FEDERAL RETIREMENT REFORM ACT OF 1985

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000200010002-0
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 129
• Document Creation Date: December 22, 2016
• Document Release Date: May 18, 2010
• Sequence Number: 2
• Publication Date: October 30, 1985
• Content Type: REGULATION

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Calendar No. 371
99Tx Congress
1St S?SSLOIt
'REPORT
it 99-166
FEDERAL RETIREMENT REFORM ACT OF
1985
REPORT
COMMITTEE ON GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
S. 1527
To amend title 5, United States Code, to establish a new retirement and
disability plan for Federal employees, postal employees, and Members of
Congress, and for other purposes
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, DC 20402
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COMMITTEE ON GOVERNMENTAL AFFAIRS
WILLIAM V. ROTH, JR., Delaware, Chairman
TED STEVENS, Alaska THOMAS F. EAGLETON, Missouri
CHARLES McC. MATHIAS, Jr., Maryland LAWTON CHILES, Florida
WILLIAM S. COHEN, Maine SAM NUNN, Georgia
DAVE DURENBERGER, Minnesota JOHN GLENN, Ohio
WARREN B. RUDMAN, New Hampshire CARL LEVIN, Michigan
THAD COCHRAN, Mississippi ALBERT GORE, JR., Tennessee
JoeIN M. Dvxcwx, Staff Director
JAMIE COWEN, Special Counsel
MARGARET P. CRENBHAW, Minority Staff Director
TERRY JOLLY, Chief Clerk
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Calendar No. 371
99TH CONGRESS l
1st Session Jr
REPORT
jl 99-166
Mr. RoTx, from the Committee on Governmental Affairs,
submitted the following
REPORT
[To accompany S. 1527]
The Committee on Governmental Affairs, to which was referred
the bill (S. 1527) to amend title 5, United States Code, to establish a
new retirement and disability plan for Federal employees, postal
employees, and Members of Congress, and for other purposes,
having considered the same, reports favorably thereon with an
amendment in the nature of a substitute and recommends that the
bill as amended do pass.
I. Background and history ..........................................................................................
II. Section-by-section analysis .....................................................................................
III. Evaluation of regulatory impact ...........................................................................
IV. Estimated cost of legislation ..................................................................................
V. Recorded vote in committee ...................................................................................
.................
VI. Changes in existing law ............................................................. .. .
Appendix: Comparison of S. 1527 and current Civil Service Retirement
System ............................................................................................................................
Page
1
38
84
84
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118
I: BACKGROUND AND HISTORY
The Civil Service Retirement System (CSRS) was established in
1920 as a way to retire superannuated employees from the civil
service. It was one of the very early retirement programs in this
country. The Social Security system was established in 1935 to pro-
vide afoundation of economic security for the elderly retiring from
commerce and industry. At the time of enactment of the Social Se-
curity program, consideration was given and rejected to include
Federal workers under the program. Until 1983, coverage of Feder-
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al employees under Social Security was often proposed and rejected
for a variety of reasons.
In the fall of 1981, President Reagan established the National
Commission on Social Security Reform to review the financial
health of the Social Security system and to recommend ways to
shore up its short and long term financial shortfalls. In January
1983, the Commission recommended, among other things, covering
newly hired Federal employees under the Social Security program.
Enactment of that proposal followed with the passage of the Social
Security Amendments of 1983.
The legislation actually provided that Federal employees newly
hired on or after January 1, 1984, or rehired on or after that date
with separation from Government service for more than 365 days,
would be covered by Social Security for such new service. The legis-
lation also covered all current Members of Congress and political
appointees in the executive branch at the equivalent of a GS-16
level or higher.
Social Security coverage of Federal employees forced a congres-
sional decision with regard to additional retirement coverage for
such employees. The primary question was: Should such employees
also be covered by the CSRS with its redundant coverage and con-
tribution amounts or should these employees have a new Federal
retirement program designed to coordinate with Social Security?
In the summer of 1983 at a hearing before the Senate Subcom-
mittee on Civil Service, Post Office, and General Services, the Gen-
eral Accounting Office released a report and testified that dual cov-
erage under both Social Security and CSRS would clearly create re-
cruitment problems for the Federal Government without some
relief from the dual contributions required by both programs. Later
that year a Senate amendment was added to an unrelated House
bill establishing a 2-year interim arrangement (Federal Employees
Temporary Adjustment Act of 1983, Public Law 98-168) which ef-
fectively reduced the employee contribution amounts to CSRS. Thia
arrangement was to expire after December 31, 1985, unless a new
plan was established, thereby requiring all employees covered by
Social Security to begin paying the full CSRS contribution. In addi-
tion, for such employees to receive CSRS contribution would have
to be repaid.
This interim plan was proffered and adopted to afford Congress
sufficient time to design a supplemental Federal retirement pro-
gram coordinated with Social Security. Thus, Congress effectively
decided at that time to begin the design of a new Federal retire-
ment program to be coordinated with Social Security.
Social Security and typical employer retirement plans have very
different benefit provisions and very different objectives. Social Se-
curity is, in part, a social insurance program redistributing wealth
from high to low income workers. In contrast, an employer retire-
ment program is a staff retirement plan which normally attempts
to replace a certain percentage of an employee's preretirement
earnings at all income levels. Social Security provides a floor of
income for the retired, the disabled and for survivors of workers.
Retirement programs, in a sense, defer wages. Coordinating the
two into a new Federal retirement program, while readily feasible,
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calls for the most significant changes in Federal retirement prac-
tices since the establishment of CSRS.
In December 1981 the Congressional Research Service issued a
report, "Restructuring the Civil Service Retirement System: Analy-
sis of Options to Control Costs and Maintain Retirement Income
Security," outlining four options to coordinate a new Federal re-
tirement plan with Social Security. Based on that report, legisla-
tion was introduced by Senator Stevens in the fall of 1982, S. 2905,
establishing a 3-tier pension plan with Social Security serving as a
base. The Senate took no further action until the establishment of
the interim plan in late 1983.
During 1984 the Senate Subcommittee on Civil Service sponsored
five Federal pension forums, which brought experts from the non-
Federal sector to discuss the various types of plans utilized by pri-
vate industry and State and local governments. The published dis-
cussions of these forums covered topics such as Social Security inte-
gration, pension funding, investments, and various retirement plan
components. In the meantime, at the request of the Senate subcom-
mittee, the General Accounting Office issued two companion re-
ports in 1984. The first, "Features of Nonfederal Retirement Pro-
grams," June 26, 1984, detailed typical retirement practices found
in the non-Federal sector such as normal retirement age, cost of
living adjustments, etc., while the second, "Benefit Levels of Non-
federal Retirement Programs," February 26, 1985, described the
range of benefits expected to be payable from non-Federal pro-
grams at retirement using a constant set of economic and demo-
graphic assumptions.
On July 30, 1985, S. 1527 was introduced by Senators Stevens
and Roth. The committee held 21/z days of hearings on the legisla-
tion on September 10-12, 1985. On October 2, 1985, the committee
marked up the bill. At that time a bipartisan substitute for S. 1527
was offered by Senators Roth, Stevens, Eagleton, and Gore. It was
adopted unanimously by the committee.
Few issues before the Governmental Affairs Committee have
been subject to such extensive study and discussions as the new re-
tirement plan. The committee has utilized numerous Government
and private sources to develop the plan. Large bodies of informa-
tion exist substantiating the committee's work, such as Congres-
sional Research Service reports, General Accounting Office reports
and the prints of the five forums.
An employer's retirement plan is not designed in a vacuum.
Many factors influence the eventual structure and provisions of a
plan. Most importantly, an employer must first decide the type of
workforce desired and then design a retirement plan that helps in-
fluence the desired workforce characteristics. The goal of a retire-
ment plan is to maintain one's preretirement standard of living.
In the 1920's the Federal Government was considerably smaller
and far less involved in the daily lives of individual citizens than
now. The composite of the Federal workforce, today, mirrors that
of the Nation's. Electricians, engineers, teachers, mechanics, law-
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yers, doctors, and secretaries are just a few of the hundreds of occu-
pations existing in the Government.
During the past 65 years the dynamism of this Nation has forced
the Federal Government to take a more active role in society than
envisioned in 1920. From rejection of the League of Nations to the
world's most philanthropic and influential Nation, from a racially
segregated society to a largely integrated one, from a stationary so-
ciety to a mobile one, from a largely uneducated society to a highly
educated one, from a primarily agrarian economy to a highly in-
dustrialized and technological one, the Federal Government has as-
sumed an active role in all of these developments. Such a role re-
quires ahighly competent and dynamic workforce. As our society
becomes increasingly more complex, the Federal Government must
have the ability to attract and retain highly qualified individuals
in all occupations who can meet the changing needs of our Govern-
ment and society.
An attractive, flexible retirement plan can assist the government
in meeting these objectives. The Committee concludes that a Feder-
al retirement plan should continue to offer incentives to build a
career workforce. Any employer must have a cadre of employees to
provide stability, continuity and the institutional memory to run
an organization effectively, particularly one as large and diverse as
the Federal Government.
The committee also finds that increased mobility of Federal em-
ployees in and out of Government, particularly during midcareer,
is desirable. The Government's workforce needs institutional exper-
tise devolving from career workers as well as fresh ideas and meth-
ods that originate from employees having extensive experience in
private industry. Currently, Federal recruitment from private
sector management levels is rare, so that Federal managers are
almost totally promoted from within. The committee believes that
such promotion arrangements are to be encouraged, but not to the
exclusion of hiring those from the outside. The committee feels
that a Federal retirement plan should be attractive to assist in re-
cruiting midcareer employees.
The committee also finds that the Government would be best
served by retaining the employees who want to work for the Gov-
ernment, while permitting those who want to leave the ability to
do so. Currently, the CSRS locks employees into a system that is
generous but inflexible. Many of these employees would prefer to
work elsewhere but cannot afford to relinquish their rights to good
retirement benefits. This results in the Government's retaining
some demoralized and inefficient employees. Greater portability of
benefits abates the significance of this problem.
The committee finds that employee financial needs vary during
their work career, as well as during retirement. Because employees
usually are the best judges of their own needs, private industry
often designs employee compensation programs around the concept
of employee choice. In addition, a certain degree of flexibility with
respect to the amount of disposable income an employee can set
aside for retirement gives employees greater involvement in their
careers and in decisions affecting their ultimate retirement bene-
fits. The committee also believes employees ought to share directly
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in retirement by encouraging greater savings by employees for re-
tirement.
Finally, for an enterprise to survive it must keep its costs under
control. Compensation is a major cost for any organization, such as
the Government, and retirement can account for 15-25 percent of
payroll. Related to cost is how a retirement plan is funded. Retire-
ment costs, unlike other costs, do not necessarily surface until
many years after the establishment of a plan. Federal law, howev-
er, requires private employers to prefund their plans to a certain
extent to ensure the availability of assets to pay for benefits when
they come due. The committee finds that the cost of the Federal
Government plan should be on a par with corporate plans. Addi-
tionally, the committee believes that the Government should pre-
fund its plan to avoid the revelation of startling costs at a later
period.
S. 1527 as amended meets all of the objectives that the commit-
tee finds necessary in designing a new Federal retirement package.
Using a computer model developed by the Congressional Research
Service to provide a cost and benefit analysis of a new Federal re-
tirement plan, the committee concludes that the benefits that will
accrue under S. 1527 will encourage career employment with the
Federal Government. In fact, in many cases, career Federal em-
ployees will receive greater benefits than under CSRS if they par-
ticipate in the thrift plan.
In addition, the portable nature of Social Security coverage cou-
pled with a highly portable thrift plan component of this retire-
ment package should make Federal employment attractive to pri-
vate sector employees in midcareer. Such portability also will clear-
ly loosen the restraints on the exodus of dissatisfied Federal em-
ployees.
S. 1527 provides a unique benefit to employees in that they will
be given a choice between two different retirement plans. Both are
three-tiered plans. The design of one is more weighted to the thrift
plan, while the other is more weighted to the defined benefit plan.
This gives new entrants maximum choice with regard to their fu-
tures.
The thrift plan component of S. 1527 provides employees signifi-
cant flexibility with respect to their level of contributions and how
they want those contributions invested. It also encourages Federal
employees to save toward their own retirement.
Finally, the cost and benefits of S. 1527 are comparable to those
offered by most large private sector companies, thus enabling the
Government to compete with private industry for talent by provid-
ing attractive benefits while holding down the costs to a reasonable
level.
Establishment of chapter 8/~
The Federal Retirement Reform Act of 1985 represents a dramat-
ic new development in Federal retirement programs. The Federal
Retirement System (FRS) established by S. 1527 sets up a complete
retirement program to coordinate with Social Security. It captures
some of the best features of pension plans frequently used by pri-
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vate industry to supplement Social Security. The three tiers of
FRS-Social Security, defined benefit, and the defined contribution
or thrift plan=are combined to offer a sound retirement program
which provides considerable career flexibility and involvement in
financial decisionmaking for Federal employees. FRS is a fully
funded and financially sound retirement program at a reasonable
cost to the Government. FRS could likely become a prototype re-
tirement plan for others.
Although there are common elements between the FRS and the
existing Civil Service Retirement System (CSRS), the two will gen-
erally function as separate retirement programs. That is, employ-
ees now covered by the CSRS retain the CSRS benefits without
change unless they personally elect to enter the new system. The
Civil Service Retirement and Disability Fund of the CSRS, a de-
fined benefit plan, will also be the fund used for the defined benefit
portion of the 3-tiered FRS. Other than this linkage, the two sys-
tems are quite different in regard to the employees covered, retire-
ment eligibility requirements, benefits, and basic design. Rather
than amending Chapter 83 of Title 5, United States Code (U.S.C.),
an administratively burdensome task, S. 1527 establishes a new
Chapter 84 in 5 U.S.C. The committee intends for FRS to be the
retirement plan design of the future. In addition to the administra-
tive concerns, the committee believes establishing Chapter 84 clear-
ly sets FRS up as a separate system.
Many of the definitions in FRS are the same or similar to those
now used in the current system, although several new or revised
ones have been added. One significant change is the definition of
"average pay". Average pay under FRS means the highest average
rate of basic pay in effect over any 5 consecutive years of creditable
service as opposed to the "high 3' years of the CSRS. This "high 5"
definition more closely conforms to prevailing private industry
practice and was one of many features of private sector retirement
programs adopted in S. 1527. This serves to reduce the overall cost
of the pension plan.
The definition of "basic pay" is broadened to include the pay rate
established by law regardless of appropriation limits on the author-
ity to pay. In cases where the Congress through the appropriation
process sets a pay cup or limits employee pay to a level less than
the statutory pay rate, the average pay for an employee would be
computed using the statutory pay rate rather than the actual
salary. Therefore, an individual's annuity and amount available for
the thrift plan would reflect the pay level to which an employee
was actually entitled. The committee believes an individual should
not be doubly penalized by capping wages during the working years
and using the capped wages for computing the annuity in retire-
ment.
The definitions of "firefighter" and "law enforcement officer"
are made more specific to include only positions with duties requir-
ing young and physically able employees who serve at least 10
years in those positions or move from those positions after 10 years
of service into managerial positions. Application of these defini-
tions will exclude other positions associated with firefighting and/
or law enforcement which are not necessarily physically demand-
ing. Employees meeting these definitions are entitled to earlier re-
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tirement than others, i.e., age 50 and 20 years of service, or 25
years of service at any age, and to annuity supplements beginning
at retirement until age 62 which are equivalent to the value of
Social Security benefits payable at age 62. These provisions of the
retirement program are costly. The committee intended to restrict
application to employees in these special classes who are faced with
earlier retirement because of the physical requirements of their
jobs.
Coverage
The committee reviewed the issue of who, in addition to Federal.
workers covered by the Social Security Amendments of 1983,
should be covered by the FRS. For instance, a number of Federal
employee groups, such as those employed by the Tennessee Valley
Authority, nonappropriated fund instrumentalities, and farm credit
districts, have for many years been covered by Social Security and
their own Federal retirement system. In addition, the Foreign
Service, the Central Intelligence Agency, and the Federal Reserve
have retirement systems separate from CSRS.
Other groups such as the District of Columbia, the U.S. Park
Police, the U.S. Secret Service, Gallaudet College, and county com-
mittees are, or have at one time been, included as Federal employ-
ees for purposes of the CSRS. Members of Congress and Congres-
sional employees were covered by the CSRS only if they elected
such coverage.
The committee finds that, to the extent possible, Federal employ-
ees should be covered by the same retirement system. Major dis-
ruptions to longstanding retirement arrangements are not consid-
ered appropriate at this time, however. Therefore, other Federal re-
tirement systems which have Social Security as a base are not af-
fected by this legislation. The FRS will apply to employees of Gal-
laudet College and the county committees. District of Columbia em-
ployees, who are not covered by Social Security, will not be includ-
ed in the FRS. Further, since the CSRS is now essentially a closed
retirement system, new District of Columbia employees will be ex-
cluded from it.
The committee also finds that Members of Congress and congres-
sional staffs should be covered by the FRS in the same way as all
other Federal employees. Further, the committee believes that the
U.S. Park Police and the U.S. Secret Service, now included in the
District of Columbia retirement system for municipal police and
firemen, should be covered by the FRS. Permitting certain groups
of Federal employees to participate in the District retirement
system creates inequities between these employees and other Fed-
eral personnel.
The Foreign Service, the Central Intelligence Agency, and the
Federal Reserve retirement systems are not affected by this bill.
However, the committee expects to work with their respective over-
sight committees to assure that system modifications necessary to
recognize Social Security coverage of new employees in one of these
retirement systems are consistent with the FRS.
The committee has determined that individuals covered by the
FRS who are also credited with service under the CSRS should be
treated the same way when at all possible. Three situations when
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this could occur are: Rehire after a break in service of more than
one year, transfer from the CSRS, and reemployment of an annui-
tant under a Government retirement system other than the FRS.
In general, the CSRS rules will continue to apply to service
under the CSRS. For example, a rehire or transfer who had 10
years of service under the CSRS and then worked 20 years under
FRS may elect to retire at age 55. Since both periods are treated as
a single total for eligibility purposes, a full 30 years of service
would be recognized. The reduction for early retirement under the
FRS, then, would be 2 percent rather than 5 percent. In determin-
ing the amount of benefit payable, however, the 10 years under
CSRS would be computed under the CSRS benefit formula and
added to the amount computed under the FRS formula for the 20
years under that system. The same general principle applies to
shorter periods of service, too. For example, a combination of 3
years under the CSRS and 7 years under the FRS would qualify
the employee to apply for an annuity under the FRS at 55. The 3
years of service under the CSRS, even though insufficient by itself
to earn a CSRS benefit, would nevertheless use the CSRS benefit
computation rules. However, payment for the CSRS portion of the
benefit would be delayed until age 62, since service of 10 years
would not result in payment from CSRS until that age.
A reemployed annuitant from a Government retirement system
other than the FRS will have his or her annuity treated in what-
ever manner is prescribed by the rules of that retirement system
during the period of reemployment. For example, a discontinued
service annuity will terminate and restart after employment
ceases, while an optional retirement annuity will continue and pay
will be reduced to reflect the amount of the annuity received. A
person whose annuity continues is not subject to Social Security, so
any post-retirement service is treated under the rules of chapter
83. A person whose annuity stops, however, is subject to Social Se-
curity and the FRS. In both cases, average pay may be increased to
reflect higher earnings during service under the FRS.
A rehire who withdrew his or her contributions from the CSRS
must redeposit the money in order to receive credit for the service
under the CSRS benefit formula.
Z~vo options
S. 1527, as amended, incorporates a unique feature in retirement
planning. Because of the size and diversity of the Federal work-
force, the committee finds that offering more than one retirement
plan to employees will make the plan attractive to a wider range of
employees. One of the attractions of the Federal Employee Health
Benefits Program is the variety of choices in health coverage. Simi-
larly, the committee believes providing a limited choice of two re-
tirement plans, equivalent in cost, but different, will be very at-
tractive to potential employees of the Government.
Employees will choose within 60 days after they begin employ-
ment the retirement plan in which they wish to participate. The
election is irrevocable for life.
In option A the basic annuity is fully paid for by the Govern-
ment and provides an annual accrual rate of 0.9 percent per year
of service for the first 15 years of service and 1.1 percent for the
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remaining years, multiplied by the employee's high-5 average
salary. Unreduced benefits are available at age 62. Benefits are
also available at age 55 with 30 years of service with a 2-percent
reduction for each year under 62. An employee's defined benefit is
adjusted for inflation after retirement beginning at age 62, with
the annual adjustment equal to the rate of increase in the Con-
sumer Price Index (CPI) minus two points from age 62 to age 67
and 100 percent on the CPI rate at age 67 and above.
Finally, option A includes a thrift plan in which the Government
will match dollar for dollar the first 5 percent of an employee's
salary.
Option B requires employees to contribute to the defined benefit
plan the difference between the normal CSRS contribution and the
OASDI tax. This means that employees contribute 7 percent on
any salary in excess of the Social Security wage base, while con-
tributing only a nominal amount on salary to the defined benefit
plan up to the wage base (1.3 percent in 1987, 0.94 percent in 1988-
89 and 0.8 percent after 1989). The march on the thrift plan is dif-
ferent from option 1 in that the first 1 percent of salary is matched
dollar for dollar, percentage points 2 and 3 are matched at 50Q on a
dollar, and percentage points 4, 5, and 6 are matched at 25Q on a
dollar.
In turn an employee can retire at age 55 with 30 years of service
with unreduced benefits from the defined benefit plan. Survivor
and disability benefits are somewhat improved over option A. Fi-
nally, post-retirement inflation protection on the defined benefit
plan is CPI minus two points for retirement under agree 62 and
full CPI at age 62 and above.
In essence, option A contains more flexibility and portability
through a richer thrift plan. Option B contains more security with
a richer and infation-protected defined benefit plan.
Retirement eligibility under basic plan
S. 1527 makes some significant changes from CSRS in the age
and service requirements for retirement eligibility. These changes
will provide a degree of career flexibility to Federal workers not
currently available in the CSRS. Under CSRS, an employee may
retire as early as 55 years of age with 30 years of service and re-
ceive an unreduced annuity. Full retirement at 55 is a costly provi-
sion of the CSRS and a practice rarely found in comparable private
sector pension plans. What is more commonly found in private in-
dustry is a retirement age of 62 for full benefits, with options to
retire at 55 with a reduced annuity to compensate for the longer
payment period.
