated, will outlast all who are now living and who shall say what rate or rates of interest the United States will pay on the money it borrows during this long period?

Let us assume that in the long run the United States government may have to pay as much as 2%. () Taking the illustration furnished by the Sub-committee, a person entering the service at the age of twenty and receiving a salary of $1,200 a year till the age of 70 would be entitled to a pension of $900 a year, which would cost $6,678, or to that sum in cash. To furnish this $6,678, $3.57 monthly or $42.84 a year is taken from his salary, amounting in all to $2,142 in the course of fifty years. As calculated by the actuaries employed by the Sub-committee, the interest on these monthly loans at 4%, compounded annually, amounts to $4,536. Interest at 2% for the same period, compounded annually, would amount to only $1,430. The cost therefore to the taxpayer for this one annuity, above what the government would be paying in case it should need to borrow, is $3,106. If the government does not need to be a borrower during any of the period, then the cost to the taxpayer of such annuity is $4,536.

Now, how many such cases are there likely to be? As to those already in the service, their ages are ascertained, and it can be calculated on life tables how many will arrive at the age of 70; but even as to them, no one knows how many will resign or be removed before that age; and as to those entering the service hereafter, there

(2) At present it is paying less than 2 per cent.

.

is the further difficulty that their ages are unknown. It is, therefore, impossible to calculate exactly what this cost will be. (") We know, however, that there are 184,178 in the competitive, classified service now and that it is growing at the rate of over 14,000 a year. (") It will not be long, at the present rate of increase, before the competitive service alone will reach 250,000. In the practical working out of this plan there are other incalculable factors of expense. The plan applies not only to those actually in the service at any given time, but to all persons who for no matter how short a period have been in the service after the plan goes into effect.

To give a general idea of how much these payments of interest of one kind or another may cost the taxpayer under the proposed plan, let us put it in this way. Every time the government shall have complied with the requirements of the Keep Sub-committee plan in a sufficient number of cases (through employees reaching the retiring age or being separated from the service for any reason before that age) to make them equivalent to the settlement of the demands of 100,000 employees as set forth in the Sub-committee's typical illustration, the taxpayer will have paid as a bonus or gratuity the huge sum of $310.600,000 in excess of the cost on the 2% compound interest basis, of borrowing the same amount of money from others than its own employees; and should it not need to be a borrower the cost to the taxpayer would be $465,980,000. In comparison with these enormous amounts, the fifty or sixty million gratuity referred to in the report with so much emphasis, is a very insignifi

cant matter.

Added Expense.

But this is not the only expense in the way of higi rates of interest. The retiring employees at the age of (") Compound interest during two periods of 25 years each, for example, is less than during one period of 50 years on the same sum and at the same rate. Therefore, resignations and removals tend to reduce the amount of compound interest.

(1) See 22nd Report, U. S. Civil Service Commission, p. 138, and 23rd Report, p. 13.

70, as well as certain others who may be separated from the service as above explained, have under the Sub-committee's plan a right to an annuity based upon the annuities that insurance companies can pay. Those insurance companies now earn net compound interest at 4%, and they calculate that they can with certainty earn, for long periods in the future, at 3% net, while the government earns nothing and can borrow at 2%. Now, by the plan of the Sub-committee of the Keep Commission, as already stated, annuities might be claimed, not only by those who have arrived at the age of 70, not only in the case of railway mail clerks and letter carriers, on account of the more strenuous demands on their physical strength at the age of 60 or 65, but by any one who has been twenty years in the service, and whose forced loans to the government at 4% compound interest, amount to $1,000. Therefore the government may be paying annuities to persons in the prime of life, no longer in its service, the annuities to be kept up during the rest of their earthly existence, and all on a higher basis of interest than the government can borrow money.

Thus the government acts, under the proposed plan, first as a savings bank for its employees, paying far higher rates of interest than it pays for money it borrows from outsiders and then as an insurance company, issuing annuities based on a greater rate of interest than any possible income on savings from withholding a part of its pay roll. This loss as a savings bank has been mentioned in the Sub-committee's report as a casual matter, hardly worth consideration and its loss as an insurance company has been altogether overlooked. Yet these losses are serious, the savings bank loss alone running up, as already stated, into the hundreds of millions.

It is clear from the above estimates of cost that the indirect gratuities in the way of high rates of interest will many times exceed the total saving from getting rid of the inefficient superannuated.

Minor Criticism.

Apart from the main criticism of the great cost of the huge indirect gratuity to its employees by paying

them higher rates of interest than the government pays to others, there are several relatively minor, but very important criticisms to the Keep Sub-committee plan. For example, why is the direct gratuity of the government to its present employees based upon the average salary of the last ten years instead of the salary actually received during employment? To illustrate, suppose a public servant to have been fifteen years in the service, that, during the first five years, his salary was $700 and for the last ten years had averaged $1,300. Why should the gratuity be based on $1,300 a year instead of ou $1,100, especially when everywhere else in the plan the annuities of the employees, both those now in the service and those entering hereafter, are based upon actual salaries received?

THE AUSTRALIAN SYSTEM RECOMMENDED AGAIN.

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In view of these various considerations again recommend most emphatically, should any provision for old age pensions be deemed necessary, the Australian system of requiring employees to take out deferred annuities in solvent insurance companies, engaged in the annuity business, which can earn fair rates of compound interest on safe investment of the sums paid them, instead of making the government a combined savings bank and insurance company, at an enormous loss, as in the proposed plan of the Keep SubCommittee.

Not Arbitrary.

The Australian method, which we have recommended is criticised by the Sub-committee of the Keep Commit tee as "forcing employees to purchase annuities from insurance companies under arbitrary conditions, and at prices that might be exorbitant." The conditions need be no more arbitrary than those contained in the plan of the Keep Sub-committee, which would have the United States government act as the insurance company. In our report issued in 1901, we suggested several optional forms of insurance, of which the employee might

avail himself. In our report of 1906, we referred only to the cheapest and most essential form, without by any means limiting it to that form alone.

Cost to Employees Commercially Reasonable.

The more serious objection that the price might be exorbitant leads us to enlarge on some ideas we only suggested in our last report. No small part of the cost of insurance, arises from the solicitation of agents, the advertisements, the persuading people that it is to their interest to insure, and the collection of the premiums. All of these heavy items of cost would be eliminated if the Australian plan were adopted. And the government before accepting for its employees the policies of any insurance company could require the company not only to make deposits of investments with the United States Treasury to secure the payment of the policies, but also to make rates that are reasonable both to the companies and to the insured, in view of the greatly lessened expense to the company of transacting this class of business. (") With a view of securing better rates for this class of insurance for persons of moderate means, a law has been recently passed in Massachusetts allowing savings banks to undertake the business of issuing old age policies. This law promises to work well. If it does, it will doubtless be extended to other states, and we shall have in it just what is wanted to secure reasonably priced policies under the Australian system.

Practicability.

If existing insurance companies, or future savings. bank insurance departments cannot be found to make suitable policies at reasonable rates, the government might charter a company for this purpose, just as it has chartered national banks. This company could be compelled to deposit securities with the United States Treas(1) To be sure the commissions paid agents on securing annuities are less than those paid for securing life insurance, yet the saving is considerable.