The committee chose to follow the private industry pattern by
raising the age requirement for retirement with full benefits and
adding alternatives for early retirement with appropriate annuity
reductions, unless the employee chose the second option, in which
case the employee's mandatory contribution pays for the early re-
tirement benefit. S. 1527 provides for full retirement at age 62 with
5 years of service. In addition to being the most common age for
retirement in the private sector, 62 is also the age at which reduced
Social Security benefits are payable. Whend the majority of the
persons covered by the FRS retire, the age at which unreduced
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Social Security benefits are payable will have risen to 67. S. 1527
allows for retirement at age 55 with 30 years of service, as in
CSRS, but with a benefit reduction of 2 percent for each year
under 62 unless Option B was chosen. The legislation also permits
early retirement at age 55 with 10 years' service with a reduction
of 5 percent for each year under 62.
Special classes-law enforcement officers, firefighters, and air
traffic controllers-may retire with unreduced annuities at age 50
with 20 years of service or at any age with 25 years of service. Na-
tional guard technicians may do so at age 55 with 30 years.
S. 1527 has tightened the definitions of law enforcement officers
and firefighters over the provisions of CSRS. The committee recog-
nizes the need for an earlier retirement age because of physically
demanding occupations and has set that age at 50 for unreduced
benefits. But the committee believes this benefit should be reserved
to those positions which require youthful employees.
The pension plan presented in S. 1527 offers the greatest benefit
to the full career worker. However, unlike the current CSRS which
more or less "locks in" Federal employees and penalizes those who
leave prior to retirement, S. 1527 offers attractive opportunities to
other workers for short, middle-length, interrupted or second ca-
reers, whatever may fit their individual situations. Employees
become vested in the basic pension plan after 5 years and retain
the right to a deferred pension payable at age 62 or a deferred re-
duced pension at 55 with 10 years service.
Benefits under basic plan
Computation of annunity
The basic annuity amount is computed by multiplying the accru-
al rate in each option by years of service by the average pay (high
5). Accrual rates have a direct bearing on benefit amounts-the
higher the accrual rate the higher the benefit. They vary consider-
ably among various pension plans depending on whether or not the
plan is an "add-on" or "integrated" with Social Security benefits.
They may also vary to achieve desired workforce characteristics-
higher accrual rates during early years of employment favor short
career employment, while higher rates during later years of em-
ployment encourage longer careers for employees. The current
CSRS falls into this second category.
The committee believes the CSRS practice of backloading the
benefit, in other words, giving greater weight to later years of em-
ployment, should be continued to reward full career employment.
Thus, in each option a varied accrual rate is provided.
The basic pension plan in S. 1527 is "added-on" rather than "in-
tegrated" with Social Security. This preserves the "tilt" in Social
Security benefits by which lower paid employees get proportionate-
ly more of their preretirement earnings than higher income em-
ployees. The committee designed the plan to protect lower income
employees from, in essence, having to participate in the thrift plan
to ensure a reasonable retirement benefit. Obviously, they may
participate if they wish. It is expected that employees at the higher
income levels will participate in the thrift plan to a greater degree
than lower-paid employees. Therefore, the benefits higher paid em-
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ployees get from the thrift plan, when coupled with Social Security
and the basic pension plan benefits, will alter the tilt. This is a de-
parture from typical private practice which deliberately tilts the
pension away from the employees with lower incomes to flatten the
tilt in Social Security benefits.
S. 1527 continues the policy under Chapter 83 of crediting days of
unused sick leave in computing an annuity. However, it changes
the current CSRS policy for computing the annuity of employees
who have worked part-time. Under the CSRS the annuity is com-
puted by multiplying the accrual rate by the "high 3" average pay
by years of service. Since the years of service count the same
whether through full-time employment or part-time employment,
the high-3 earnings are the key in determining the annuity
amount. This policy makes it financially impractical for employees
to work part-time toward the end of their careers. It essentially
prohibits employees from phasing into retirement, an option which
may be attractive to the employee and the Government. On the
other hand, under CSRS an employee could work full-time only for
the final 3 years of employment and achieve the same annuity as
an employee with an identical "high 3" who has worked full-time
for an entire career. This could be costly depending on the frequen-
cyS. 1527 changes this policy by crediting part-time employment on
a proportional basis but using the annual rate of basic pay payable
for full-time service. The committee believes this provision is more
fair to the employee and the employer and may reduce costs over
the long run.
Reductions for survivor annuities
S. 1527 provides fora 10 percent reduction in an annuity if the
employee elects at retirement to provide for a survivor annuity.
Under the current CSRS, an employee who selects a joint and sur-
vivor option is subject to a reduced pension. However, the pension
is reduced by less than 10 percent and is, therefore, subsidized to a
greater extent by the Government. A 10-percent reduction still sub-
sidizes the survivor benefit but to a lesser extent than CSRS.
Under S. 1527, the reduction in the annuity to provide for survi-
vor benefits would change to reflect any change in circumstances
for entitlement to an annuity because of a change in marital
status, an election relating to a former spouse or except under
Option A, the death of a spouse. In the case of an annuitant whose
pension has been reduced to provide for joint and survivor benefits,
the pension returns to the unreduced amount if the spouse dies
first only in option B. Option A maintains the reduced benefit for
the remainder of the annuitant's life.
Cost-of-living adjustments
S. 1527 provides for different annual cost-of-living adjustments
(COLAs) to be made in the basic pension plan depending upon the
option chosen. In option A no COLA is provided for retirees be-
tween ages 55 and 62; a COLA of CPI minus two is provided for
retirees aged 63 through 66 and a full COLA is provided for those
beginning at age 67. Clearly, it is less than the full CPI protection
provided in the current system. This significant change was made
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for several reasons. Full COLAs are one of the two costliest fea-
tures of the current CSRS. In private industry, the common prac-
tice is to make cost-of-living adjustments on an ad hoc rather than
annual basis. In addition, the adjustments are typically less than
the full increase in CPI, usually up to one-half.
In designing this option, the committee chose the automatic ap-
proach as more certain for retirees but reduced the full CPI adjust-
ment for younger retirees. Social Security benefits are fully in-
dexed by the CPI. The committee believes that the reduced COLAs
provided for younger retirees are justified in that these retirees can
still supplement their income. As one gets older the need for full
inflation protection on a fixed income increases.
For individuals selecting option B, full COLAs are provided for
all benefits except for the retirement benefits of individuals be-
tween the ages of 55 and 62. These "early retirees" receive COLAs
equal to CPI minus 2. This policy contrasts with the current system
in which full COLAs are provided for retirees regardless of wheth-
er or not they retire before 62.
Benefit supplement for special classes
Law enforcement officers, firefighters, and air traffic controllers
may retire with unreduced annuities at age 50 with 20 years of
service or at any age after 25 years of service. Although eligible to
receive unreduced benefits from the defined benefit plan at 50 or
before, these classes are not eligible for Social Security benefits
until age 62. Therefore, S. 1527 provides for an annuity supplement
which is approximately equal to the Social Security benefit payable
at age 62. This allows individuals in these special classes who retire
with unreduced annuities at 50, or even earlier to receive total ben-
efits from retirement to age 62 which are equivalent to the benefits
payable to annuitants retiring at age 62 from both Social Security
and the basic pension.
Methods of payment
S. 1527 provides for several methods of receiving pensions. In ad-
dition to the standard method of providing for a monthly annunity
to the annuitant for life, S. 1527 offers an option of ajoint-and-sur-
vivor form. Under the joint-and-survivor method, a joint pension is
received in a reduced amount during the years both the annuitant
and spouse or other designated person are living. Upon the death
of the annuitant, the annuity to the survivor would be reduced to
50 percent and continued to the survivor for life. In the case of an
individual who is married on the date of application for the annun-
ity, ajoint-and-survivor method must be selected unless jointly
waived.
S. 1527 also offers a Social Security level benefit option for those
who retire before age 62 when Social Security benefits are payable.
This increases the basic annunity payment between the ages of 55
and 62 and reduces the payments beginning at 62 so that the total
amount each month is approximately equal before and after Social
Security begins at 62. The total value of the benefits payable re-
mains the same with no additional costs to the employer.
The committee intends for OPM to offer other options for annu-
ity payments which allow individuals to make selections best suited
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to their individual circumstances. Just as S. 1527 provides retire-
ment eligibility alternatives and career planning flexibility, the
committee believes that similar choices for method of payment
should be available. The committee believes OPM should consider
methods frequently used in private industry. One example is life
annuity certain whereby an annuitant is guaranteed a specified
number of monthly payments whether the annuitant lives or dies
before that time but guaranteed for the life of the annuitant who
lives beyond the guaranteed time. Another option might be a joint
and survivor option which provides less than 50 percent reduction
to the survivor.
The General Accounting Office report to the committee entitled,
"Features of Nonfederal Retirement Programs," June 26, 1984, re-
ported that various pension surveys of the private sector found that
most companies utilized some type of capital accumulation plan
(CAP) to supplement the employer pension plan. For example, the
largest survey, conducted by the Bureau of Labor Statistics, found
that 3/4 of the companies they surveyed utilized such a plan. CAPS
cover a variety of plans including stock options, profit sharing and
thrift plans.
CAPs are advantageous to both the employer and the employee.
The costs are def"fined from year to year and thus avoid open ended
pension liabilities for the employer. Employees enjoy them because
of their portable nature, their inherent flexibility and their poten-
tial for investment growth.
A thrift plan, unlike other CAPS, is offered to employees on a
voluntary basis, since it requires employee contributions. These
contributions are typically matched to a certain extent by the em-
ployer. The contributions flow to individual employee accounts and
are invested either by the employer or a board of trustees. Employ-
ees normally have access to the accounts upon separation from the
employer or retirement. Employer contributions and earnings on
the accounts are tax deferred until withdrawal. The Internal Reve-
nue Service has interpreted the Internal Revenue Code to also
allow tax deferral of employee contributions to a thrift plan under
certain restrictions.
Thrift plans are very popular with employees at all income
levels. Even at low income levels, 60-70 percent participation rates
are common. Obviously, at higher income levels participation rates
approach 100 percent.
Thrift plans are also provided in certain specialized retirement
plans which cover such Federal entities as the Federal Reserve
Board, the Tennessee Valley Authority, the Federal Deposit Insur-
ance Corporation, and the Comptroller of the Currency. The com-
mittee finds no good reason to deny the majority of the Federal
workforce this benefit. For the Federal Government to be competi-
tive in its hiring practices, it must accord its employees at least
some of the creative compensation items offered in private indus-
try.
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Matching
S. 1527 provides for a tax deferred thrift plan. An employee may
contribute up to 10 percent of salary per year. In option A, the
Government will match the 5 percent dollar for dollar. In option B,
the first 1 percent is matched dollar for dollar, percentage points 2
and 3 are matched at 50? on a dollar and percentage points 4, 5,
and 6 are matched at 25? on a dollar. Employee contributions are
based on pre-tax dollars. In fact, in this type of plan, also known as
a salary reduction plan, Federal income tax is applied to the salary
minus the employee contributions. Social Security taxes, however,
are applied to total income up to the Social Security wage base.
Although matching at 50? on the dollar up to 6 percent of salary
is typical in private industry, dollar-for-dollar matches are not in-
frequent. Since the vast majority of private sector plans are inte-
grated with Social Security, thereby reversing the tilt away from
low income workers, richer thrift plans are not necessary to retain
higher-income employees. However, since S. 1527 provides fora de-
fined benefit plan that does not reduce the Social Security tilt, a
richer thrift plan is warranted to ensure competition with private
industry at the managerial and executive levels.
Statistics show the greater the matching ratio, the greater the
participation rate. Higher income employees are expected to utilize
such a plan regardless of the match partly because of the tax ad-
vantages. Ahigher matching ratio, however will influence lower
income workers to participate more extensively.
The legislation provides employees with an option to vary the
amount of their contributions once a year, as well as to vary the
investment vehicle. Thus, the committee expects employees to con-
tribute from 0-10 percent of their salaries depending upon their
needs. This grants employees great flexibility during their careers.
When large expenditures from disposable income are necessary,
employees presumably will reduce thrift plan participation. At
other times the generous match and tax relief will ensure signifi-
cant participation.
Vesting
Employees are immediately vested in their own contributions
and earnings attributable to them. Employees gradually vest in the
Government contributions over a 5-year period. An employee who
remains for at least a year and then separates vests in 20 percent
of the Government contributions. After each succeeding year this
employee vests in another 20 percent until this percentage reaches
100 percent after the 5th year. Service under CSRS is applied to
the vesting schedule for any employee transferring into this plan
from CSRS.
At retirement an employee may withdraw the account balance
either in a lump sum (which would allow 10 year tax averaging
under current law) or in installments. Alternatively, the employee
may apply the account balance to buy an annuity or may roll it
over into an Individual Retirement Account (IRA) or a subsequent
employer's pension program, all without tax consequences.
Prior to retirement but upon separation from Government serv-
ice, the employee may leave the money in the account, or roll it
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over into an IRA or subsequent employer's pension program. Out-
right withdrawals, however, are prohibited before retirement age.
The committee recognizes the fact that private sector 401(k) plans
normally authorize withdrawals upon separation from employ-
ment. However, the committee designed this plan, including the
thrift portion to provide sufficient income to maintain one's stand-
ard of living into retirement. Requiring the thrift account to be
used solely for retirement purposes is consistent with the commit-
tee's objectives.
On the other hand, permitting rollovers into IRAs or other pen-
sion programs does offer employees a great deal of flexibility and
portability. One finding in the report of President Carter's Commis-
sion on Pension Policy, "Toward a National Retirement Income
Policy," February 26, 1981, was that the lack of portability among
employer pension programs often forfeited or seriously diminished
employee retirement benefits. Essentially, permitting a transfer of
assets from the thrift plan to an IRA or another employer's pen-
sion program resolves at least part of this problem.
Additionally, S. 1527 authorizes hardship loans from the thrift
plan. The committee desires extensive participation in the thrift
plan. However, employees occasionally are reluctant to lock in part
of their income for 20-30 years. Since S. 1527 prohibits withdrawals
until retirement eligibility, the committee was concerned that such
a limitation would inhibit employee participation. The committee
concluded that the best approach was to permit hardship loans
similar to those permitted under some private sector 401(k) plans.
This means that under certain limited circumstances, such as un-
expected medical bills or educational expenses, employees could
borrow part of their accounts with the requirement that principal
and interest be repaid over a fixed period prior to retirement. This
grants employees the needed financial flexibility to ensure signifi-
cant participation in the thrift plan, while maintaining the plan's
primary purpose to provide additional retirement income.
Private investment
Probably, the most significant and unique feature of the thrift
plan is the gradual availability of thrift plan monies for private in-
vestment. Because this investment arrangement is a departure
from traditional Federal practice, the committee spent substantial
time in resolving this matter. Most convincing to the committee
are the practices of private and State and local government pen-
sion funds, as well as a few Federal funds. Almost all such funds
invest outside their own entities. Such employers have found that
the more latitude available in selecting investments the greater the
opportunities for making investments with higher returns and thus
the lower the costs of providing the desired benefits. The commit-
tee is cognizant, however, of the drawbacks and dangers of private
investment and, hence, has designed this plan to avoid those poten-
tial pitfalls. (These are discussed in t`he following pages.)
Offering employees the option to invest their thrift plan monies
outside the Federal Government affords them an opportunity to re-
ceive higher investment returns and thus benefits at lower costs.
Note the following chart provided to the committee by a witness,
Jon S. Fossel, Senior Vice-President, Alliance Capital Management
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Corporation, testifying at the committee's hearings on the legisla-
tion based on a widely quoted study by University of Chicago
economists:
STOCK, BONDS, RISK FREE ASSETS, & INFLATION
COMPOUND GROWTH RATES, 1926-1983
NOMINAL
REAL
COMMON STOCKS
ISBP 500)
9.6%
6.6%
LONG-TERM CORPORATE BONDS
4.2%
1.2%
LONG-TERM GOVERNMENT BONDS
3.5%
0.5%
TREASURY BILLS
3.2%
0.2%
INFLATION
3.0%
-
All~.nce ~
Current practices are to invest Federal pension funds in long-
term Government bonds. As can be seen in the above chart, invest-
ments in corporate bonds and securities have historically provided
greater returns. Of course, the committee is aware that economic
conditions of the future will not necessarily replicate economic con-
ditions of the past. However, the committee believes that offering
such investments to employees may translate into better benefits.
Another chart provided by Mr. Fossel shows how State and local
government pension funds have invested their monies since 1950:
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PERCENTAGE OF
STATE AND LOCAL GOVERNMENT
PENSION PUNS INVESTED AMONG VARIOUS ASSETS, 1960 - 7963'
Alliance ~
This chart shows that since 1950 State and local government
funds have divested themselves of reliance upon their own bonds
and Federal securities for higher yielding corporate bonds and se-
curities, although recent high interest rates for Federal securities
reversed that somewhat. These facts were most compelling in the
committee's conclusion that the Federal thrift plan take advantage
of such investment opportunities.
Naturally, the committee was concerned about the higher risks
associated with private investments. The committee dealt with that
in several ways. First, the structure of S.S. 1527's investment funds
minimizes risk. Second, pension fund investments are long-term in-
vestments. The daily and yearly vagaries of the market place will
not have a significant impact on employee accounts which are in-
vested over a 30-35 year period. Third, another chart derived from
the same University of Chicago study revealed some interesting
statistics:
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COMPOUND ANNUAL RATES OF RETURN
OVER BEST/WORST 20 YEAR PERIODS
(1926-1983)
Small Stocks 21.1% 17.2% 5.7% 4.0%
(1942-61) (1942-611 (1929-481 11929-481
Common Stocks 16.9% 13.0% 3.1% 0.8%
(1942-611 (1942-61) (1929-481 (1962-811
Long Term Corporate Bonds 5.5?/. 5.4% 1.3% -2.7%
(1926-45) (1926-45) (1950-69) (1962-811
Long Term Government Bonds 4.7% 4.6?/s 0.7% -3.1
11926-45) (1926-45) (1950-69) (1962-81)
Treasury Bills 6.1% 1.0% 0.4?/s -3.1%
(1962-811 (1952-71) (1931-50) (1933-52)
Inflation 5.9% 0.1
(1962-811 (1926-45)
SOUPCE: Stocks. Bonds. Bi//s ?nd/n/bti?n~ t98< Ye?tb?ok, R.G. Ibbotson Ass?ci?tes. Cnicago.198~.
Alliance ~
Surprisingly, when comparing the worst 20 years of investment ex-
perience for each of these investment vehicles, long-term Govern-
ment bonds had a lower return than corporate bonds or securities.
Despite this the committee agreed to add language requiring the
Thrift Investment Board to inform employees of the higher risks
associated with investing in non-Federal securities.
Another concern the committee wrestled with was the potential
for market manipulation through political pressure by Federal
managers of the thrift plan. The committee specifically designed
the plan to avoid this problem. S. 1527 provides for three invest-
ment funds which are essentially self managed. Employees will
have the choice at least once a year to direct their contributions
and the Government's contributions into one of these funds.
The first fund is a Federal securities fund. This fund will be com-
posed of special issues of the Treasury, whose interest rate will be
pegged to the average interest rate on all outstanding long-term
Federal securities. The Second fund is a fixed income fund which
will include non-Federal securities that guarantee a fixed rate of
return, such as guaranteed insurance contracts, certificates of de-
posit and other debt instruments. The Federal managers of the
thrift plan will contract with insurance companies, banks and
other pension asset managers, who can provide fixed rates of
return on secure investmens. The intention of this fund is to diver-
sify assets among a variety of fixed-income instruments to assure a
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reasonable rate of return. The investment instruments are to be
secure, highly rated and conservative. The legislation requires that
the contract investors be qualified pension asset managers certified
under Department of Labor regulations.
The third fund is a stock index fund. A stock index fund is one in
which a common stock index such as Standard & Poor's 500 or Wil-
shire's 5000 is used ~as the mechanism to allocate investments from
the fund to various stocks. A common stock index is a composite of
stocks such as Standard & Poor's 500 which moves up and down in
value as prices of the stocks change. An index fund then allocates
its investments to the stocks in the index in the same or similar
ratio that the value of a given stock has to the total value of all of
the stocks in the index. Thus, the actual decision to buy or sell a
given stock is determined by the market place, i.e., the ratio of
values of stock within the index. As the relative values change, the
investments from the fund change. Hence, no individual or group
of individuals are capable of manipulating investments. The com-
mittee finds the innate structure of the investment funds precludes
political manipulation. In each case the fund is essentially self-
managed.
To further avoid potential problems, S. 1527 extrapolates the fi-
duciary obligations, the enforcement provisions and the penalties
applicable to private plans contained in the Employee Retirement
Income Security Act and applies them to those handling the invest-
ments in the Federal thrift plan.
Granting a limited array of choices for employees follows the typ-
ical practice of private industry. Employees have varying needs
and desires, and thus these investment choices provide Federal em-
ployees different ways to meet those needs. Such choices have
proven very popular with private sector employees. The committee
finds limiting the choices as important as providing them.
As an alternative the committee considered permitting any
qualified institution to offer to employees specific investment vehi-
cles. However, the committee rejected that approach for a number
of reasons. First, there are literally thousands of qualified institu-
tions who would bombard employees with promotions for their
services. The committee concluded that employees would not favor
such an approach. Second, few, if any, private employers offer such
an arrangement. Third, even qualified institutions go bankrupt oc-
casionally and a substantial portion of an employee's retirement
benefit could be wiped out. This is in contrast to the diversified
fund approach which could easily survive a few bankruptcies.
Fourth, it would be difficult to administer. Fifth, this "retail" or
"voucher" approach would give up the economic advantage of this
group's wholesale purchasing power derived from its large size, so
that employees acting individually would get less for their money.
The Board
S. 1527 also establishes an off-budget agency called the Thrift In-
vestment Board to handle the investment and administration of
the thrift plan. The legislation authorizes appropriations for the
first 2 years. Subsequently, the Board is funded partly by forfeiture
of Government matching contributions of non or partly vested ter-
minated employees and by investment income from its invest-
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ments. The committee expects this institution to be small and effi-
cient.
The Board will be comprised of the Chairman of the Federal Re-
serve Board, the Director of the Office of Personnel Management,
the Secretary of the Treasury, and two employee representatives,
one from labor and one from a manager organization. These indi-
viduals will set the overall policy for investment of the thrift plan.
For instance, the Board will decide the general types of fixed
income instruments to invest in such as guaranteed insurance con-
tracts or certificates of deposit. It will also choose the stock index
to be utilized in the stock fund. The Board will be assisted in these
functions by an advisory committee comprised of experts in invest-
ment and administration from private industry. A special employee
advisory committee will be elected by thrift plan participants,
which will also advise the Board on investment decisions and will
vote the fund's shares in relevant corporate matters.
The Board will also choose an executive director who will manage
the thrift plan. As opposed to general policy, the Executive Direc-
tor will choose the contracts with pension asset managers and ad-
minister the plan provisions. The Board is prohibited from direct-
ing the Executive Director to make specific investments or con-
tracts. The committee believes the political accountability of the
Board members is important to ensure that the intent of the law is
carried out. On the other hand, the committee intends that invest-
ment decisions be made totally independent of the Board members
and possible political pressures.
Finally, the committee was concerned that opening the door for
immediate investment opportunities outside of the Federal Govern-
ment would have a negative impact on the large Federal deficit.
Thus, employee contributions and then employer contributions are
gradually phased into the opportunities to invest on the outside
over a 10-year period.
Disability benefits
Contrary to popular opinion, the current sick leave systems and
CSRS disability provisions fail to adequately protect workers from
long illnesses or disabling injuries. Long illnesses or injuries requir-
ing long recuperation periods can be financially devastating.
Good private sector coverage of sickness and disability usually in-
cludes acombination of sick leave, short-term disability protection
such as accident and sickness insurance, and long-term disability
protection. While the Federal Government now offers fairly gener-
ous sick leave benefits, disability retirement is the only employer
sponsored plan available to an employee who exhausts his or her
accumulated sick leave, even if the illness or disabling injury is of
a temporary nature.
Protection under the CSRS disability provisions is limited, how-
ever. An employee is not vested for disability retirement until he
or she has served 5 years or more in the Federal government and,
until the employee serves for 22 years, his or her maximum benefit
will be 40 percent of high-3 average salary.
The committee decided to establish a separate long-term disabil-
ity (LTD) insurance plan, self-insured by the Federal Government
but with benefits and services provided by a third party adminis-
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trator, and to lower the time needed to qualify for benefits. Only 18
months of service are necessar to be eligible for benefits, rath;.r
than the 5 years required for CRS disability benefits.
The CSRS has been criticized because its benefit levels are less
generous than those provided by many private sector disability
plans, combined with social security. LTD plans typically replace
60 percent of predisability earnings, offset by 100 percent of the
Social Security disability benefit. CSRS, on the other hand, pro-
vides this replacement level only when the individual has 32 or
more years of service.
The committee has adopted the practice of utilizing an LTD plan
by paying a disabled employee 60 percent of his or her high-5 aver-
age salary, offset by 100 percent of the Social Security primary
benefit, if any. After 1 year, if the employee does not meet the
Social Security disability definition (unable to work in substantial
gainful activity) but does meet the civil service occupational dis-
ability definition (unable to do any job at his or her grade level for
which qualified in the same commuting area and agency), benefits
are reduced from 60 percent to 40 percent of high-5 pay. If, howev-
er, the employee does meet the Social Security definition of disabil-
ity, benefits remain at 60 percent of high-5 pay.
LTD benefits begin after all sick leave has been used and contin-
ue until the employee recovers or is converted to the regular retire-
ment rolls. For an employee who is occupationally disabled, conver-
sion to annuitant status occurs at age 55. An employee who is dis-
abled under the Social Security definition is converted at age 62.
An employee's high 5 at the onset of disability is used to compute
his respective retirement benefit, adjusted by the annual increase
in the CPI minus 2 percentage points under Option A and the Gen-
eral Schedule salary increase in Option B.
During the period the employee is receiving LTD benefits, his or
her time on the disability rolls is credited as service for the basic
retirement benefit formula, the LTD benefit is adjusted by the
annual increase in the CPI minus 2 under Option A and the
annual increase in the CPI in Option B. Also, the employee may
continue to participate in the thrift plan.
To minimize differences from the CSRS, the majority of stand-
ards and procedures applicable to the FRS are identical to those of
the CSRS.
Employees receiving LTD benefits are subject to medical exami-
nation and to a review of earnings to determine that continuation
of these benefits is warranted. Because agencies will pay the cost of
disability benefits to their disabled workers, the committee expects
this to encourage managers to make stronger efforts to reemploy
those workers who recover from their disability.
The Office of Personnel Management must contract for claims
payment and related administrative services for the LTD benefits
program. The bill contemplates that these services could be provid-
ed by an insurance company or some other entity.
The committee decided to provide no exemption from competitive
contract procedures. The committee intends that OPM be allowed
maximum flexibility in applying streamlined contracting proce-
dures so that avoidable delays in administration of this program
will not occur. Contracts may run up to 5 years, with an option for
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annual renewal in recognition of the fact that considerable start up
effort is likely on the part of the contractor. On the other hand, it
is expected that unsatisfactory performance by the contractor will
result in prompt termination of the contract.
OPM will compute the amount due the disability insurance fund
from each agency for payments to disabled employees of that
agency. It is intended that OPM be permitted to vary the amounts
in recognition of different experience rates in different agencies.
Because disability benefits are provided in a completely different
way under this plan as compared to the CSRS, the committee de-
cided that employees covered by the FRS who have service under
the CSRS (transfers or rehires) will receive disability benefits only
under the FRS. Service under both plans will count for benefit eli-
gibility, however.
Survivor benefits
With Social Security serving as the base for this plan, widows
and widowers who have attained age 60 (50 if disabled) or with chil-
dren under 16 receive benefits from Social Security. Survivor bene-
fits are also paid to surviving children up to age 18 and to a di-
vorced spouse who was married at least 10 years. However, Social
Security benefits received are subject to an earnings test while the
recipient is under age 70.
The committee decided to provide enhanced supplemental death
benefits. An annuity will be payable from the basic plan upon the
death of the worker. In addition to survivor benefits from the pen-
sion plan, employees covered by the Federal Employees Group Life
Insurance (FEGLI) will receive basic life insurance coverage while
they are working, which is enhanced in option B.
Life insurance can be very valuable immediately after the death
of an employee. Essentially, the new change in option B guarantees
life insurance in an amount equal to approximately two times
salary while working. This is in contrast to the current FEGLI pro-
gram, which option A maintains, of gradually reducing coverage
after age 35 to 1.0 multiplied by salary at age 45 and beyond.
The committee further decided not to offset Social Security survi-
vor benefits from the survivor annuity payable from the pension
plan. A retiree's annuity will be reduced by 10 percent to pay for
part of the cost of each survivor annuity under the FRS. The survi-
vor annuity will still be subsidized by the Government, but not to
the same extent as the CSRS.
Preretirement benefits
Preretirement death benefits are 50 percent of the amount pay-
able to the decreased worker before reduction for election of a
joint-and-survivor form of annuity payment and, in Option B, also
before reduction for early retirement. In computing this benefit,
the employee is deemed to have a minimum of 10 years of service.
The Committee also concluded that an annuity should be provid-
ed for survivors of former Federal employees who were entitled to
a deferred annuity at the time of their death, computed the same
way as for other preretirement death situations.
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Preretirement survivor benefits are automatically paid from the
basic plan immediately after the death of the employee to the
spouse of a decreased employee who had 18 months of service.
Postretirement benefits
Postretirement survivor benefits from the basic plan are contin-
gent upon elections made by the employee at the time of retire-
ment or, in the event of a change in marital status, after retire-
ment. For an employee who is married on the date of retirement, a
50-percent joint-and-survivor annuity is automatic unless the retir-
ee and spouse jointly waive this method of payment. Postretire-
ment benefits are essentially the same in both options, 50 percent
of the amount payable to the deceased retiree before reduction for
a joint-and-survivor annuity, but after any early retirement reduc-
tons. Such a waiver permits election of some other annuity form, if
desired.
The committee decided to treat elections of survivor annuities
from the basic pplan in essentially the same manner as they are
treated under CSRS. An annuitant may elect to provide a survivor
annuity from the basic plan to one or more eligible former spouses
or to a des~nated individual who has an insurable interest in the
annuitant. The annuitant also may elect a payment method other
than a 50-percent joint-and-survivor annuity. Survivor annuities
from the basic plan are subject to an overall limit of 50 percent of
the deceased individual's annuity, so that elections to provide more
than one survivor annuity result in a sharing of this amount.
A survivor annuity terminates on the date the recipient remar-
ries before age 55 or dies. In option B only. If the spouse or other
designated person predeceases the retiree, the annuity is recomput-
ed to restore the value of the annuity to what it would have been
absent a reduction to provide such an annuity.
Option A continues the reduction throughout the annuitant's
life, similar to private industry practice.
To protect employees or annuitants entitled to benefits from both
the CSRS and the FRS, the committee decided survivor benefis
would be computed based on years of service under each plan sepa-
rately. For employees who die while in active service with only a
few years under the CSRS, this would most likely result in pay-
ment of the guaranteed minimum under CSRS, plus benefits pay-
able under the FRS.
An annuitant may also elect an annuity with a survivor benefit
from the Thrift Savings Fund. The committee's intent is to allow
maximim flexibility to the Board and the annuitant in deciding
how to allocate money from this fund. The only limit on payment
of survivor annuities from the Thrift Savings Fund is the total
income accumulated in the individual's thrift account. It is there-
fore possible, if an annuitant wishes to do so, to provide several
survivor annuities with a value of 50 percent of the annuitant's an-
nuity.
Preretirement death benefits from the Thrift Savings Fund are
automatically paid to the surviving spouse unless the deceased in-
dividual is not survived by a spouse, in which case payment is
made to an individual designated as having an insurable interest
or to the deceased's estate. The surviving spouse may elect to re-
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ceive an annuity, to transfer the amount to an IRA, or to withdraw
it in one or more payments.
An annuitant may elect to provide a survivor annuity from the
basic plan, the Thift plan, or both to any former spouse who was
married to the annuitant for at least 9 months. The amount of the
annuity and the upper limit on annuities, when more than one is
payable, are the same as for a spouse. If there is a current spouse,
that spouse must consent to the election of this benefit for a former
spouse.
Although the suvivor benefits are described as automatically
going to a surviving spouse, the existence of a court order directing
payment to another person would preclude this automatic feature
from taking effect.
Transfers from the CSRS to the FRS
The committee finds that the FRS contains a number of advan-
tages over the CSRS and that employees subject to the CSRS
should therefore be permitted an opportunity to join the FRS.
These advantages include increased portability, greater flexibility,
generally better survivor and disability protection, and better bene-
fits for full career employees participating in the thrift plan.
Most employees, when they join the Government, do not plan to
make it a career. However, if they leave prior to retirement eligi-
bility, their eventual retirement benefits, if any, are significantly
devalued because of future inflation. Additionally separating em-
ployees are unprotected for disability and survivor benefits.
Social Security coverage ensures continued disability and survi-
vor protection, and the FRS provision of a thrift plan substantially
removes the penalty normally attrached for leaving Government to
pursue another career. The committee believes that these benefits
alone will attract a number of current workers to the new system.
Another advantage of the FRS for a current worker is the possi-
bility of participation in the thrift plan. Many younger employees
will find the portable thrift plan attractive. Employees who are
considering leaving Government prior to retirement would find
transferring plans probably in their interest.
The committee believes that employees electing to join the FRS
should have an attractive and timely opportunity to do so. The de-
cision to join must be made within 1 year after the effective date of
the FRS, which is January 1, 1987, meaning employees will have
until January 1, 1988 to make a choice, and the election will be
prospective. Benefits at retirement will be computed using the
rules of both systems for the period of service attributable to each
system. To avoid a loss of benefits due to the transition, several ad-
ditional provisions apply.
First, the employee's salary after the transfer counts toward the
average salary computation under both the old and new plans.
Thus, although crediting of service toward CSRS stops at the point
of transfer, increases in the average salary afterward are used in
the CSRS salary base.
Second, service both before and after transfer counts toward the
service required under either plan to retire, or to get deferred
vested benefits.
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Also, employees carry forward any survivor coverage they had at
the date of transfer. Disability coverage from the old plan stops,
and employees get credit for service before transfer toward the 18
months needed to become eligible for LTD benefits under the plan.
In addition to these provisions, which guard against loss of bene-
fits, are several others which support a decision to transfer. First,
the employee's service before the transfer counts as plan service in
determining the extent he or she is vested in the Government's
share of contributions to the thrift plan. Second, employees who
transfer and remain in the new system for 5 years are no longer
subject to the windfall benefit reduction or the public pension
offset rule applying to spouses under the Social Security Act.
Under the windfall benefit reduction, workers may have their
Social Security benefits computed by a modified formula that pro-
vides reduced benefits, if they first become eligible after 1985 for
both a Social Security benefit and a pension earned in employment
not covered by Social Security. Under the public pension reduction,
most persons who become eligible for a public pension will have
the amount of any Social Security dependents' or survivors' bene-
fits reduced on account of that public pension.
While the FRS is specifically designed for a new workforce, the
aforementioned features make it very attractive for current work-
ers to join.
Interim employees
Employees hired after 1983 pay 1.3 percent of salary toward civil
service retirement, in addition to Social Security payroll taxes. The
committee finds that, since the FRS is noncontributory by employ-
ees in option A and requires only the difference between the
normal CSRS contribution and the OASDI tax in option B, contri-
butions from January 1, 1984 through December 31, 1986 in excess
of the amount required in the new plan, if any, should be used to
establish thrift savings accounts for employees still employed on
January 1, 1987, the effective date of the FRS.
The thrift savings account so established will be invested in the
Government Securities Investment Fund established by S. 1527. It
will consist of the participant's contributions, plus interest equal to
the yield on new investments in the Civil Service Retirement Fund,
multiplied by 2. This will give these employees a head start in the
new thrift plan.
Employees hired during the interim period who separate prior to
the effective date of the FRS are entitled to receive alump-sum
credit of their contributions under the terms of chapter 83 of title
5.
S. 1527 extends the Federal Employees' Retirement Contribution
Temporary Adjustment Act of 1983 for an additional year, until
January 1, 1987. Therefore, for the period January 1, 1984 through
December 31, 1986, new Federal employees continue to be covered
under both CSRS and Social Security, with survivor and disability
benefits payable under CSRS fully offset by benefits payable from
Social Security and with a contribution rate of 1.3 percent rather
than 7 percent to CSRS.
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Cost
The cost of a retirement program is certainly a major consider-
ation in its design. In light of the size of the Federal workforce,
whatever retirement plan is designed will have a significant cost.
The committee very carefully crafted the provisions of S. 1527 with
cost in mind, giving particular attention to the cost of the CSRS
and private sector plans. The actual cost of a pension plan is equal
to the benefits paid, plus administrative expenses minus invest-
ment income. This cost is based on the level of benefits, retirement
age, mortality rates, turnover, administrative expenses, participa-
tion rates and investment income from the plan. Because most of
the factors that determine the true cost of a retirement plan are so
variable and all are in the future, the committee relied upon a
method utilized in the pension field to estimate the future cost.
Such a method is called the "entry age normal cost" method.
Normal cost is defined as the present value of future retirement
benefits divided by the present value of future earnings during the
worker's career. In other words, it is the percentage of payroll for a
group of newly hired employees which must be invested over the
total career of each employee to fully pay for all benefits received
by that group. Normal cost can vary significantly depending upon
demographic, economic, and behavorial assumptions.
The committee turned to the Congressional Research Service to
provide the various assumptions and computer model to determine
the normal cost of this plan.
The following is an excerpt of their report to the committee de-
tailing the cost of S. 1527:
COST
The cost projections represent "entry-age normal costs,"
a cost presentation that compares the career salaries and
lifetime benefits of a statistically representative group of
entering employees. The approach can be generally under-
stood as the percentage of every paycheck that should be
invested, over the total career of each employee in a group
of new entrants, to fully pay for all benefits received by
that group, including all elig7ble survivors. Normal cost is
formally defined as the present value of future benefits di-
vided by the present value of future compensation. These
values are expressed as a percentage of payroll, and pro-
vide aconsistent measure of relative pension costs over
time.
The Congressional Research Service (CRS) priced Op-
tions Aand B as separate plans, as if the entering group of
employees were covered by ene or the other. Allowing the
group of employees to choose between the plans at entry
will not affect cost projections, although permitting em-
ployees to choose at some point after entry could have a
significant impact on costs as the group began to separate
according to actual advantages. CRS has not attempted to
estimate the extent of this `adverse selection" contingen-
cy, but its potential magnitude would increase with the
distance over time between entry and the point of choice.
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CRS is not providing estimates of long-term tax revenue
effects of the tax advantages of any part of the system.
Measuring those potential advantages requires the incor-
poration of easily challenged assumptions; however, in
theory the ultimate impact of the tax advantage will be
smaller than that of the existing Civil Service Retirement
System (CSRS) because the proposed plan costs less and
thus defers less in potentially taxable compensation. Any
estimates of short-term revenue losses or gains will be
done by the Congressional Budget Office.
TABLE 1.-COMPARISON OF ENTRY AGE NORMAL COST ESTIMATES FOR TWO
OPTIONS OF S. 1527 1
[In percent]
D ~ Empbyee p ye Employee
Em l share Total Em to r share Total
re (average) s re ;average)
Defined benefit plan .......................................... 13.0 .................. 13.0 14.2 1.1 :5.3
Social security a ............................................... 5.9 5.9 11.8 5.9 5.9 11.8
Increased FEGLI ....................................................................................................... .3 .................. .3
Capital accumulation plan (voluntary) a.......... 3.0 3.0 6.0 1.5 2.6 4.1
Full cost' ......................................................... 21.9 8.9 30.8 21.9 9.6 31.5
All cost figures are rounded to the nearest tenth of a percent. Administrative costs and benefits to special
groups are excluded. Under the current CSRS these costs are estimated to be 0.1 and 0.3 percent of pay, respec-
tively.
: Social security cost is the percentage of total Federal payroll taxable for social security (OASDI).
For employees, cost of the capital accumulation plan is shown as the average cost. Average cost is deter-
mined by dividing the projected sum of all contributions (up to the specified matching limit for each employee) by
the number of employees, assuming the estimated rate of full participation. The cost to the government is the
employee cost times the matching rate.
* Average full rwst includes projected average employee contribution and employer match to the capital accu-
mulation plan.
TABLE 2.-ENTRY AGE NORMAL COST OF THE TWO OPTIONS OF S. 1527 BY
BENEFIT NORMAL COST 1
[Percent of total Federal pay]
Annuities to employees:
Optional retirement ..........................................................................................................
9.5
10.6
Involuntary retirement ......................................................................................................
.3
.5
Disability retirement .........................................................................................................
9
1.5
Deferred retirement ..........................................................................................................
.6
.6
Subtotal, retirement ..................................................................................................... 1
1.3
13.2
Annuities to survivors of:
Age retirees .....................................................................................................................
1.0
1.2
Disability retirees .............................................................................................................
.3
.3
Active employees ..............................................................................................................
4
.6
Refunds .........................................................................................................................................................................
Total:
FEGLI ................................................................................................................................................. .3
Defined benefits ............................................................................................................... 13.0 15.3
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Average capital accumulation 2 ........................................................................................ 6.0
4.1
Social security 9 ............................................................................................................... 11.8
11.8
All benefits ....................................................................................................................... 30.8
31.4
Less employee contributions:
Defined benefit ..................................................................................................................................
1.1
Capital accumulation ........................................................................................................
3.0
2.6
Social Security * ..............................................................................................................
5.9
5.9
Total, employee contributions ......................................................................................
8.9
9.6
Total, employer cost .................................................................................................... 2
1.9
21.9
' Detail may not sum to totals due to rounding. Administrative costs and benefits to special groups are ex-
cluded.
ZBased upon net employer contributions matching average contributed by all workers (including nonpartici-
pants.
9Approximately 0.4 percent of payroll of the social security cost is not distributed to Federal workers but flows
to relatively lower-income social security participants outside the federal Government.
* Social security average contribution as a percent of total payroll.
Details of the various assumptions and methods used by the Con-
gressional Research Service to estimate costs are included in ex-
cerpt from their report following the replacement rate section in
this report.
Although the main objective of calculating the normal cost of a
pension plan is to ensure that it is properly funded, the normal
cost of a plan becomes a good comparative measure of costs among
various plans. The normal cost of the FRS to the Government is
21.9 percent. Using the same assumptions, the normal cost of the
CSRS is 25 percent.
The 21.9 percent figure includes the Government's matching
share for the Social Security contribution, the Government's contri-
bution to the basic pension plan, and the employer's matching
share to the thrift savings plan. The committee believes that the
benefits provided by S. 1527 at a normal cost of 21.9 percent com-
pare favorably to private sector plans. This also represents a signif-
icant reduction in cost from the current CSRS. The latest study of
typical private sector plan costs by the Congressional Research
Service indicates that the average employer cost for a group of
medium and large size firms is between 18 and 19 percent of pay-
roll, although some of the plans examined ranged as high as 25
percent in cost. The committee believes that the normal cost of the
new FRS, when looked at in the context of the total Federal bene-
fits and employment picture, compares favorably with equivalent
private sector retirement and other benefit programs.
Financing FRS
Financing Federal retirement programs has become a subject of
significant public debate. Central to the controversy is the funding
for the current CSRS. Under the present retirement system, em-
ployees contribute 7 percent of their basic pay to the CSRS Trust
Fund. Employing agencies must contribute a matching amount.
Other contributions to the Trust Fund come from general revenues
of the Treasury. Therefore, under the current CSRS, there is a con-
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siderable subsidy from the General Fund. Even with this subsidy
the unfunded liability of the system grows each year.
In designing the funding arrangement for the new plan, the com-
mittee was guided by several considerations. Foremost is the inter-
est in sound fiscal and accounting management, whereby the Gov-
ernment will have a set cost for the retirement plan with the em-
ploying agencies paying fully for each of their employees in the
system. The committee is also sensitive to the public's concern
about mounting future financial obligations for Federal retirement.
In addition, the committee believes that the funding arrangement
for the new FRS should meet some of the same requirements im-
posed upon private sector pension plans.
To be a qualified plan for tax purposes, private plans normally
fund a plan on a normal cost basis, along with a process for amor-
tizing liabilities over time.
The funding approach of the current CSRS would fail to meet
the requirements of Federal law as applicable to private pension
plans. To meet such requirements, each agency would be required
to fund the normal cost of its employees at somewhere between 25-
29 percent of payroll, as opposed to the matching 7 percent. In ad-
dition, the Government would have to amortize the entire unfund-
ed liability of the system in 30-40 years.
With these concerns in mind, the committee chose to have the
new FR.S funded along the lines of Federal requirements for pri-
vate industry. This applies primarily to the basic pension plan por-
tion, since the thrift savings plan is fully funded by its very nature.
Employing agencies will be required to pay into the retirement
fund the full amount of the normal cost for their employees, esti-
mated to be approximately 13-15 percent of payroll depending
upon the option chosen. On an annual basis, when any part of the
FRS is found to be unfunded, the liability will be amortized by pay-
ments from the Treasury over a 30-year period. Therefore, the FRS
can be said to be fully funded through this process.
There is a key change in the funding arrangements under FRS
with regard to military service credit. Employees covered under
FRS, other than those who voluntarily transfer from the CSRS,
will automatically receive retirement service credit for their mili-
tary service without making a deposit to the retirement fund. How-
ever, the Department of Defense will reimburse the Civil Service
Retirement Fund annually for the normal cost of the military serv-
ice for individuals who become participants in the system during
that year.
Under the current plan, employees must reimburse the retire-
ment fund in amount equal to 7 percent of their military basic pay
in order to receive credit for their military service toward retire-
ment. However, the employer share comes from the general reve-
nues of the Treasury which has added to the funding liabilities of
the current CSRS. Since the basic pension portion of the FRS is
funded by the employer with no employee contribution, except
under option B, the committee believes that the contributions for
military service should be made by the employer. Just as each
agency pays for the normal cost of its employees, the Department
of Defense will pay the normal cost for the military service of those
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joining the new system. The committee believes this is in keeping
with the full funding approach.
Replacement rates
The committee again utilized the services of the Congressional
Research Service for projections of retirement benefits expected to
be received by participants of the FRS. Projected retirement bene-
fits are expressed in terms of replacement rates.
A replacement rate is simply the percentage of an employee's
final pay replaced by retirement benefits. Replacement rates are
oftA.^. ~~sed as a measure of the adequacy of retirement benefits.
Normally retirement income is lower than during the working
years, with most retirees facing lower expenses than when they
were working. However, it is expected that retirement income
should bear some relationship to pre-retirement earnings so that a
worker's standard of living is generally carried over into retire-
ment. This amount, or the replacement rate, will vary depending
on income level. Most experts agree that the rate for low income
employees should equal 70-80 percent, while for higher income
workers, the rate should be around 60 percent. For FRS this means
that the combined benefits from Social Security, the defined benefit
plan, and the thrift savings portion should egaual these generally
accepted replacement rates.
Analyzing replacement rates under the CSRS is relatively
straightforward. By applying the benefit formula of accrual rates
multiplied by average pay multiplied by years of service, the re-
placement rates are changed only by years of service. In other
words, under CSRS, employees who retire with 30 years of service
have replacement rates of 53 percent regardless of income level.
Those who retire after 35 years get pensions equal to 63 percent of
their final pay, whether they retired as a $15,000 per year worker
or as a $70,000 executive.
However, replacement rates under the new FRS are subject to
several variables-amount of Social Security benefit, years of serv-
ice, income level, age at retirement, and participation in the thrift
savings plan. While there is a natural tendency to compare rates
between CSRS and FRS, the comparison must consider the varia-
bles.
Replacement rates from the Social Security portion of the pen-
sion will vary by income level because of the "tilt" by which lower
income employees receive a greater proportion of their earnings
through the Social Security benefit. When the defined benefit plan
is added to the Social Security benefit, lower income employees re-
ceive alarger percentage of their salaries than their higher income
counterparts. To achieve the desired level of replacement rates for
a full career employee as discussed above, a lower income employee
would need to participate in the thrift plan at a lesser rate than a
higher income employee. The committee fully intends the plan to
provide benefits to employees at all income levels which are neces-
sary to maintain in the employees' standards of living into retire-
ment. Obviously, the eventual replacement rates will be dependent
in large part upon returns on investment in the thrift plan, as well
as wage growth and price inflation. As mentioned previously the
committee is utilizing the projections of the Congressional Re-
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search Service (CRS) to assist in explaining the benefits to be de-
rived from this plan. The following is an excerpt of the CRS report
detailing expected benefits at various ages and income levels, as
well as an explanation of the methodological support for the bene-
fit and cost projections.
The replacement rates are the projected percentages of
gross salaries received in the year before retirement that
are replaced by gross benefits in retirement. These bene-
fits and wages have been adjusted to 1985 levels. Workers
are shown retiring in the year 2030 after all increases in
the Social Security retirement age for full benefits have
phased in. By 2027, that age for full benefits will be 67,
and benefits received before that age will be reduced, with
a maximum of 30 percent the reduction applied to benefits
received at age 62, the earliest age of entitlement for old-
age retirement under the program. Social Security benefits
shown here are prorated to reflect the proportion of Social
Security benefits earned in Federal employment.
Capital accumulation plan (CAP) amounts are fully in-
dexed so that real values over time are shown. The tables
show replacement rates for individuals participating fully
in the respective CAPS and for those participating not at
all. Maximum annuities imply full participation up to the
matching limit throughout the work career; conversely,
the "without CAP" line represents workers never partici-
pating. Experience from the private sector suggests that
most workers would not exhibit either of these polar char-
acteristics but would vary their participation in response
to changing personal or broader economic circumstances.
TABLE B-1.-GROSS PERCENTAGE OF PRERETIREMENT SALARY REPLACED BY
POSTRETIREMENT BENEFITS FOR WORKERS RETIRING UNDER CURRENT
CSRS IN THE YEAR 2030
[Final salaries have been adjusted to 1985 dollars]
Gross replacement rates:
10 years of service ....................................................
15
15
15
15
15
20 years of service ....................................................
34
34
34
34
34
30 years of service ....................................................
53
53
53
53
53
35 years of service ....................................................
63
63
63
63
63
40 years of service ....................................................
72
12
72
72
72
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TABLE B-2.-Gross Percentage of Preretirement Salary Replaced by Postretirement
Benefits for Workers Retiring in the Year 2030
[Final salaries have been adjusted to 1965 dollars]
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OASDI ....................................................................
27
21
16
12
10
CAP .......................................................................
22
22
22
22
22
Total rate at age 67 .............................................
79
73
68
64
61
(without CAP) ...........................................................
(57)
(51)
(46)
(42)
(39)
Pension ..................................................................
29
29
29
29
29
OASDI ....................................................................
27
21
16
12
10
CAP .......................................................................
22
22
22
22
22
Total rate at age 80 .............................................
79
73
68
64
61
(without CAP) ...........................................................
(57)
(51)
(46)
(42)
(39)
OPTION B
At retirement:
Total rate ...............................................................
79
72
67
63
61
(without CAP) ...........................................................
(59)
(53)
(48)
(44)
(42)
Pension ..................................................................
32
32
32
32
32
OASDI ....................................................................
27
21
16
12
10
CAP .......................................................................
19
19
19
19
19
Total rate at age 67 .............................................
79
72
67
63
61
(without CAP) ...........................................................
(59)
(53)
(48)
(44)
(42)
Pension ..................................................................
32
32
32
32
32
OASDI ....................................................................
21
21
16
12
10
CAP .......................................................................
19
19
19
19
19
Total rate at age 80 .............................................
19
12
67
63
61
(without CAP) ...........................................................
R
ti
t
t
62
ith
(59)
f
40
(53)
i
(48)
(44)
(42)
e
remen
a
age
w
OPTION A
At retirement:
Total rate ...............................................................
years o
89
serv
ce
83
78
74
12
(without CAP) ...........................................................
(64)
(58)
(53)
(49)
(47)
Pension ..................................................................
31
37
37
37
37
OASDI ....................................................................
28
21
16
12
10
CAP .......................................................................
25
25
25
25
25
OPTION B
At retirement:
Total rate ...............................................................
86
80
15
71
68
(without CAP) ...........................................................
(64) ~
(58)
(53)
(49)
(47)
Pension ..................................................................
37
37
37
37
31
OASDI ....................................................................
28
21
16
12
10
CAP .......................................................................
R
ti
t
61
ith
t
22
f
30
22
i
22
22
22
remen
age
w
e
a
OPTION A
At retirement:
Total rate ...............................................................
years o
81
serv
ce
14
68
64
62
(without CAP) ...........................................................
(58)
(51)
(45)
(41)
(39)
Pension ..................................................................
21
21
27
27
27
OASDI ....................................................................
31
24
18
14
11
CAP .......................................................................
23
23
23
23
23
OPTION B
At retirement
Total rate ...............................................................
78
71
65
61
59
(without CAP) ...........................................................
(58)
(51)
(45)
(41)
(39)
Pension ..................................................................
27
27
27
21
27
OASDI ....................................................................
31
24
18
14
11
CAP .......................................................................
20
20
20
20
20
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Note.-Accural rate of .9 percent of pay per year fa the first 15 years of service and 1.1. percent per year for the remaining service. CAPS are indexed to
slaw actual value over time. Totals may not add due to rounding.
Cast and replacement rate models
The estimates of retirement costs and benefits presented
in this analysis were generated using the Congressional
Research Service's cost and replacement rate models.
These computer-based actuarial models were developed by
CRS with actuarial support and a Pension Valuation Lan-
guage (PVL) provided under contract by Hay-Huggins,
Inc., an actuarial consulting firm. It should be noted that
these models project future outcomes from assumptions.
While such projections are valuable tools for making rela-
tive cost and benefit comparisons, it is inappropriate to
imply or to seek a degree of accuracy for them that is in
principle unattainable.
1. Cost Model
The cost model projects long-term costs of pension de-
signs. The approach used is known as "entry age normal
cost," and can be generally understood as the percentage
of every paycheck that should be invested, over the total
career of each employee in a group of new entrants, to pay
fully for all benefits received by that group, including all
eligible survivors. Normal cost is formally defined as the
present value of future benefits divided by the present
value of future compensation. These values are expressed
as a percentage of payroll, and provide a consistent meas-
ure of relative pension costs over time.
2. Replacement rate model
The replacement rate model projects the percentage of
gross preretirement wages replaced by gross postretire-
ment benefits. This percentage can be shown at retirement
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and at various ages after retirement, with the latter ex-
pressed in values relative to purchasing power at retire-
ment. Capital accumulation replacement rates assume the
purchase of an annuity indexed to the assumed rate of in-
flation.
Data and assumptions
The cost and replacement rate models required the use
of certain data and assumptions, in order to project cost
and benefit outcomes for employees entering work in 1985
and retiring in the year 2030. A profile of the Federal
work-force into the future was drawn from data of the cur-
rent system, and other factors pertaining to costs and ben-
efits were identified and assumptions about the relative
weight of those factors were made. Complete documenta-
tion of the methodology, data and basis for all assumptions
is available from CRS.
1. Demographic assumptions
Given the order of magnitude of Federal employment,
fairly reliable data on the Federal workforce could be ob-
tained, and was used whenever appropriate. The vast ma-
jority of the data used to construct a demographic profile
of the Federal workforce was provided by the Office of Per-
sonnel Management (OPM). These data included career
patterns, mortality and disability rates, probability of leav-
ing asurviving dependent, etc. Certain modifications were
made to the OPM data that lessen the growth over time in
the patterns of career improvement, and social security es-
timations of future improvements in mortality were also
incorporated.
2. Economic assumptions
All economic assumptions were taken from the 1985
Social Security Trustees' Report under the designation,
"Intermediate II-B." The II-B assumptions are most com-
monly accepted as being neither optimistic nor pessimistic.
When the 1986 Trustees' report is issued, CRS will incorpo-
rate any changes to II-B into the cost and replacement
rate models. For 1985, the assumptions were annual aver-
age increases of: Interest, 6.1 percent; wages, 5.5 percent;
and prices, 4.0 percent.
Behavioral assumptions
Changes in plan designs relative to one another will
cause changes in behavior which in turn affect plan costs.
The changes in assumed rates of retirement, separation,
etc., were made by the actuarial consultant, after research
and discussions with CRS staff.
.~. The cost of Social Security
Generally, the cost of Social Security to its participants
is the same as the tax that must be paid to the program.
For these estimates, the cost of Social Security is the ratio
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of Social Security (OASDI) taxes to total Federal payroll
over the 75-year period of the projection, evenly divided be-
tween employees and the Federal Government as employ-
er. Under Social Security II-B assumptions, the benefits
and taxes of the program are roughly in balance over that
period, if the tax on Social Security benefits is treated as a
revenue to the program. It should be noted, however, that
some of the Social Security taxes on Federal payroll are
not received back by Federal workers in the form of bene-
fits because the average of Federal wages covered by Social
Security exceeds the average covered wage in employment
outside the Federal Government. Because the Social Secu-
rity formula enhances the benefits of lower-paid workers,
approximately 0.4 percent of payroll of the tax credited to
Social Security from Federal wages is redistributed to
workers outside the Federal Government. If the Federal
Government is viewed, not as an employer, but in its other
role as participant in the national economy, this redistrib-
uted amount could be construed as savings.
Other differences in the pattern of payments between
the present CSRS and Social Security are also taken into
consideration when costs or replacement rates for a new
plan incorporating Social Security are compared to the
current system. The value of this difference is approxi-
mately 2 percent of payroll. About two-thirds of the differ-
ence is attributable to the portable rights to Social Securi-
ty earnings credits retained by employees who leave em-
ployment with less than a full career. The remainder of
the difference, after certain offsets and overlaps are
netted, is attributable to dependents' benefits payable
under Social Security but not payable from the current
CSRS. The sum or these differences in the pattern of pay-
ments has been distributed across the various benefit com-
ponents of the proposal and is thus reflected in lower re-
placement rates at retirement (excluding benefits from
capital accumulation) of about 5 percent of total benefits
attributable to the employer share of total plan costs.
5. Estimated capital accumulation costs
Cost of the capital accumulation plans analyzed by CRS
depend on the participation rate of individuals. Such rates,
expressed as "percent of full participation," are influenced
by two features of the plan: The rate at which employee
payments to the capital accumulation plan are matched by
employer payments, and the ceiling on employee contribu-
tions eligible for such matching dollars. Some employees
will contribute the full amounts permitted by the plan
specifications, others only some, still others not at all. The
percent of full participation is the net average of full par-
ticipation after all full, partial, and zero contributions
have been combined.
The cost to the Federal Government of the capital accu-
mulation plans is established by multiplying the matching
rate specified for the plan by the estimated percent of full
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participation. For example, Hay-Huggins, Inc., estimated
that a plan with a 50-percent employer match of employee
contributions to 6 percent of pay would acquire a 55-per-
cent average full participation. Multiplying that rate by
the maximum Government match (3 percent) yields a Fed-
eral Government cost for the plan of 1.65 percent of pay.
This proposal includes a capital accumulation plan in
each option, and both options permit employees to contrib-
ute as much as 10 percent of their salaries into these ar-
rangements. In option A, the first 5 percent of the employ-
ee contribution is matched dollar for dollar. In option B,
the first 1 percent is matched dollar for dollar, percents 2
and 3 are matched by one-half the amounts, and percents
4, 5, and 6 are matched at a rate of one-fourth the amount
of the employeee contribution. Hay/Huggins, Inc. esti-
mates that in these options, the phased vesting of 20 per-
cent per year for the first 5 years would reduce the cost to
the Government approximately 0.03 percent, as employees
who separated with less than 5 years of service lost por-
tions of the matching amount.
Thus, in option A, at a 60-percent rate of full participa-
tion, employees would contribute an average of approxi-
mately 3.0 percent of salary, and the Federal Govern-
ment's matching cost would be approximately 3.0 percent
of pay. In option B, at a 44-percent rate of full participa-
tion, employees would contribute an average of 2.6 percent
of pay and the corresponding government cost would be
approximately 1.5 percent of payroll. Documentation of the
method for arriving at the variable used for the capital ac-
cumulation plan cost assumptions is available from CRS.
The opening section provides that the Act is to be known as the
"Federal Retirement Reform Act of 1985".
This section indicates purposes of the legislation, which sets forth
a new program of retirement, thrift-savings, survivors and disabil-
ity benefits for those Federal civilian employees who are covered
under Social Security. These purposes include providing employees
with financial security through a retirement program that com-
pares favorably with those found in the private sector, encouraging
all employees to set aside funds for retirement, and giving employ-
ees more options as to career mobility and financial planning for
retirement.
Title I establishes a new program of retirement and other bene-
fits for most Federal civilian employees who are covered by Social
Security. Because Social Security covers all employees newly hired
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on or after January 1, 1984, this new program will gradually super-
sede the existing Civil Service Retirement System (CSRS).
Section 101(a)
This section adds a new Chapter 84 to Title 5, United State Code,
after Chapter 83-Retirement, which continues to set forth the cur-
rent Civil Service Retirement System. Chapter 84, entitled "Feder-
al Retirement System", is subdivided as follows:
Subchapter I-Definitions; Federal Retirement System;
Subchapter II-Basic Plan;
Subchapter III-Thrift Savings Plan;
Subchapter IV-Survivor Benefits;
Subchapter V-Disability Benefits;
Subchapter VI-General and Administrative Provisions;
Subchapter VII-Transition Provisions;
Subchapter VIII-Federal Retirement Thrift Investment
Management System.
SUBCHAPTER I-DEFINITIONS; FEDERAL RETIREMENT SYSTEM
This subchapter sets forth basic definitions used in this chapter,
many of them identical or similar to those used in Chapter 83.
Section 8.01. Definitions
Paragraph (1) defines a participant's or annuitant's "account" to
mean the record of thrift plan funds held on that person's behalf.
Paragraph (2) defines "annuitant" to mean a former employee
who has applied to receive an annuity under this chapter that he
or she is entitled to receive.
Paragraph (3) defines "average pay" to mean the employee's
highest average rate of basic annual pay, computed over 5 consecu-
tive years, or over the period of total credited service if less than 5
years.
Paragraph (4) defines "basic pay" to mean a participant's basic
rate of legally scheduled pay, subject only to the limits in sections
5308 and 5382(b) relating to statutory pay limits on General Sched-
ule pay (Executive Level V) and Senior Executive Service pay (Ex-
ecutive Level IV) but not more than the rate for Level I of the Ex-
ecutive Schedule. This new definition of basic pay ensures that em-
ployee retirement benefits will not be restrained by appropriation
limitations on the amount of pay that will be payable when the
legal rate of pay is higher.
Paragraph (5) defines "Board" to mean the Federal Retirement
Thrift Investment Board established under section 8491(a).
Paragraph (6) defines "Civil Service Retirement and Disability
Fund" to mean the existing fund established under section 8348.
Paragraph (7) defines "court" to mean a Federal, State or Indian
court, or a court of the District of Columbia, Puerto Rico or a U.S.
territory or possession, having jurisdiction.
Paragraph (8) defines "Director" to mean the Director of the
Office of Personnel Management (OPM).
Paragraph (9) defines "dynamic assumptions" to mean economic
assumptions that reflect long-term future increases in wages and
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prices and are used in determining actuarial costs for a retirement
system.
Paragraph (10) defines "earnings" of the Thrift Savings Fund to
mean the investment yield received or the gain realized.
Paragraph (11) defines "eligible former spouse" to mean someone
who was married to a participant or former participant for at least
9 months.
Paragraph (12) defines "employee" to mean-
(A) an individual described in subparagraph (A), (E), (H), (I),
or (J) of section 8331(1), relating to employees of a Federal De-
partment or agency, U.S. Commissioners, employees of a
county committee established under section 590h(b) of title 16,
employees of Gallaudet College, staff members of a former
President, certain aliens employed by foreign governments and
serving the interests of the U.S., and employees of the U.S.
Park Police and the U.S. Secret Service; and
(B) a congressional employee as defined in section 2107, in-
cluding atemporary congressional employee;
provided that the individual had some period of Federal service
covered under Social Security after 1983, excluding (1) persons des-
ignated by certain clauses of section 8331, relating to Federal jus-
tices or judges, employees covered by another Federal retirement
system, certain temporary employees of the courts, certain employ-
ees of the Tennessee Valley Authority, certain student-employees
and teachers employed during summer recess periods; (2) any indi-
vidual excluded under section 8402(bx2), relating to temporary or
intermittent employees, (3) any individual covered by the Civil
Service Retirement System on December 31, 1983 who has not had
a break in service of more than 1 year after that date and who has
not transferred into the new plan.
This definition no longer includes employees of the District of Co-
lumbia.
Paragraph (13) defines "Employee Advisory Committee" to mean
the committee appointed under section 8493 of this title.
Paragraph (14) defines "Executive Director" to mean the individ-
ual appointed under section 8494(a)(1).
Paragraph (15) defines "firefighter" to mean an employee with
rigorous firefighting duties that require young and vigorous indi-
viduals, as determined by OPM after considering the recommenda-
tion of the employing agency, and an employee who is transferred
directly to a supervisory or administrative position after perform-
ing 10 years of actual firefighting duty. This is a more restrictive
definition than under present law. The committee expects that
OPM will review every position that an agency requests to be treat-
ed as a firefighter position and only authorize the usage of this def-
inition where an employee in that position will actually and direct-
ly participate in firefighting activities. The committee added the
caveat of supervisory and administrative positions to encourage
upward mobility in career employment. However, to qualify for the
definition, such employees in supervisory or administrative posi-
tions must have at least 10 years of actual firefighting duties.
Paragraph (16) defines "Fund" to mean the Civil Service Retire-
ment and Disability Fund.
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Paragraph (17) defines "Government" to mean the Federal Gov-
ernment and Gallaudet College.
Paragraph (18) defines "law enforcement officer" to mean an em-
ployee with rigorous law enforcement duties that require young
and vigorous individuals, as determined by OPM after considering
the recommendation of the employing agency, and an employee
who is transferred directly to a supervisory or an administrative
position after performing 10 years of actual law enforcement duty.
This is a more restrictive definition than under present law. The
limitations in the usage of this definition are similar to those for
the firefighter definition. The committee expects far fewer posi-
tions to be defined as law enforcement positions than under cur-
rent law. Frequent contact with criminals is an insufficient reason
for a position to be defined as a law enforcement position.
Paragraph (19) defines "loss" with respect to the Thrift Savings
Fund to mean loss experienced from the investment of sums in the
Fund.
Paragraph (20) defines "lump-sum credit" to mean the same as
in section 8331(8).
Paragraph (21) defines "Member" to mean a Member of Con-
gress, except a Member who was serving in Congress on December
31, 1983 who has not transferred into the new plan.
Paragraph (22) defines "military reserve technician" to mean a
military reserve member who is assigned to a civilian technical po-
sition which may be filled only by a military reserve member serv-
ing in a specified military grade. This definition includes national
guard technicans.
Paragraph (23) defines "net earnings" of the Thrift Savings Fund
to mean the excess of earnings over losses.
Paragraph (24) defines "net losses" of the Thrift Savings Fund to
mean the excess of losses over earnings.
Paragraph (25) defines "normal cost" to mean the entry-age
normal cost of retirement and related benefits, computed by OPM
as a level percentage of basic payroll using generally accepted actu-
arial practices and standards including dynamic assumptions, i.e.,
assumptions that anticipate inflation in wages and prices. The
normal cost as computed under this definition shall be used to
value the cost of the retirement plan for all other administrative
purposes.
Paragraph (26) defines "Office" to mean the Office of Personnel
Management.
Paragraph (27) defines "participant" to mean an employee, a
Member or person receiving disability benefits under this chapter.
Paragraph (28) defines "price index ' to mean the same version of
the Consumer Price Index that is used under Chapter 83.
Paragraph (29) defines "service" of a participant or former par-
ticipant to mean-
(A) employment as a participant after December 31, 1986;
(B) employment subject to the interim plan;
(C) military service, as provided in section 8332(c) subject to
section 8419(a);
(D) employment as a participant in the old plan, to the
extent provided by section 8472(a); and
(E) leave without pay as treated under the current system.
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Service is computed as full years and twelfth parts thereof, ex-
cluding fractions of months.
Paragraph (30) defines "supplemental liability" to mean the ac-
tuarial value of future benefits that is not covered by normal cost
contributions under section 8418(a) or by assets of the Fund. Con-
tributions made by agencies under the interim arrangement to
CSRS will be credited to the FRS for the purpose of determining
this liability. In addition, the Office will credit any excess unfunded
liability payments made by the Postal Service for employees who
transfer form CSRS to the new plan.
Paragraph (31) defines "System" to mean the Federal Retire-
ment System described in section 8402.
Section 8.02. Federal Retirement System; participation
Subsection (a) states that the provisions of Chapter 84 constitute
the Federal Retirement System (FRS).
Subsection (b) states that all employees and Members are partici-
pants in the FRS except temporary or intermittent employees who
are excluded by OPM, the Architect of the Capitol or the Librarian
of Congress.
Section 8103. Relationship to the Social Security Act
This section states that all benefits payable under the system are
in addition to Social Security benefits, except as otherwise provid-
ed.
SUBCHAPTER II-BASIC PLAN
Subchapter II describes the basis annuity plan, which is a de-
fined-benefit plan covering all permanent employees who were
hired or rehired after December 31, 1983 and Members of Congress
who began service after such date and were subject to Social Secu-
rity on or after January 1, 1984, and any employees or Members
subject to the CSRS who elect to transfer to the new plan.
Section 8.11. Entitlement to immediate retirement
This section sets forth the various age and service requirements
for an employee's or Member's entitlement to immediate retire-
ment benefits, computed under section 8413 through 8415.
Subsection (a) provides for immediate retirement benefits at age
55 with 10 years of service.
Subsection (b) provides for immediate retirement benefits at age
62 with 5 years of service.
Subsection (c) provides for immediate retirement benefits at age
50 for a law enforcement officer or firefighter who has served in
one or both occupations for 20 years, or at any age after serving for
25 years. The mandatory retirement ages under CSRS for these oc-
cupations are applicable in this plan.
Subsection (d) provides for immediate retirement benefits at age
50 for an air traffic controller who has served in such an occupa-
tion for 20 years, or at any age after serving for 25 years. The man-
datory retirement age under CSRS for an air traffic controller is
applicable in this plan.
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Subsection (e) provides for immediate retirement benefits at age
50 for an employee with 20 years of service or at any age after 25
years of service, in the case of an employee, other than a law en-
forcement officer, firefighter or air traffic controller, who-
(A) is involuntarily separated except for cause and has not
declined a reasonable offer of employment within two grades
or pay levels which is within the employee's agency and com-
muting area, or
(B) is voluntarily separated while serving in a geographic
area designated by OPM, from an agency undergoing a reduc-
tion in force or reorganization where a significant percentage
of employees are downgraded or separated.
Subsection (fl specifies that annuities under this section are com-
puted under section 8413, 8414 and 8415.
Subsection (g) provides that a former employee or Member enti-
tled to workers' compensation benefits under subchapter I of chap-
ter 81 is not entitled to an annuity while receiving such benefits.
Section 8l~12. Entitlement to deferred retirement
This section sets forth the various age and service requirements
for an employee's or Member's entitlement to deferred retirement
benefits, computed under sections 8413 through 8415.
Subsection (a) provides that a participant who leaves Govern-
ment employment, while under age 55 and with 10 or more years
of service, may elect deferred retirement benefits that begin at any
age between 55 and 62, as the participant elects.
Subsection (b) provides that a participant who leaves Govern-
ment employment, while under age 62 and with 5 years but less
than 10 years of service, may elect deferred retirement benefits
that begin at age 62.
Subsection (c) provides that an annuity authorized under this
section is computed under sections 8413, 8414, and 8415.
Subsection (d) states that someone receiving benefits under the
Federal Employees Compensation Act, chapter 81, is not entitled to
an annuity from the basic plan while receiving such benefits.
Section 8.13. Computation of annuity
This section provides the basic formula for computing the annu-
ity aparticipant is entitled to receive. This formula does not reflect
possible adjustments for reduced early retirement benefits or elec-
tion of a survivor annuity or for cost-of-living increases.
Subsection (a)(1) gives the basic annuity formula under both op-
tions-.9 percent of the employee's average pay multiplied by the
number of years service which does not exceed 15 years; 1.1 per-
cent multiplied by the number of years of service more than 15
years, except as provided in subsection (a)(2).
Subsection (ax2) provides the special annuity formula of one per-
cent times the years of service for a law enforcement officer, fire-
fighter, air traffic controller, or military reserve technician.
Subsection (a)(3) provides that unused sick leave is counted as ad-
ditional service under this formula, to the same extent as provided
in section 8339(m), if the employee retires entitled to an immediate
annuity or dies leaving a survivor or survivors entitled to a survi-
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vor annuity. The unused sick leave is not counted toward the serv-
ice needed to become entitled to an immediate or deferred annuity.
Subsection (b) provides for an annuity supplement to individuals
retiring after at least 25 years service or at age 50 with 20 years of
service as a law enforcement officer, firefighter, or air traffic con-
troller, payable from retirement until age 62. The intention is that
the amount of the individual's benefits will not change appreciably
when payment of this supplement stops at the time the retired em-
ployee reaches age 62 and Social Security first becomes payable.
The annuity supplement is the estimated Social Security amount,
computed from the employee's covered earnings in one or more of
the above occupations as if he or she were then 62 years old. The
supplement should equal the amount of Social Security benefits
that the employee is projected to receive at age 62 multiplied by
the ratio of covered earnings attributable to such occupation over
total covered earnings. This amount is increased each year by the
percentage increase, if any, in the average wage index published by
the Social Security Administration.
Subsection (c) provides that a year of part-time service will be
treated proportionately as a fraction of a year in the annuity for-
mula, with 5-year average pay based on the full-time rate of pay.
The committee intended that an annuity computed under this sec-
tion accurately reflect the amount of service of an annuitant. The
committee also believes that part-time work should be a viable
option for workers reaching or nearing retirement. This provision
does not contain the current financial penalties that exist under
the CSRS for employees who change from full-time to part-time
employment.
Section 8.~1/~. Reduction for early retirement
This section provides for reduction percentages that apply to an-
nuities when employees retire early and elect to begin receiving
benefits before the normal retirement age. It also provides for ex-
ceptions to the early retirement reduction for certain annuitants.
Subsection (a)(1) provides that a 2-percent reduction factor ap-
plies for an annuitant who retires between ages 55 and 62 after 30
or more years of service other than a law enforcement officer, fire-
fighter, air traffic controller, military reserve technician as speci-
fied in paragraph (3xA) and in subsection (c) of this section), and an
annuitant who elects to make contributions under section 8418(c).
Benefits are reduced by 2 percent per year (one-sixth of 1 percent
for each month) by which the benefit commencement date precedes
age 62. This 2-percent reduction factor also applies to benefits for
involuntary retirement under section 8411(e).
Subsection (a)(2) provides that a 5-percent reduction factor ap-
plies to voluntary early retirement benefits commencing before age
62 when the employee has less than 30 years of service. Benefits
are reduced by 5 percent per year (five-twelfths of 1 percent for
each month) by which the benefit commencement date precedes
age 62.
Subsection (a)(3) provides that a 2-percent reduction factor ap-
plies to involuntary retirement benefits commencing before age 55
for a military reserve technician. Benefits are reduced by 2 percent
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per year (one-sixth of 1 percent for each month) by which the bene-
fit commencement date precedes age 55).
Subsection (b)(1) provides that the annuity reductions in subsec-
tion (a) shall not apply to law enforcement officers, firefighters and
air traffic controllers as provided in section 8411 (c) and (d).
Subsection (b)(2) provides that subsection (a) shall not apply to an
annuitant who elected to make contributions under section 8418(c),
did not receive a refund of such contributions, is at least 55 years
of age, and has completed 30 years of service.
Subsection (c) provides that subsection (a)(1) shall not apply to a
participant who separates from Government employment as a mili-
tary reserve technician after becoming age 55 and completing 30
years of service.
Section 8/y15. Reduction for survivor annuities
Subsection (a) provides that an annuitant's annuity computed
under section 8413 or 8414 shall be reduced by 10 percent for each
survivor annuity which could be payable out of the Fund with re-
spect to the annuitant. For example, if the annuitant has elected
two survivor annuities for two potential survivors, the total reduc-
tion is 20 percent, and the annuity is paid at 80 percent of the un-
reduced amount.
Subsection (b)(1) provides that a reduction of an annuity for the
purpose of providing a survivor annuity will be adjusted in the case
of an annuitant who elected to make contributions under section
8418(c) and has not received a refund, to reflect any change in cir-
cumstances relating to entitlement to a survivor annuity. Such a
change includes the annuitant's marriage or remarriage after re-
tirement, with the new spouse eligible for a survivor annuity elect-
ed under section 8434, or election of a survivor annuity for a
former spouse under section 8436.
Subsection (b)(2) provides that an adjustment under paragraph
(1) of this subsection may not be made in the case of an annuitant
not described in such paragraph.
Section 8.16. Methods of payment
The basic annuity, computed as described in section 8413 and re-
duced for early retirement as described in section 8414, is paid to
the retired employee for life in a constant amount subject only to
cost-of-living adjustments, unless benefit payments are elected
under some other method. Certain other methods may be elected
by the employee, with the consent of the employee's spouse or
former spouse in some situations.
Subsection (a)(1) provides that OPM shall prescribe methods of
payment of annuities.
Subsection (a)(2) provides that these methods will include but not
be limited to monthly annuities payable (A) to the retired employee
only for life, (B) to the retired employee for life and thereafter in
an amount that is 50 percent of the annuity to the retired employ-
ee's surviving spouse without regard to any survivor annuity reduc-
tions under section 8415 or election under 8417(a), and (C) to the
retired employee for life and thereafter in an amount that is 50
percent of the annuity, computed without regard to an election
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under 8417(a), to a designated individual who has an insurable in-
terest in the annuitant.
Subsection (b)(1) provides that employees or former employees
must elect one of these alternative methods of payment when ap-
plying for an annuity. Subsection (b)(2) provides that a participant
may select a method of payment other than the joint and survivor
method in (a)(2xB) only if both the employee or former employee
and spouse sign an irrevocable written waiver of that method
before that annuity commences.
Subsection (bX3) provides that a joint and survivor annuity shall
be paid as described in (a)(2)(B) in the case of an annuitant who
fails to make an election under (bxl).
Subsection (b)(4) provides that an employee may not designate
another individual to be eligible for a survivor annuity under sub-
section (a)(2)(c) unless the employee is in good health, as deter-
mined by OPM.
Section 8l~17. Level benefits option
Subsection (a) provides for an employee who retires before age 62
with an immediate annuity to convert it to an optional annuity in
an amount that is higher up to age 62, and lower after age 62 as
provided in subsection (b).
Subsection (b)(1) provides that the amounts payable under this
level benefits option are computed so that at attainment of age 62
the total benefits including social security remain level, as nearly
as is practical.
Subsection (b)(2) provides that the option is an actuarial equiva-
lent, i.e., the value of all benefits payable under the option is equal
to the value of the benefits payable if the option were not elected.
Section 8/18. Contributions
Subsection (a) provides that each agency will contribute to the
Fund the normal cost of benefits for that agency's employees, as
determined by OPM using dynamic assumptions, including the cost
of annuity supplements under section 8413(b). The normal cost
computation paid by each agency will be reduced by the normal
cost attributable to military service since the Department of De-
fense will pay for that under section 8419. The contributions will
be made from salary appropriations or certain other funds. For
subsection (a) and (b), the committee intends for OPM to credit the
agencies for normal cost and supplemental liability payments from
contributions paid during the Federal Employees Retirement Con-
tribution Temporary Adjustment Act of 1983, and from any excess
unfunded liability payments made by the Postal Service for pre-
1984 employees who transfer to the new plan.
Subsection (b)(1) provides that each fiscal year OPM will compute
the supplemental liabilities attributable to employees of the U.S.
Postal Service and to non-Postal employees separately.
Subsection (b)(2) provides that these supplemental liabilities will
be amortized in 30 annual installments.
Subsection (b)(3) provides that each year OPM will notify the Sec-
retary of the Treasury and the Postmaster General of the amount
of the annual installment payable by them to amortize the liabil-
ity.
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Subsection (bx4) provides that the Secretary of the Treasury and
the Postmaster General shall pay to the Fund the annual install-
ment due as determined under subsection (bx3) before the close of
each fiscal year.
Subsection (bx5) provides that OPM may require the Board of
Actuaries of the Civil Service Retirement System to make actuarial
valuations and determinations, make recommendations, and main-
tain records in the same manner as provided in section 8437(f), re-
lating to data used in making periodic actuarial valuations of the
CSRS. OPM may use the Board of Actuaries' valuations and deter-
minations.
Subsection (c)(1) provides that a participant may elect to contrib-
ute to the Fund. An election, which is irrevocable, must be made
within 60 days after the participant first becomes a participant.
Subsection (cX2) provides that for an employee who elects to con-
tribute to the Fund under (cxl), the amount withheld from the
basic pay is equal to the difference between 7 percent of basic pay
and the amount of Social Security tax withheld for old age, survi-
vor and disability insurance.
Subsection (c)(3) provides that the amounts withheld shall be de-
posited in the Treasury of the United States to the credit of the
Fund.
Subsection (c)(4) provides that a participant who elects to contrib-
ute to the Fund shall agree to the deductions required in (2).
Subsection (c)(5) provides that section 8334(d) applies to refunds
of amounts deducted as required by paragraph (2) of this subsec-
tion.
Subsection (cX6) provides that a law enforcement ofiicer, fire-
fighter, air traffic controller, and military reserve technician may
not make an election under paragraph (1).
Subsection (d) provides that under regulations prescribed by
OMB, the head of an agency may request a reconsideration of the
amount of the normal cost and supplemental liability computed by
OPM under subsection (a) or (b). The Board of Actuaries of the
Civil Service Retirement System shall review the computation and,
if appropriate, recompute the amount. The determination of the
Board of Actuaries shall be final. The committee intends for the
Board of Actuaries to serve in an appeal capacity in this regard.
Section 8119. Funding of annuity attributable to military service.
Subsection (a) provides that participants get credit for military
service under this plan as provided in 8332(c), unless they have
transferred from the CSRS as provided in 8471(a)(1)(A). No deposit
is required from the employee. Employees who transfer from CSRS
may receive credit under CSRS for military service by making a
deposit as provided in 8334(j).
Subsection (b) provides that the Secretary of the Treasury is to
reimburse the Fund from Department of Defense appropriations
annually for the normal cost relating to military service of people
who join this plan during such fiscal year.
Subsection (c) provides that OPM shall compute the amount re-
quired in (b) and notify the Secretary of the Treasury.
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Section 81,20. Lump-sum benefits; designation of beneficiary; order
of precedence
Subsection (a) provides that a participant who has elected to
make contributions to the Fund under section 8418(c) may be paid
the portion of the lump-sum credit attributable to his or her contri-
butions and interest. The participant must be separated from Gov-
ernment employment for at least 31 consecutive days or be trans-
ferred to a position not subject to this subchapter. He or she must
apply to OPM for the refund and may not receive it if reemployed
in a position subject to this subchapter when the application is
filed, or if eligible of receive an annuity within 31 days after filing.
Subsection (b) provides that a participant or former participant
may designate a beneficiary or beneficiaries for purposes of this
subchapter.
Subsection (c) provides that lump-sum benefits shall be paid to
survivors of the participant who are alive when title to the pay-
ment arises. It provides that order of precedence for entitlement to
payment shall be the same as provided in 8342(c).
Subsection (d) provides for payment of the lump-sum refund to be
paid as provided in (c) if the participant or former participant dies
without a survivor.
Subsection (e) provides that if annuity rights of a deceased partic-
ipant and any survivors terminate before the total annuity pay-
ments equal the total lump-sum credit, the difference shall be paid
as prescribed in subsection (c).
Subsection (f) provides that if an annuitant dies, the accrued and
unpaid annuity shall be paid as provided in subsection (c).
Subsection (g) provides that accrued and unpaid annuity on the
termination of the annuity or survivor annuity shall be paid to the
individual. On the death of a survivor annuitant, accrued and
unpaid annuity will be paid in the same order of precedence as in
section 8342(8).
Subsection (h) provides that payment of the lump-sum credit may
be made only after notification to current and former spouses and
subject to court orders regarding former spouses.
Subsection (i) provides that interest on the lump-sum credit shall
be compounded annually at the rate computed under section
8334(e)(3).
Subsection (j) provides that payment of the lump-sum credit
voids all rights under this chapter which result from the election to
make contributions under 8418(c).
SUBCHAPTER III-THRIFT SAVINGS PLAN
This plan is financed by employee contributions and by matching
employer contributions. The plan is patterned after those found
among large employers in private industry. It includes many fea-
tures that have proved popular among employees and have
achieved excellent investment results at low cost. It is modified as
necessary to accommodate a public employee benefit program that
must also have broad acceptaiice among the general public.
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Section S1~21. Contributions
Subsection (a)(1) provides that at the point an employee chooses
to contribute to the Fund under section 8418(c) or within 60 days of
commencement of employment, he or she may contribute up to 10
percent of pay to the thrift plan in any year.
Subsection (a)(2) provides employees receiving disability benefits
under the new plan may contribute up to 10 percent of such bene-
fits in any year they receive such benefits.
Subsection (a)(3) permits employees to contribute unused portions
of prior year allowable contributions to the thrift plan up to a total
employee contribution of 15 percent of pay in any 1 year. Unused
amounts from prior years are not matched.
Subsection (ax4) provides that contributions will be made under
a regular program regulated by the Executive Director.
Subsection (a)(5) provides that employees will be given the oppor-
tunity to change their level of contributions at least once a year, as
regulated by the Executive Director. The committee intends that
the contributions will normally be a flat percentage of pay, but
other arrangements may be allowed as administratively feasible,
for example contributions that are coordinated with the Social Se-
curity payroll tax, which stops when the employee's pay during the
year reaches the maximum amount taxable, $39,600 in 1985.
Subsection (b)(1) provides that the employee's agency will make
contributions to the fund for the benefit of the employee or dis-
abled participant at the end of each pay period.
Subsection (b)(2) provides that agency s contribution will match
contributions up to 5 percent of employee pay at adollar-for-dollar
rate, except that for employees who also have elected to make a
contribution under section 8418(c), the agencies will match contri-
butions up to 1 percent of employee pay at a rate of a dollar for
dollar, percents 2 and 3 at a rate of 50? on a dollar and percents 4,
5, and 6 at a rate of 25? on a dollar.
Subsection (c) provides that the matching agency contributions
are derived from salary appropriations or from certain other funds.
Subsection (d)(1) provides that the amounts of pay contributed by
employees, and the matching employer contributions, are not in-
cluded in the employee's current gross income for Federal income
tax purposes. These amounts, and investment return on such
amounts, will instead be treated for tax purposes as described in
Section 401(a) of the Internal Revenue Code, relating to tax-quali-
fied pension and profit-sharing plans.
Subsection (d)(2) provides that this tax treatment will not apply
in any taxable year with respect to which section 402(a)(8) of the
tax code does not apply to contributions made to any qualified cash
or deferred arrangement within the meaning of section 401(k) of
the tax code. Thus, if the waiver of the constructive receipt doc-
trine embodied in section 402(ax8) with regard to salary reduction
plans is changed or eliminated, such a change will be applicable to
the tax treatment of this plan. The committee strongly believes
that Federal employees should be treated similarly to employees in
private industry for this purpose.
Subsection (e) provides that these amounts of pay are included in
wages, for purposes of payroll taxes under the Federal Insurance
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Contributions Act and crediting under the social security benefit
procedures, to the same extent as cash compensation to the em-
ployee.
Section 8122. Vesting
Subsection (a) provides that a participant who leaves Govern-
ment employment is entitled to his or her own contributions to the
plan, and the vested portion of the employer matching contribu-
tions as indicated in subsection (b), plus any gain, or minus any
loss, from investment of the employee contributions and the vested
portion of the employer match. The resulting amount is paid ac-
cording to the employee's election under section 8423.
Subsection (b) provides a table indicating the percentage of em-
ployer matching contributions that is vested, based on the number
of completed years of the employee's participation in the new
plan-
Number of completed years Percentage
Less than 1 year ............................................................................................................. 0
1 but less than 2 years .................................................................................................. 40
2 but less than 3 years .................................................................................................. 60
3 but less than 4 years .................................................................................................. 80
4 but less than 5 years .................................................................................................. 100
5 or more years ...............................................................................................................
An employee who dies while in Government service is 100 per-
cent vested. An individual making contributions during a period of
disability gets credit toward vesting for the period in which he or
she was contributing.
Subsection (c) provides for disposition of any amounts remaining
in the account of a participant who is less than 100 percent vested
and elects to receive payment under section 8423(c). In that event
the remaining balance for the year in which the election is made is
first used to pay administrative expenses of the Thrift Plan in-
curred during such year. Any part of this balance remaining after
payment of administrative costs in any year reverts to the Treas-
ury.
Section 8I~23. Entitlement and elections relating to entitlement
This section specifies the options a participant has to withdraw
his or her funds from the plan upon leaving Government employ-
ment. The options available depend on the participant's retirement
status under the basic pension plan set forth in subchapter I.
Subsection (a)(1) states that a participant entitled to an immedi-
ate annuity under the basic plan, a benefit recipient under chapter
81 of this title, or a participant entitled to disability benefits from
this plan has four options under the thrift plan:
(A) an immediate annuity,
(B) a deferred annuity,
(C) withdrawal of the thrift plan funds in one or more pay-
ments, or
(D) rollover of the funds to an individual retirement account
(IRA) or to a qualified pension plan.
Subsection (a)(2) provides that a disabled participant may make
an irrevocable election of one of these options only within 1 year of
the disability date.
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Subsection (b) states that a participant entitled to a deferred an-
nuity under the basic plan has four options under the thrift plan:
(1) a deferred annuity, commencing when the employee first
could receive a deferred annuity under the basic plan,
(2) a deferred annuity, commencing at a date after the em-
ployee first could receive a deferred annuity under the basic
plan,
(3) withdrawal of the thrift plan funds in one or more pay-
ments, commencing on or after the date the employee first
could receive a deferred annuity under the basic plan, or
(4) rollover of the funds to an individual retirement account
(IRA) or to a qualified pension plan upon separation from Gov-
ernment employment.
Subsection (c) states that a participant not entitled to any annu-
ity under the basic plan has two options under the thrift plan:
(1) withdrawal of the thrift plan funds in one or more pay-
ments, commencing at age 62, or
(2) rollover of the funds to an individual retirement account
(IRA) or to a qualified pension plan upon separation from Gov-
ernment employment.
Subsection (d) provides that a participant who has elected a de-
ferred annuity from the thrift plan to commerce at a date later
than the earliest possible date, may modify the election and choose
an earlier date.
Section 8/~2.~. Annuities; metTzods of payment; election; and computa-
tion
Subsection (a) provides that the Board which administers the
thrift plan will prescribe methods of payment of annuities, which
will include at least the following five monthly annuity methods:
(A) payable to the annuitant for life in a level monthly
amount,
(B) payable to the annuitant and spouse while both are alive
in a level monthly amount, and to the survivor for life in an
appropriate amount,
(C) payable as in method (A) but with annual increases,
(D) payable as in method (B) but with annual increases, and
(E) payable to the annuitant during the joint lifetime of the
annuitant and a designated individual who has an insurable
interest in the annuitant's life, and to the survivor for life.
Subsection (b) provides that an employee electing to receive an
annuity from the thrift plan must elect one of the methods speci-
fied in subsection (a) before the date the annuity is to begin.
Subsection (c) provides that the amount of annuity available
from the thrift plan will be determined by regulation on an actuar-
ial basis.
Section 8425. Administrative provisions relating to payments and
elections
The Executive Director will arrange for payout of thrift plan
benefits and will issue regulations giving the procedures for elect-
ing to receive benefits. Such elections may not violate the terms of
applicable court orders as to dissolution of marriage or property
settlement.
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Section 8/26. Thrift Savings Fund
This section describes the way the Government will account for
the thrift plan funds being held on behalf of the participants.
Subsection (a) establishes a Thrift Savings Fund in the Treasury
of the United States.
Subsection (b) states that the Thrift Savings Fund contains all
the contributions plus the net earnings or minus the net losses
from investment of the contributions, reduced by payouts from the
fund.
Subsection (c) makes the Thrift Savings Fund available for thrift
plan purposes-to invest, pay benefits, pay administrative ex-
penses, make loans to participants, and purchase insurance as pro-
vided in section 8499.
Subsection (d) provides that except as otherwise provided by Fed-
eral law, sums in the Thrift Savings Fund may not be assigned and
are not subject to legal process, except for amounts being paid to
individuals who legally owe payments for child support, alimony or
debts to the Government.
Subsection (e) states that the Board will establish a program of
loans to a participant in the event of financial hardship, using the
sums held in an employee's account derived from the employee's
contributions and net investment earnings. The program will be
subject to the same conditions prescribed by section 408(b)(1) of
ERISA.
Subsection (f) states that the Thrift Savings Fund may be used
only for the purposes specified in this section.
Section 8/27. Investment of Thrift Savings Fund
This section specifies how the thrift plan funds are invested, as
designated by individual participants with respect to funds held on
their behalf, subject to certain restrictions during the plan's first
10 years. The investments are patterned after those which have
proven successful in private plans in recent years, offering employ-
ees acarefully selected and limited choice of investments either
within the Government or in the private sector, and in either fixed
income or equity (common stock) investments.
Because this is a Government plan, and so must have broad ac-
ceptance among the general public as well as employees, the pri-
vate sector investment options are designed to minimize decision-
making by the Government that might not allow private invest-
ment markets to maintain their stability and objectivity.
The fixed income investments are intended to be highly secure
debt instruments which guarantee a specified rate of return. The
equity investments use a common stock index fund, which provides
a broad cross-section of the stock market in a way that adjusts
automatically for changing conditions and securities prices; index
funds are widely used in private plans because of their simplicity,
very low administrative costs and proven ability to provide good in-
vestment results.
By offering only a few alternative choices of investment funds,
just as private plans do, this plan uses its size and mass purchasing
power to make the funds available for investment work harder and
more effectively than is otherwise possible, and avoids turning the
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workplace into a marketplace where numerous promoters will con-
tact employees to sell them investment products.
Subsection (a) defines terms relating to thrift plan investments:
(1) The "Common Stock Index Investment Fund" is one of
the three optional investment funds established under this sec-
tion, providing for common stock investments.
(2) The term "equity capital" is defined for use in specifying
minimum size requirements for certain asset managers.
(3) The "Fixed Income Investment Fund" is another of the
three optional investment funds established under this section,
providing for fixed-income investments in the private sector.
(4) The "Government Securities Investment Fund" is an-
other of the three optional investment funds established under
this section, providing for investment in Government securities
whose interest rates are tied to the average rate of long-term
Government securities.
(5) The term "net worth" is defined for use in specifying
minimum size requirements for certain asset managers.
(6) The term "plan" means an employee benefit plan, as de-
fined in the Employee Retirement Income Security Act of 1974
(ERISA).
(7) The term "qualified professional asset manager" is de-
fined as in regulations of the Department of Labor under
ERISA, and includes an entity that can legally serve an em-
ployee benefit plan and that meets minimum size require-
ments, in any of four classes-
(A) abank,
(B) a federally insured savings & loan association,
(C) aState-licensed insurance company, or
(D) a federally registered investment advisor.
(8) The term "shareholder's or partner's equity" is defined
for use in specifying minimum size requirements for certain
asset managers.
Subsection (bxl) provides that the Board administering the plan
will establish at least three alternative funds for investment of
thrift plan funds-
Fund A, the Government Securities Investment Fund, in-
vests in U.S. Government securities;
Fund B, the Fixed Income Investment Fund, invests in in-
sured contracts, certificates of deposit or other securities which
guarantee the return of principal plus a specified rate or rates
of interest over a certain period of time;
Fund C, the Common Stock Index Investment Fund, invests
in common stocks according to an index as specified in subsec-
tion (b)(2).
The Board may establish additional funds as appropriate.
Subsection (bx2) describes the operation of the Common Stock
Index Fund. First, the Board will define an index representing a
broad cross-section of the stock market. The index may consist of
either: all of the stocks listed on one or more national exchanges
and over-the-counter securities quoted publicly on an automated
basis; or a commonly recognized index comprising common stock
which has an aggregate market value which is as complete a repre-
sentation of the U.g. equity markets as is reasonably practicable.
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Second, the Common Stock Investment Fund is simply invested in
all of the stocks making up the index, with a percentage of the
fund invested in given stock equal to the percentage of the index
represented by that stock as computed from the aggregate market
values of the respective stocks or in a sampling of stock designed to
replicate the performance of the defined index. Third, the Executive
Director may exclude certain stocks from the index based upon a
recommendation from the Employee Advisory Committee on rea-
sons other than the standards in section 8495.
Subsection (c) provides that the Executive Director shall invest
moneys in the Government Securities Fund that are not directed by
employees into other funds. Thrift plan funds available for invest-
ment will go to the Government Securities Investment Fund when
required by the limitations applying during the plan's first 10
years, or when participants have not elected to use one of the other
funds.
Subsection (d) outlines the procedures for participants to elect
the funds in which their accounts will be invested. A participant is
allowed to make such an election at least once a year, subject to
the limitations in subsection (e), in accordance with regulations of
the Executive Director. Participants may move all of their moneys
out of one fund to another during these periods with the exception
of moneys mandated to be in Government securities. The partici-
pant is given a specified period of time to make the annual election
after being sent an annual statement of his or her account in ac-
cordance with subsection 8428(b). Finally, the participant must sign
an acknowledgment when investing in funds other than the Gov-
ernment Securities Fund that the participant understands that the
investment is made at the participants risk and that returns on
the other funds are not federally guaranteed.
Subsection (e) describes the limitations on thrift plan invest-
ments during the plan's first 10 years, intended to avoid sudden ad-
ministrative, financial, or budgetary impacts. During these years a
certain minimum percentage of the contributions to a participant's
account must go to the Government Securities Investment Fund-
Minimum percentage of each participant's
contributions that go into Government
secunt~es
Employee Employer
contnbuhons coninbutions
1981 .................................................................................................................................... 100 100
1988 .................................................................................................................................... 80 100
1989 .................................................................................................................................... 60 100
1990 .................................................................................................................................... 40 100
1991 .................................................................................................................................... 200 100
1992 .................................................................................................................................... 0 80
1993 .................................................................................................................................... 0 60
1994 .................................................................................................................................... 0 40
1995 .................................................................................................................................... 0 20
1996 ....................................................................................................................................
Contributions by or on behalf of a disabled participant are also
subject to these limits. Amounts contributed during the transition
period to the new plan (1984-86) and used to establish account bal-
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antes at January 1, 1987, as provided by section 8473(b), must also
go into the Government Securities Investment Fund. Amounts allo-
cated to the Government Securities Investment Fund in accordance
with these limits, or interest earned on such amounts must be rein-
vested in such fund even after the earlier securities mature.
Subsection (f) provides that the Secretary of the Treasury is au-
thorized to issue special interest-bearing obligations of the United
States for purchase by the Thrift Savings Fund. Maturities will be
fixed with due regard for the needs of the fund. The average
market rate shall be computed by the Secretary of the Treasury on
the basis of market quotations as of the end of the month preced-
ing the date of issue of all marketable interest-bearing obligations
then forming a part of the public debt which are not due or call-
able for 4 years. Such average market yield shall be rounded to the
nearest multiple of one-eight of 1 percent. This arrangement en-
sures that the fund will receive yields associated with long-term
bonds but not tie the fund down with bonds that cannot be bought
or sold fairly frequently. Investing the money in special issues
rather than marketable securities keeps the funds on budget.
Section 8.28. Accounting
Subsection (a) provides that an account is maintained for each
participant of the funds held on his or her behalf. These funds are
derived from contributions to the thrift plan by the employee and
employer, and from transfers of funds on January 1, 1987 from the
temporary plan in effect during 1984-86, reduced by amounts paid
out as permitted by the plan. Each account is also credited with a
proper share of the net investment earnings and losses, and is re-
duced by its share of the administrative expenses incurred under
subchapter VIII. An employee's account will be increased or re-
duced by investment performance in the funds in which the em-
ployee participates, allocated by the proportion of the moneys in-
vested in a particular fund to the total moneys of the account.
Subsection (b) provides that each participant gets an annual
statement of his or her account.
Subsection (c) provides that the participants' accounts and the
other books and records of the plan are audited annually by a
qualified public accountant, with the accountant providing a writ-
ten report and determination to the Board and the General Ac-
counting Office regarding the audit using the same standards that
apply to audits under EBISA.
SUBCHAPTER IV-SURVIVOR BENEFITS
The entire plan provides benefits to survivors of deceased em-
ployees and former employees from several sources:
(1) Social Security pays monthly benefits to the surviving
spouse and children of a deceased worker, as specified by exist-
ing law;
(2) basic plan survivor benefits pay annuities to surviving
spouses, former spouses or other designated individuals with
an insurable interest, typically in the amount of 50 percent of
the annuity payable during the lifetime of a retired worker, as
provided in this subchapter; and,
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(3) thrift plan survivor benefits pay out the deceased work-
er's vested account balance under the payment method elected
to the surviving spouse, former spouse, other designated indi-
vidual with an insurable interest or estate, as provided in this
subchapter.
Section 8.31. Basic plan spousal benefits relating to the death of a
participant or former participant other than an annuitant
Subsection (a)(1) provides for immediate payment of basic survi-
vor benefits to the surviving spouse of a deceased employee who
had at leat 18 months of service.
Subsection (a)(2) states that the amount of the survivor annuity
is 50 percent of the employee's reduced annuity, computed as if the
employee had retired just prior to death on the basis of service to
that point. The reduced annuity is the greater of: the deceased par-
ticipant's earned annuity, computed in accordance with section
8413 and reduced for early retirement as provided in 8414, as ap-
propriate, without regard to the 10 percent reduction for election of
a survivor benefit; or 65 percent of the amount computed as provid-
ed in 8413 without applying the reductions for early retirement
and election of a survivor benefit, except as provided in subsection
(a) (3).
Subsection (a)(3) provides that the surviving spouse of a partici-
pant who elected to make contributions under section 8418(c) and
did not receive a refund of these contributions receives 50 percent
of the employee's annuity, without any reductions for early retire-
ment or election of the survivor benefit and without regard to elec-
tion of the level benefits option.
Subsection (b)(1) provides for immediate payment of basic survi-
vor benefits to the surviving spouse of a deceased former employee
eligible for a deferred annuity that had not yet commenced.
Subsection (b)(2) states that the amount of the survivor annuity
is 50 percent of the former employee's annuity, computed as if the
former employee had elected for the annuity to commence just
prior to death if he or she were then eligible to so elect, and other-
wise as if the former employee were 55 years old just prior to
death.
The annuity is based on the greater of the earned annuity, com-
puted in accordance with section 8413 and reduced, as appropriate,
as provided in 8414, without the reduction for election of a survivor
benefit, or 65 percent of the amount computed without applying
the reductions for early retirement or election of a survivor benefit
and without regard to election of the level benefits option. If the
former participant had elected to make contributions under section
8418(c) and had not received a refund of these contributions, the
surviving spouse receives 50 percent of the annuity, without any
reductions.
Subsection (c) provides that the survivor annuity of a participant
or former participant who dies with less than 10 years of service
will be computed using service of 10 years.
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Section 8.32. Basic plan spousal and insurable interest benefits re-
lating to the death of an annuitant
This section provides for payment of basic survivor benefits after
the death of an annuitant to the individual eligible to receive such
benefits, in accordance with the election made by the annuitant
either explicitly or implicitly under the four relevant provisions:
(1) Section 8416 provides that an annuitant may elect one of
the standard methods of payment when benefits commence.
(2) Section 8416(bX3) provides that a married employee who
retires is automatically deemed to elect the 50-percent survivor
annuity method unless both spouses reject that method in writ-
ing.
(3) Section 8434(a) provides that an annuitant who marries
or remarries after retiring may elect a survivor annuity under
certain conditions.
(4) Section 8436(c) provides that an annuitant whose former
spouse loses some or all entitlement to a survivor annuity, be-
cause of the former spouse's death or remarriage, may make
an election under certain conditions.
Section 8.33. Survivor benefits under the thrift savings plan
Subsection (a) provides for payment of benefits to the survivor of
a decreased annuitant who was receiving payments from the thrift
plan. The survivor annuity is payable on an actuarial basis in ac-
cordance with regulations, based on the method of payment elected
by the annuitant under section 8424(b), relating to elections that
are allowed under the thrift plan when benefit payments com-
mence, or under section 8434(a) or 8436(c), relating to elections that
are allowed after benefit payments commence.
Subsection (b) provides for payment of benefits to the survivor of
an employee or former employee who died before his or her basic
annuity payments commenced, to the extent that the account bal-
ance was vested in accordance with section 8422. Payment is made
to the surviving spouse in accordance with a method elected under
subsection (c), except as provided in subsection (d) relating to
former spouses. If there is no surviving spouse, payment may be
made to a designated individual with an insurable interest, or to
the estate if no individual has been properly designated.
Subsection (c) provides that a surviving spouse or another indi-
vidual entitled to payments under subsection (b) may elect one of
three possible methods.
(1) payment of monthly annuity for life,
(2) transfer of the account balance to an individual retire-
ment account (IRA), or
(3) withdrawal of the account balance in one or more pay-
ments. Subsection (d) gives first priority to payments under
section 8435, relating to former spouses. Any amounts required
for former spouses are deducted from payments to a later
spouse under subsection (b) and held separately, until they are
required to be paid to the former spouse or until they can be
distributed to the later spouse when the former spouse's enti-
tlement to survivor benefits is terminated by death or remar-
riage.
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Section 8l~31~. Basic and thrift savings plan survivor benefits relat-
ing to marriage after commencement of an annuity
Subsection (a) allows an annuitant to make an irrevocable elec-
tion of survivor benefits for a spouse of a marriage that occurs sub-
sequent to the annuitant's retirement under the methods provided
in the basic and thrift plans, provided election is made within 2
years after the marriage, subject to the conditions in subsections
(b), (c) and (d).
Subsection (b) requires that the election take effect no earlier
than 9 months after the date of the marriage.
Subsection (c) provides that, within 2 years after electing a basic
survivor benefit, the annuitant must deposit into the Fund the esti-
mated amount by which his or her annuity payments to date would
have been reduced if a basic survivor benefit method had been in
effect, plus interest as provided in section 8438(a) relating to rates
of interest on deposits.
Subsection (d) states that the election described in this section
may not be made in the case of a remarriage, if the annuitant had
been married earlier to the same spouse and both spouses had
waived the right to survivor benefits under section 8416 (b) (2).
Section 8/35. Survivor benefits for eligible former spouses: entitle-
ment; amount
This section provides for designation of a former spouse to re-
ceive survivor benefits from the basic and thrift plans.
Subsection (a) provides for payment of benefits to former spouses
of deceased employees who were participants or former partici-
pants, if the benefits were expressly provided by an election under
section 8436 or a court order or decree dissolving or annulling the
marriage, and subject to subparagraphs (b) through (g).
Subsection (b) provides that the amount of basic survivor annuity
to a former spouse may not exceed 50 percent of the basic annuity
payable to the employee less the amount of basic survivor annuity
payable to any other former spouses who have a higher priority
based on the order of precedence set forth in subparagraph (d). The
amounts are computed in accordance with sections 8416(a)(2)(B),
8431(a), and 8431(b) depending upon whether the deceased was an
employee, annuitant or former employee with entitlements to a de-
ferred benefit.
Subsection (c) provides that the employee may not allocate more
than 100 percent of his or her account balance under the thrift
plan to provide survivor annuities for former spouses, including an-
ticipated interest on the account.
Subsection (d) provides that the limitations on amounts of bene-
fits in subsections (b) or (c) are implemented on a first-come, first-
served basis by reference to the date of election or court order.
Subsection (e) provides that the survivor annuity to the former
spouse may not begin before the election or court order is received
by OPM or the participant dies, whichever is later, and it may not
continue beyond the former spouse's remarriage before age 55 or
death.
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Subsection (f) provides that a court order or decreee is not effec-
tive if it is inconsistent with a joint waiver of rights to survivor
benefits executed earlier.
Subsection (g) provides that pa ment of benefits under this sec-
tion to one person bars recovery by any other person for the same
benefit.
Section 8436: Survivor benefits for former spouses: elections, deposits
and collections, and administrative provisions
This section describes how the survivor benefits which annu-
itants may elect for former spouses under section 8435 are adminis-
tered.
Subsection (axl) provides that an annuitant may elect that survi-
vor benefits to a former spouse by paid in a specified amount. The
election may be made on the date the annuitant applies for annu-
ity or not later than 2 years after the date the marriage to the
former spouse was dissolved or annulled, whichever is later.
Subsection (ax2) provides that if the annuitant elects a basic sur-
vivor benefit after retiring, then during the 2-year period referred
to in subsection (axl) the annuitant must deposit into the Fund the
estimated amount by which his or her annuity payments to date
would have been reduced if the election had been in effect, plus in-
terest as provided in section 8438(a).
Subsection (aX3) provides that such an election may not be fully
effective in three situations-
(A) It is not effective to the extent it conflicts with a court
order or notice already filed with the plan;
B) In the case of a basic survivor benefit, it is not effective
to the extent that the amount of survivor benefit exceeds the
limitation in section 8435(bx2), relating to the 50-percent annu-
ity formula, or in the case of both basic and thrift plan benefits
in section 8435(c) and (d), relating to multiple survivor annu-
ities;
(C) It is not effective if the annuitant is married when the
election is made and does not get the current spouse's written
consent.
Subsection (b) provides for an election by an annuitant who had
elected survivor benefits to a former spouse or who has an eligible
former spouse entitled to receive a survivor annuity when that
former spouse's survivor-benefit entitlement terminates, due to his
or her death or remarriage before age 55. This annuitant then may
elect to provide or increase survivor benefits under the basic or the
thrift plan for any other former spouse, during the 2-year period
following such termination, subject to the same conditions specified
in subsection (c) for electing a survivor benefit for a current spouse,
and subject to the consent of the current spouse if any.
Subsection (c) provides that when the entitlement of a former
spouse to survivor benefits is terminated or reduced due to that
spouse's death or remarriage, during the following 2 years the an-
nuitant may elect to provide a survivor annuity to the current
spouse from the basic plan or the thrift plan by filing the election
with OPM or the Executive Director as the case may be.
Subsection (d) provides that when the entitlement of a spouse to
survivor benefits is terminated by death, the annuitant may elect,
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within 2 years after the death to provide or increase an annuity for
a former spouse.
Subsection (e) provides for OPM to authorize exceptions tot e
rule requiring consent of a married annuitant's spouse to waive
election of a survivor annuity if the spouse's whereabouts cannot
reasonably be determined or obtaining the consent would be inap-
propriate due to exceptional circumstances.
Section 8l~37. Termination of entitlement
This section provides that the rights to a survivor annuity of an
annuitant's current spouse terminate at the death of the spouse or
at dissolution of their marriage.
Section 8/38. Deposits to the Fund
This section indicates how to compute deposits to the Fund when
basic survivor benefits are elected by an annuitant whose annuity
has already commenced. Such elections and deposits are permitted
under section 8434(c), relating to marriage or remarriage of an an-
nuitant, and under section 8436(a)(2), relat Whichf the annuity pay-
each case the deposit is the amount by
ments to date would have ball rf om thetdate theoannui y com-
been elected earlier, typ Y field of the
menced, plus interest equal to the overall average y
CSRS fund.
Subsection (a) provides that interest rates are computed for this
purpose each calendar year in the same manner as for deposits to
the CSRS relating to prior service for which no contributions were
made or for. which contributions were withdrawn or which was
military service. field of the Fund1984, rates are computed from the
overall average y
Subsection (b) provides that when an annuitant does not ma e
the deposit required for this pro pa sm O ~M m Iof 251 percent o f the
by offsetting the annuity, up
net annuity otherwise payable, and without getting the annuitant's
consent to this offset. extend the time limit
Subsection (c) provides that OPM may
specified for making the deposit for good cause shown.
SUBCHAPTER V-DISABILITY BENEFITS
This subchapter establishes a separate long-term disability (LTD)
insurance plan which is self-insured by the Federal Government.
Benefit payments and administrative services are to be provided by
a third-party administrator. Only 18 months of service are needed
to be eligible for benefits.
Section 8.x.41. Definitions
Paragraph (1) defines an "administrator of benefits" as OPM or
an insurance company or other entity which OPM contracts with
to provide claims payment services and related administrative serv-
ices.
Paragraph (2) defines "disability benefits under the Social Securi-
ty Act" as those payable under section 223 or 202 of the Social Se-
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curity Act (relating to determinations of eligibility and amount of
benefits).
Paragraph (3) defines "disability date" as the date an eligible
participant became disabled.
Paragraph (4) defines "disabled" to mean that an eligible partici-
pant-
(A) meets the conditions established by section 223 of the
Social Security Act (unable to work in substantial gainful ac-
tivity) or
(B) is unable, because of disease or injury, to render useful
and efficient service in his or her position and is not qualified
for reassignment to a vacant position in his or her employing
agency, commuting area, and at the same grade or pay level,
and in which he or she would be able to render useful and effi-
cient service (occupationally disabled).
Paragraph (5) defines "eligible participant" as an employee or
Member with service exceeding 18 months who-
(A) has applied for disability benefits under the Social Secu-
rity Act and has been determined to be eligible within the
meaning of title II of the Social Security Act (this includes
someone not entitled to these benefits only because of insuffi-
cient quarters of coverage in which case the administrator of
benefits will determine the disability) or
(B) meets the conditions set forth in paragraph (4)(B) of this
section as determined by the administrator of benefits.
Paragraph (6) defines "final average pay" as the participant's
annual rate of pay on his or her disability date, increased thereaf-
ter by the same overall average increase in General Schedule rates
of pay.
Paragraph (7) defines "onset average pay" as the participant's
average pay on his or her disability date, increased on January 1 of
each year by the annual Consumer Price index increase minus 2
percentage points.
Paragraph (8) defines "projected service" as the sum of years of
service before the disability date and the years after such date and
before age 62, in the case of an individual referred to in paragraph
(5)(A), or age 55, in the case of an individual referred to in para-
graph (5)(B).
Section 8.~/~2. Entitlement
Subsection (a) provides that an eligible participant is entitled to
receive benefits under this subchapter while under 62, in the case
of a person who meets the Social Security definition of disability
(totally disabled) or while under 55, in the case of a person who
meets the occupational disability definition. Benefits begin after ac-
crued sick leave has been used and continue through the end of the
month during which he or she reaches 62 or 55 as the case may be.
On the first day of the month after the participant reaches the
maximum age prescribed above, the annuity payable under the
basic plan applies.
Subsection (bxl) provides that an employee who has 5 or more
years of service and projected service shall be entitled to an annu-
ity when he or she reaches age 62 or 55 as the case may be.
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Subsection (b)(2) provides that the annuity is computed by count-
ing service and projected service through the end of the month in
which he or she reaches the maximum age for disability benefits.
Average pay is the participant's onset average pay, in the case of a
participant who did not elect to make contributions under section
8418(c), and the participant's final average pay, in the case of a
participant who elected to make contributions under section
8418(c).
Subsection (b)(3) provides that if an eligible participant did not
elect to make contributions under section 8418(c) or has received a
refund of contributions made under such an election, the amount
of the annuity he or she is entitled to receive will be the lesser of
(i) the monthly amount of the disability benefits received before be-
coming eligible to receive an annuity or (ii) the amount of the an-
nuity computed under paragraph (1) of this subsection.
Subsection (c) provides that if the condition of the disabled par-
ticipant changes so that someone who is occupationally disabled be-
comes totally disabled, or vice versa, the participant's disability
benefits are adjusted to reflect the changed condition.
Section 8/~l~3. Computation of benefits
Subsection (a) provides that someone who is totally disabled re-
ceives 60 percent of his or her average pay minus the amount of
any disability benefits payable under the Social Security Act at the
date of disability. Subsequently, the disability benefit is increased
by CPI minus 2 in option A, and by the full CPI in option B, with-
out regard to the Social Security amount.
Subsection (b) provides that someone who is occupationally dis-
abled receives 60 percent of average pay during the first year of
disability and 40 percent of that amount (as increased by any appli-
cable cost-of-living increase) thereafter, until her or she reaches
age 55.
Section 8l~.~.~. Application
Subsection (a) requires a claim for disability benefits to be filed
before the date the participant separates from employment by the
Government or within 1 year after such date.
Subsection (b) provides that the appropriate administrator of
benefits may waive the time limit for applying for benefits if it is
determined that the participant was mentally incompetent during
that period and the application for benefits is filed within 1 year
after the participant is restored to mental competency or the date
a fiduciary is appointed to manage the participant's financial af-
fairs, whichever date is earlier.
Section 8~.~5. Medical examinations
Subsection (a) provides that an applicant for or a recipient of dis-
ability benefits shall be examined by a physician of the benefit ad-
ministrator's choice at its discretion.
Subsection (b) provides for a physician examining a participant
under subsection (a) to report the diagnosis and prognosis to the
appropriate administrator of benefits.
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Subsection (c) provides that a participant who fails to submit to
the examination required under subsection (a) shall not be entitled
to disability benefits.
Section 81~.~6. Offers of alternative employment
Subsection (a) requires that an agency consider for appointment
an applicant for disability benefits who is determined to be able, on
the basis of the medical examination required by section 8445, to
perform the work of a position in his or her agency for which the
participant is qualified, is not lower than the participant's grade or
pay level, and is within the participant's commuting area.
Subsection (b) provides that the applicant is entitled to appeal to
the Merit Systems Protection Board a determination of ability to
perform the work required in the position described in subsection
(a).
Section 81~l~7. Recovery or restoration of earning capacity
Subsection (a)(1) provides for the administrator of benefits to ter-
minate disability benefits to an individual who recovers from dis-
ability before age 62 or from occupational disability before 55. The
termination date is the date of reemployment by the Government
or 1 year after the date of the medical examination on which the
determination is based, whichever date is earlier.
Subsection (a)(2) provides that payment of benefits is resumed if
the disability recurs, as determined by the administrator of bene-
fits after a medical examination, and the individual has not yet
reached the maximum age for receipt of the total disability or the
occupational disability benefit, as the case may be. Payments will
resume effective on the date the medical examination was complet-
ed and will be at the annual rate that would have been payable if
payment of disability benefits had not been terminated.
Subsection (b)(1) provides for the administrator of benefits to ter-
minate disability benefits to a recipient who receives income from
wages or self-employment or both during a calendar year which
totals an amount equal to 60 percent of the rate of pay for the indi-
vidual's position on the date of disability, increased by the same
percent as the overall percent increase in rates of pay under the
General Schedule. The termination date is 60 days after the end of
such calendar year.
Subsection (bX2) provides that payment of benefits is resumed if
the individual is not reemployed in a position subject to this chap-
ter, continues to be disabled, is under the maximum age for receipt
of disability benefits, and income from wages or self-employment
during the year in which benefits were terminated is less than 60
percent of the pay for his or her position. Payments will resume
effective the first day of the first year after the year in which
income was less than 60 percent. The annual rate of the disability
benefits upon resumption is the annual rate that would have been
payable if payments had not been terminated.
Subsection (c) provides that a determination under this section
may be appealed to OPM. A determination by OPM may be ap-
pealed to the Merit Systems Protection Board.
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Section 8l~1~8. Relationship to workers' compensation
Subsection (a) provides that an individual is not entitled to re-
ceive both disability benefits under this chapter and compensation
for injury to or disability of the individual under subchapter I of
chapter 81 of this title covering the same period of time. This does
not bar the claimant's right to the greater benefit conferred by
either subchapter for any part of this period of time, nor does it
deny the individual any concurrent benefit he or she is entitled to
receive under this chapter and under subchapter I of chapter 81 on
account of the death of another individual.
Subsection (b) provides that an individual's receipt of a lump-sum
payment for compensation under section 8135 shall not affect the
individual's entitlement to disability benefits under this subchap-
ter. However, if benefits are payable under this subchapter for the
same disability for whcih a lump-sum payment of compensation
has been made, the compensation amount paid for a period ex-
tended beyond the date payment of disability benefits begins is re-
funded to the Employees' Compensation Fund maintained by the
Department of Labor. The amount owed and the method of settle-
ment are as determined by the Department of Labor.
Section 8l~.~9. Military reserve technicians
Subsection (a)(1) provides that a participant is entitled to disabil-
ity benefits under the occupational disability definition of this
chapter if the participant-
(A) is separated from employment as a military reserve tech-
nician by reason of a disability that disqualifies the individual
from membership in a reserve component of the Armed Forces
or from holding the military grade required for such employ-
ment;
(B) is not considered disabled;
(C) is not appointed to another position in the Government;
and
(D) has not declined an offer of appointment to a position in
the Government.
Subsection (a)(2) provides that payment of disability benefits
under this section terminates on the date the individual is appoint-
ed to a position in the Government or declines an offer of appoint-
ment to a position in the Government, or as provided in section
8447 of this title (relating to recovery from disability).
Subsection (b) provides that any individual applying for or receiv-
ing disability benefits under this section shall be considered by any
agency of the Government, as specified by OPM, before any vacant
position in the agency is filled if the position is in the same com-
muting area and at the same grade or level and the individual is
qualified for it.
Section 850. Administrative provisions
Subsection (a) defines "State" as a State of the United States, the
District of Columbia, the Commonwealth of Puerto Rico, and a ter-
ritory or possession of the United States.
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Subsection (b)(1) authorizes OPM to contract with one or more in-
surance companies or other entities to perform some or all of the
functions described in paragraph (2) of this subsection.
Subsection (b)(2) identifies the functions referred to in paragraph
(1). They include determining entitlements, computing the benefits,
making payments, communicating the program to agencies and
employees, monitoring cases for rehabilitation opportunities or re-
covery from disability, and other administrative duties.
Subsection (c) provides that a contractor under a contract award-
ed by subsection (b) shall establish an administrative office under a
name approved by OPM.
Subsection (d) provides that contracts under this section shall not
exceed 5 years and may be automatically renewable, in the absence
of a notice by either party of intention to terminate, for successive
1 year terms.
Subsection (e) permits OPM to terminate a contract under this
section at any time, subject to reasonable notice and opportunity
for hearing (as prescribed by OPM regulations) if OPM finds that
the contractor is not carrying out the contract properly.
Subsection (f) provides that each contract under this section will
provide for advances of monies from the Federal Employees' Dis-
ability Insurance Fund to the contractor as needed to pay disability
benefits and administrative expenses.
Subsection (g) provides for OPM to include terms and conditions
appropriate to protect the interest of participants and the United
States in contracts awarded under this section.
Subsection (h) provides that records established or maintained by
an administrator of benefits are the property of the United States.
Subsection (i) provides that provisions of a contract under this
subchapter supersede and preempt State laws or regulations relat-
ed to group disability insurance to the extent such laws or regula-
tions are inconsistent with the contractual provisions.
Subsection (j) requires the Secretary of Health and Human Serv-
ices to furnish OPM and the administrator of benefits such infor-
mation relating to administration of the Social Security Act as is
necessary to carry out this subchapter.
Section 8l~51. Annual accounting; special contingency reserve
Subsection (a) provides for a contract under this subchapter to in-
clude aprovision requiring the administrator of benefits to trans-
mit to OPM, not later than 90 days after the end of each contract
year, an accounting of all .monies advanced, benefit payments
made, and authorized expenses charged for the contract year.
Subsection (b) provides that any funds advanced which were not
used for benefit payments or administrative expenses shall be cred-
ited to contract charges in the next contract year or returned to
the Federal Employees' Disability Insurance Fund upon termina-
tion of the contract, as directed by OPM.
Section 8152. Federal Employees' Disability Insurance Fund
Subsection (a) establishes this fund in the U.S. Treasury.
Subsection (b) requires each Government agency employing par-
ticipants to make payments to this fund from appropriations or
funds available for salaries equal to the percentage of basic pay
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which OPM determines is necessary to fund benefits and adminis-
trative expenses. OPM shall require agencies to pay into the fund
amounts that take into consideration the proportion of disability
recipients of that agency to the rest of the Government.
Subsection (c) provides that sums in this fund are available with-
out fiscal year limitation as OPM determines necessary to pay au-
thorized benefits and expenses.
Subsection (d) provides for the Secretary of the Treasury to
invest and reinvest money in this fund in interest-bearing obliga-
tions of the United States and to sell such obligations for the pur-
poses of such fund. The interest on and proceeds from the sale of
these obligations become a part of such fund.
Subsection (e) precludes a State, any political subdivision, or
other governmental authority thereof to impose or collect a tax,
fee, or other monetary payment on, or with respect to, any funds
transferred to contractors for payment and administration of dis-
ability benefits under this subchapter. This does not exempt any
administrator of benefits from the imposition of collection of a tax,
fee, or other monetary payment on the net income or profit real-
ized by the administrator from business conducted under this sub-
chapter, if such a levy is applicable to a broad range of business
activity.
SUBCHAPTER VI-GENERAL AND ADMINISTRATIVE PROVISIONS
Section 8161. Authority of the Office of Personnel Management
Subsection (a) provides that OPM shall pay all benefits that are
pa able from the CSRS fund.
Subsection (b) provides that OPM shall administer all provisions
of this chapter not specifically required to be administered by the
Board, the Executive Director, or any other entity.
Subsection (c) permits OPM to make regulations to carry out the
provisions of this chapter which they administer.
Section 862. Cost-of-living adjustment in basic plan annuities, sur-
vivor annuities, and disability benefits
Subsection (a) specifies that, for this section, the term "base
quarter" means, with respect to a year, the calendar quarter
ending on September 30 and that the price index for a base quarter
is the arithmetic mean of such index for the 3 months of such
quarter.
Subsection (b)(1) provides, that, effective December 1 of each year
in which the price index for the base quarter of such year exceeds
the price index for the base quarter of the preceding year, basic
and survivor annuities paid from this plan beginning not later
than December 1 are increased by the applicable percentage com-
puted under paragraph (2), (3), (4), (5), (6), or (7) of this subsection.
Subsection (b)(2) provides that, for annuities paid to those who
did not elect to contribute to the Fund under section 8418(c), or
who received a refund, pursuant to section 8420, of such contribu-
tions, increases are as follows:
no increase prior to age 62;
from age 62 through 66, the Consumer Price Index increase
minus 2 percent;
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at age 67 and above, an amount equal to the Consumer Price
Index increase.
Subsection (bx3) provides that, for annuities paid to those who
elected to contribute to the Fund under section 8418(c) and who
have not received a refund of such contributions, increases are as
follows:
before age 62, the consumer price index increase minus 2
percent;
at age 62 and above, an amount equal to the Consumer Price
Index increase.
Subsection (bx4) provides that annuities for the special classes re-
ferred to in sections 8411(c) and 8411(d) will be increased by the
Consumer Price Index minus 2 percent from age 55 through 66;
after age 67, the increase will be equal to that of the Consumer
Price Index.
Subsection (bx5) provides that the annuity of a disability benefit
recipient under section 8442(b) will be increased after conversion to
the retirement rolls at age 55 as follows:
If he or she did not elect to contribute to the Fund, the in-
crease prior to age 67 is the Consumer Price Index increase
minus 2 percent; after 67 it is equal to the Consumer Price
Index increase.
If he or she elected to contribute to the Fund and has not
received a refund, the increase is equal to the Consumer Price
Index increase.
Subsection (bx6) provides for survivor annuities in the case
where the deceased did not elect to contribute to the Fund. In these
situations survivor annuities are increased by an amount equal to
the Consumer Price Index increase minus 2 percent for a survivor
annuitant under 67 years of age and are increased by an amount
equal to the Consumer Price Index for survivor annuitants who are
at least 67 years old.
Subsection (bx7) provides for survivor annuities in the case
where the deceased elected to contribute to the Fund under section
8418(c). In these situations, the survivor annuities are increased by
an amount equal to the Consumer Price Index.
Subsection (c) provides for a pro rata share of the increase to re-
tirees or survivor annuitants for whom this is the first increase,
and for an increase to a surviving spouse or former spouse annuity
equal to the total percentage by which the deceased annuitant's an-
nuity had been increased from the date it began through the date
it ended.
Subsection (d) provides that disability benefits payable under
subchapter V of this chapter will be increased effective December 1
of each year as follows:
If he or she did not elect to contribute to the Fund, by an
amount equal to the Consumer Price Index minus 2 percent;
If he or she elected to contribute to the Fund and has not
received a refund, by an amount equal to the Consumer Price
Index increase.
Subsection (e) provides for a pro rata share of the increase for
disability recipients for whom this is the first increase.
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Subsection (f) provides that the monthly installment of an annu-
ity s rounded to the next lowest dollar, but the increase is to be at
least $1.
Section 8463. Rate of benefits
This section provides that each annuity and disability benefit is
stated as an annual amount, one-twelfth of which, fixed at the next
lowest dollar, is the monthly rate payable on the first business day
of the first month beginning after the last day of the month for
which the annuity or disability benefit has accrued.
Section 8.~6.~. Commencement and termination of annuities
Subsection (a) provides that, unless otherwise specified, a partici-
pant's annuity begins the first day of the first month after separa-
tion from employment if entitled to an immediate annuity or, if en-
titled to a deferred annuity, the date elected by the participant or
the date he or she becomes 62, whichever is earlier. The annuity
terminates at death or other terminating event provided by law.
Subsection (b) provides that, unless otherwise specified, a survi-
vor annuity begins on the first day of the first month after the date
of the participant's or former participant's death on which the an-
nuity is based. It ends on the last day of the last month ending
before the surviving spouse or former spouse dies or, if under the
age of 55, remarries.
Section 8.65. Wainer, allotment and assignment of benefits
Subsection (a) provides that an individual entitled to benefits
from the basic plan may decline to accept all or part of these bene-
fits by filing a waiver with OPM. The waiver may be revoked in
writing at any time. Payment of the benefits waived may not be
made for the period the waiver was in effect.
Subsection (b) permits an individual entitled to receive basic plan
benefits to make allotments or assignments from such benefits for
such purposes as OPM considers appropriate.
Section 8.66. Application for benefits
Subsection (a) provides that no benefits may be paid unless an
application for payment is received by OPM before the 115th anni-
versary of the former participant's birth.
Subsection (b) provides that benefits based on the death of a par-
ticipant or former participant will not be paid unless an applica-
tion is received by OPM within 30 years after the death or other
event which establishes the entitlement to the benefit.
Section 8.67. Court orders
Subsection (a) provides that payments which would otherwise be
made to a participant or former participant shall be paid in whole
or in part to another person if and to the extent a court order or
court-approved property settlement incident to a divorce, annul-
ment, or legal separation expressly provide. This applies to both
the basic plan and the thrift plan. Any payment under this para-
graph to a person bars recovery by any other person for the same
payment.
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Subsection (b) provides that subsection (a) applies only to pay-
ments made by OPM or the Executive Director after the date they
receive written notice of such decree, order, or agreement and such
additional information and documentation as they may require.
Section 8/68. Annuities and pay on reemployment
Subsection (a)(1) provides that when an annuitant becomes em-
ployed in an appointive or elective position in the Government, his
or her annuity terminates effective on the date of employment.
Service after employment is covered by this chapter. When the em-
ployment terminates, the annuitant's rights under subchapter II
are redetermined. If the annuitant dies while employed, a survivor
annuity shall be redetermined as if employment had otherwise ter-
minated on the date of death.
Subsection (a)(2) provides that the annuity resulting from a rede-
termination of rights will not be less than the amount of the termi-
nated annuity plus cost-of-living increases occurring during the
same period it was terminated.
Subsection (b) provides for OPM to prescribe regulations permit-
ting an annuitant employed on a part-time basis to elect to have
his or her annuity continued. The combined annuity and salary
payment may not exceed the annual rate of pay for full-time em-
ployment in the position in which the annuitant is employed.
Section 8.69. Information
Subsection (a) provides that OPM shall make available to each
individual who is required or eligible to be a participant such infor-
mation as may be necessary to enable the individual to understand
the rights and benefits, including options, which the individual has
under the provisions of this chapter. The committee expects OPM
to allocate substantial resources to this task. The design of this re-
tirement plan incorporates the principle of employee choice. With-
out adequate information, employees are unable to make informed
choices. The committee strongly urges OPM to design an informa-
tional program which can be easily transmitted by agencies to em-
ployees or prospective employees with regard to employee benefits,
choices and the likely consequences of such choices.
Subsection (b) provides that the information in subsection (a)
shall include a summary of the Thrift Savings Plan similar to in-
formation required by ERISA. It must also include a statement
that investment of a participant's funds in the Fixed Income Fund
and the Common Stock Index Fund is made at the participant's
risk and that the Federal Government does not protect against loss
on the investment or guarantee a return on the investment.
SUBCHAPTER VII-TRANSITION PROVISIONS
This subchapter outlines the treatment that will apply to em-
ployees covered by the Civil Service Retirement System (CSRS)
who elect to participate in this plan, to employees covered by this
plan who have prior service under CSRS, to employees in the inter-
im program, and to reemployed annuitants from another Govern-
ment retirement system.
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Section 8.71. Treatment of certain individuals subject to the Civil
Service Retirement and Disability System
Subsection (aXl) permits employees in the CSRS, whether or not
their service is covered employment under Social Security, other
than the District of Columbia government employees, to elect to
transfer to the Federal Retirement System (FRS). It also provides
that a Member of Congress who is not required to participate in
the FRS may elect to transfer to it. Such an election must be in
writing, as prescribed by OPM regulation, and not later than De-
cember 31, 1987. In the case of an individual who becomes an em-
ployee or Member after a break in service for a period that in-
cludes January 1, 1987, the election must be not later than 1 year
after the date the individual resumes service.
Subsection (a)(2) provides that an individual who elects to trans-
fer to the FRS retains credit for entitlement to benefits under the
CSRS for service performed subject to CSRS, except for disability
benefits and for service in the interim program.
Subsection (ax3) provides that an individual electing to transfer
to the FRS who becomes an employee or Member after a break in
service for a period including January 1, 1987, retains any rights to
make deposits for service under the CSRS prior to such date.
Subsection (b) provides that an individual with prior service
under the CSRS who has not received a refund of his or her CSRS
contributions and who is required to participate in the FRS credit
for entitlement to benefits under the CSRS, subject to section
8472(d), which excludes entitlement to CSRS disability benefits for
such an individual.
Subsection (c) provides that an individual who has received a
refund of his or her CSRS contributions and who is required to par-
ticipate in the FRS make a deposit to the retirement fund to have
his or her service under CSRS recredited, except for service in the
interim program. Such an individual retains CSRS credit in the
same way as an individual subject to subsection (b).
Subsection (d) provides that survivor benefits are payable based
on conditions of eligibility and service under both the CSRS and
the FRS.
Section 8.72. Special rules for participants retaining entitlement in
the Civil Service Retirement and Disability System
Subsection (a) provides that CSRS participants who elect to
transfer to the FRS or who are covered by the FRS but retain
credit for prior service under CSRS will have their CSRS service
credited under the FRS only for determining eligibility to retire
under the FRS, receiving disability benefits under the FRS, vesting
in the thrift plan, and determining the applicable accrual rate
under section 8413(a)(1).
Subsection (b) provides that individuals described in subsection
(a) may have service under the FRS credited under CSRS only for
determining eligibility to retire entitled to an annuity under provi-
sions covering mandatory separation, immediate retirement, or de-
ferred retirement.
Subsection (c) provides that rates of pay in effect for an individ-
ual referred to in subsection (a) after he or she transfers to the
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FRS are included in computing average pay for benefits under the
CSRS and that rates of pay in effect before such date are included
in computing average pay for the FRS.
Subsection (d) provides that disability benefits from CSRS do not
apply to a participant who transfers to the FRS or who retains en-
titlement to benefits from the CSRS.
Section 8.73. Participants Subject to the Federal Employees' Retire-
ment Contribution Temporary Adjustment Act of 1983
Subsection (a) provides that the service of a participant, other
than a Member of Congress or an individual described in section
8471(a)(1xAxii), who made a reduced contribution to the CSRS
based on this Act, will be credited for all purposes under the FRS.
Subsection (bxl) provides that on January 1, 1987, the amount
computed under paragraph (2) of this subsection will be transferred
to an account in the Thrift Savings Fund established for partici-
pants to whom subsection (a) applies.
Subsection (b)(2) provides that the amount transferred to the
Thrift Savings Fund will be twice the amount of money the individ-
ual contributed to CSRS plus interest at the rate determined under
section 8334(e) credited monthly and compounded annually.
Subsection (b)(3) provides that, for vesting purposes in the thrift
plan, half of the amount will be treated as a contribution from the
participant and half as a contribution by the employing agency.
Subsection (bX4) provides that all amounts transferred will be in-
vested in the Government Securities Investment Fund established
under section 8427.
Subsection (c) provides that participante hire during the period
covered by this act who made a deposit to cover military service
will receive a refund of the deposit.
Section 8~7.~. Reemployed annuitants under a Government retire-
ment system
Subsection (a) defines terms used in this section-
Paragraph (1) defines "annuitant" as having the same mean-
ing as it does under section 8331(9) of title 5 (for CSRS annu-
itants), section 4044(1) of title 22 (for Foreign Service annu-
itants, excluding survivors), and section 203 of the Central In-
telligence Agency Retirement Act of 1964 for Certain Employ-
ees.
Paragraph (2) defines "Government retirement system" as
the Civil Service Retirement and Disability System, the For-
eign Service Retirement and Disability System, and the Cen-
tral Intelligence Agency Retirement and Disability System.
Paragraph (3) defines "reemployed annuitant" as an annui-
tant who becomes employed by the Government after the effec-
tive date of the Federal Retirement Reform Act of 1985 and is
required by section 8402 of this title to be participant. Individ-
uals who are not covered by the Social Security Amendments
of 1983 (i.e., those whose annuities continue after reemploy-
ment as described in section 8344 of title 5) are not included
under this definition; those whose annuities cease upon reem-
ployment (i.e., those excepted from section 8344(a) of title 5)
are included under this definition.
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Subsection (b) provides that a reemployed annuitant retains enti-
tlement in the Government retirement system under which he or
she is receiving an annunity.
Subsection (c) provides that service creditable under the reem-
ployed annuitant's Government retirement system is credited
under this chapter only for determining eligibility to retire under
the FRS. Service performed as a reemployed annuitant is not cred-
itable for the individual's previous retirement system.
Subsection (d) provides that pay earned as an employee before
and after reemployment is considered in computing average pay
under both the FRS and the annuitant's Government retirement
system.
Section 8.75. Exemption from certain offset provisions of the Social
Security Act
This section provides that individuals covered by the CSRS who
elect to transfer to the FRS, or those covered by the FRS who
retain entitlement to CSRS benefits, are excluded from the wind-
fall benefits reduction and the public pension spouse offset after
they have completed 5 years of service under the FRS.
Section 8.76. Regulations
This section permits OPM to prescribe regulations to carry out
this subchapter.
SUBCHAPTER VIII-FEDERAL RETIREMENT THRIFT INVESTMENT
MANAGEMENT SYSTEM
This subchapter sets forth the management, policy, and oper-
ation of the Federal Retirement Thrift Investment Management
System. It establishes the Federal Retirement Thrift Investment
Board, the Executive Director function, the Federal Retirement
Thrift Advisory Committee, and the Employee Advisory Commit-
tee, and defines the role of each in the management of the Thrift
Savings Fund.
Although thrift plans are a common feature of private-sector
pension plans, they have been used only in a few Federal organiza-
tions, the Tennessee Valley Authority, Federal Reserve Board, the
Federal Deposit Insurance Corporation and Comptroller of the Cur-
rency. None of these Federal thrift plans is comparable to the size,
scope, and complexity of the Thrift Savings Plan for the Federal
workforce covered under S. 1527. The committee designed the
system to parallel private sector practice where possible but took
into account the special political and economic considerations pre-
sented by a large scale thrift plan for the Federal retirement
system. To the extent possible, the Federal Retirement Thrift In-
vestment Management System meets the requirements of the Em-
ployee Retirement Income Security Act of 1974 (ERISA). The com-
mittee built as many protections as possible into the thrift plan.
Section 8.91. Federal Retirement Thrift Investment Board
Subseciton (a) establishes the Federal Retirement Thrift Invest-
ment Board in the executive branch of the Government.
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Subsection (b) provides for the five members of the Board to be
the Chairman of the Federal Reserve Board, the Secretary of the
Treasury, the Director of OPM and two representatives of Federal
employee organizations appointed by the President, one of whom
must be from a labor organization and one from a Federal manag-
ers' organization. The Chairman of the Federal Reserve will serve
as the Chairman of the Thrift Investment Board. To enable the
Board to continue to function in the event of a vacancy in one or
more of the ex-officio positions, the committee provided for the
person acting in such position to serve as a member of the Board
during this time. This subsection also provides for the members of
the Board appointed by the President to serve until replaced by the
President which would provide continuity during the transition
period following a change in Presidents.
Subsection (c) defines the required responsibilities of the Board to
establish policies for investment and management of the Thrift
Savings Fund and for administering the thrift plan benefits and
survivor annuities payable from .the Thrift Fund. The Board must
also review the investment performance of the Thrift Fund, set the
rate of pay for the Executive Director without regard to civil serv-
ice and classification laws, supervise the Executive Director and
review and approve the budget for the Board.
Subsection (d) provides for the Board to delegate responsibilities
to the Executive Director to carry out Board policies with regard to
the provisions in subchapter III and this subchapter and those of
subchapter IV relating to survivor annuities payable from the
Thrift Savings Fund. This subsection also provides for the Board to
remove the Executive Director for good cause with concurring
votes of four members after investigation by the Comptroller Gen-
eral of the United States.
The committee intends for the Board to provide broad oversight
to the Thrift Savings Fund but not to be involved either directly or
indirectly in specific investment decisions. Accordingly, subsection
(dx2) provides that the Board is prohibited from directing the Exec-
utive Director or any contractor under a contract for the Thrift
Fund to invest in any particular asset or dispose of any asset in the
Fund. The Board is not permitted to direct the Executive Director
to enter into or terminate a contract relating to investments.
Subsection (e) requires the Board members to act solely in the in-
terest of those participating and receiving benefits from the Thrift
Fund.
Section 8/92. Federal Retirement Thrift Advisory Committee
Subsection (a)(1) provides for the Board to establish as Federal
Retirement Thrift Advisory Committee. Subsection (a)(2) provides
for the committee to be composed of six members appointed by the
Board. Three of the members are to be from among investment
asset managers outside the Government and three among adminis-
trators of thrift savings plans for employees in private sector enter-
prises. Subsection (a)(3) provides that the Board shall set the terms
and conditions of service of Advisory Committee members.
Subsection (b) defines the responsibilities of the Advisory Com-
mittee. Although the Board is not permitted to be directly involved
in specific investment decisions, this Advisory Committee will pro-
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vide expert advice to the Board and Executive Director on the
broad overall investment policy and decision making responsibil-
ities relating to selection of investment funds and investment man-
agers. It will also advise on the administration of the Thrift Sav-
ings Fund and performance of the duties of the Board and Execu-
tive Director.
Section 8.93. Employee Advisory Committee
This section establishes and defines the responsibilities of the
Employee Advisory Committee, which is an elected body represent-
ing the participants in the Thrift Savings Plan. The committee in-
tended that through this Advisory Committee the views of the
Thrift Plan participants are represented. One of the primary func-
tions of the Employee Advisory Committee will be to exercise all
rights as shareholders with respect to the Common Stock Index In-
vestment Fund. The Board, with Federal Government officials,
could not perform this function. Because of the potential number of
participants, it would be administratively impossible for individ-
uals to exercise shareholder rights. Therefore, the committee estab-
lished the Employee Advisory Committee.
Subsection (a) provides for the Board to establish an Employee
Advisory Committee, composed of five elected members each of
whom is a participant and has an account balance in the Thrift
Savings Fund.
Subsection (b) defines the requirements for the election of the
members who must be elected by majority vote of the voting par-
ticipants who vote. A voting participant is defined as a participant
who has an account balance in the Thrift Savings Fund. Nomina-
tions for the elections of members of the Employee Advisory Com-
mittee are to be solicited from voting participants. Each voting par-
ticipant has one vote for each vacancy and a voting participant
may cast only one vote for an individual nominee. The Executive
Director will prescribe regulations for run-off elections. Each
member of the Employee Advisory Committee shall serve fora 2-
year term except that three of the first five members shall serve
for a term of 3 years to provide some continuity in the beginning of
the operation of the Thrift Plan.
Subsection (c) requires a majority vote for action by the Employ-
ee Advisory Committee.
Subsection (d) defines the functions of the Employee Advisory
Committee, which are to advise the Board and Executive Director
on investment policies for the Thrift Savings Fund and selection of
types of investment funds. The Employee Advisory Committee will
also advise the Executive Director about stocks to be excluded from
the Common Stock Index Investment Fund in accordance with sec-
tion 8427(b)(2xC), exercise all rights as shareholders for stocks in
the Common Stock Index Investment Fund, and perform other
duties as the Board may direct.
Section 8l~9.~. Executive Director
This section defines the functions and responsibilities of the Ex-
ecutive Director, who the committee intends to be the primary
manager of the Thrift Plan. Unlike the Board, the Executive Direc-
tor will have direct responsibility for investment decisions.
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Subsection (a) provides for the Board to appoint an Executive Di-
rector with majority agreement by the members of the Board. The
Board will set the terms and conditions of service for the Executive
Director, who must have substantial experience and expertise in
the management of financial investments.
Subsection (b) provides for the required responsibilities of the Ex-
ecutive Director. They are to carry out Board-established policies,
invest and manage the Thrift Savings Fund in accordance with
policies established by the Board, administer the Thrift Plan and
the payment of survivor annuities out of the Thrift Savings Fund,
and provide for payment of annuities and other authorized distri-
butions from the Thrift Fund. For making payments or distribu-
tions out of the Thrift Savings Fund, the committee intends for the
Executive Director to have the flexibility to select the vehicle for
doing this. Since the Office of Personnel Management (OPM) ad-
ministers payments of other annuities, it may be feasible for OPM
to administer the payments for the Thrift Savings Fund also. How-
ever, the committee intends for the Executive Director to have the
option of selecting OPM or some other source.
Subsection (c) defines the discretionary functions of the Execu-
tive Director.
Subsection (c)(1) provides that the Executive Director may pre-
scribe regulations to carry out his/her responsibilities as defined in
this section other than regulations relating to fiduciary responsibil-
ities.
Subsection (c)(2) provides that the Executive Director may, with-
out regard to civil service and classification laws, hire and set pay
of personnel to carry out the provisions of this subchapter, or sub-
chapter III and of subchapter IV which relate to survivor annuities
payable to the Thrift Savings Fund. However, these employees, as
part of an executive branch agency, would be covered under the
Civil Service Retirement System or the Federal Retirement
System.
Subsection (c)(3) provides for the Executive Director to contract
for services, including administrative services, to Carr out the pra
visions of this subchapter, investment of the Thrift ~avings Fund,
and policies of the Board.
Subsection (cx4) provides for the Executive Director to obtain
from Federal entities, information, data and advice, as necessary,
to carry out the provisions of this subchapter and subchapter III,
provisions of subchapter IV which relate to survivor annuities pay-
able out of the Thrift Savings Fund, and policies of the Board.
Subsection (c)(5) provides for the Executive Director to make pay-
ments from the Thrift Savings Fund necessary to carry out provi-
sions of this subchapter and subchapter III, provisions of subchap-
ter IV relating to survivor annuities payable out of the Thrift Sav-
ings Fund and policies of the Board.
Subsection (cx6) provides for the Executive Director to pay com-
pensation, per diem, and travel expenses of personnel from the
Thrift Savings Fund.
Subsection (c)(7) provides for the Executive Director to utilize the
services of individuals employed intermittently in the Government
service and reimburse these individuals for travel and per diem ex-
penses asauthorized by section 5702 and 5703 of title 5.
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Subsection (cx8) provides for the Executive Director, except as
prohibited by law or Board policy, to delegate his/her responsibil-
ities to officers and employees under the Board and provide for fur-
ther redelegation.
Subsection (c)(9) provides for the Executive Director to take other
actions as appropriate to carry out his/her function.
Section 895. Investment policy
This section requires the Board to develop investment policies
which provide for prudent investments suitable for accumulating
funds for retirement income, low administrative costs, and invest-
ments likely to receive broad acceptance by participants and the
public, taking into consideration the views of the Employee Adviso-
ry Committee.
Section 896. Administrative provisions
This section provides for the meeting schedule of the Board,
quorum for transaction of business, and compensation for members
of the Board, the Federal Retirement Thrift Advisory Committee,
and the Employee Advisory Committee.
Subsection (a) provides for the Board to meet at the call of the
Chairman but at least once during each fiscal year.
Subsection (b) provides for the Board to transact business on a
majority vote of a quorum of the Board and provides that a vacan-
cy on the Board shall not affect the authority of a quorum.
Subsection (c) provides that three members of the Board consti-
tute aquorum.
Subsection (d) provides for Board members who are not officers
or employees of the Federal Government, each member of the Em-
ployee Advisory Committee who is not an employee or member,
and each member of the Federal Retirement Thrift Advisory Com-
mittee to be compensated. They are to be compensated at the daily
rate of basic pay at the grade GS-18 level under the General
Schedule when performing the above functions. Board members,
the Federal Retirement Thrift Advisory ('ommittee, and the Em-
ployee Advisory Committee are to be paid travel and per diem ex-
penses, as necessary.
Subsection (e) provides that an employee who is a member of the
Board or the Employee Advisory Committee will not be charged
annual leave for time in performing service for the Board.
Subsection (f) provides for the Federal Retirement Thrift Adviso-
ry Committee and Employee Advisory Committee to be exempt
from section 14(ax2) of the Federal Advisory Committee Act, which
requires advisory committees to terminate after 2 years.
Section 8.97. Fiduciary responsibilities; liability and penalty
This section identifies fiduciaries and their responsbilities, de-
fines "party in interest," states basic standards of fiduciary con-
duct, lists prohibited practices by fiduciaries and describes penal-
ties for violations.
Subsection (a)(1) defines the term "fiduciary" to include each
member of the Federal Retirement Thrift Advisory Committee and
the Executive Director, any person with discretionary authority
over the management of assets of the Thrift Savings Fund, each
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member of the Employee Advisory Committee with respect to the
member's duties related to the Common Stock Index Investment
Fund except when defining a stock index as provided in section
8427, and any person with respect to the Thrift Savings Fund de-
scribed in section 3(21xA) of the Employee Retirement Income Se-
curity Act of 1974. Board members are not fiduciaries for the
Thrift Savings Fund.
Subsection (a)(2) defines the term "party in interest" to include:
(A) any fiduciary;
(B) any counsel to a fiduciary, acting as such;
(C) any participant;
(D) any person providing services to the Board or the Execu-
tive Director, acting as such;
(E) a labor organization, the members of which are partici-
pants;
(F) a spouse, sibling, ancestor, lineal descendant, or spouse of
a lineal descendant of a person described in subclause (A), (B),
or (D);
(G) a corporation, partnership, or trust or estate of which, or
in which, 50 percent or more of-
(i) the combined voting power of all classes of stock enti-
tled to vote or the total value of shares of all classes of
stock of such corporation;
(ii) the capital interest or profits interest of such part-
nership; or
(iii) the beneficial interest of such trust or estate,
is owned directly or indirectly, or held by a person described in
subclause (A), (B), (D), or (E) of this clause;
(H) an employee, officer, director, or any individual having
powers or responsibilities similar to those of an officer and di-
rector, or a holder (directly or indirectly) of 10 percent or more
of the shares of a corporation referred to in subclause (G) of
this clause; and
(I) an employee, officer, director, or an individual having
powers or responsibilities similar to those of an officer and di-
rector, or a person who, directly or indirectly, is at least a 10-
percent partner or joint venturer in a person described in sub-
clause (A), (B), (D), (E), or (G) of this clause;
It is intended in this subsection that "party in interest" will be
interpreted the same as under the Employee Retirement Income
Security Act of 1974.
Subsection (a)(3) defines the term "person" to mean an individ-
ual, partnership, joint venture, corporation, mutual company, joint-
stock company, trust, estate, unincorporated organization, associa-
tion, or labor organization.
Subsection (a)(4) defines "adequate consideration" as follows:
(A) in the case of a security for which there is a generally
recognized market-
(i) the price of the security prevailing on a national secu-
rities exchange which is registered under section 6 of the
Securities Exchange Act of 1934; or
(ii) if the security is not traded on such a national securi-
ties exchange, a price not less favorable to the Thrift Sav-
ings Fund than the offering price for the security as estab-
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lished by the current bid and asked prices quoted by per-
sons independent of the issuer and of party in interest;
(B) in the case of an asset other than a security for which
there is a generally recognized market, the fair market value
of the asset as determined in good faith by the fiduciary or fi-
duciaries in accordance with regulations by the Department of
Labor.
Subsection (b)(1) provides that a fiduciary will carry out his/her
duties solely in the interest of the participants and beneficiaries for
the purpose of providing benefits and defraying reasonable ex-
penses of the Thrift Savings Fund. It also provides that a fiduciary
will act in the manner of a prudent individual who is familiar with
such matters in similar circumstances and diversify investments of
the Thrifts Savings Fund to minimize the risk of large losses unless
under the circumstances it is clearly prudent not to do so. A fiduci-
ary should also act in accordance with the policies described by the
Board.
Subsection (b)(2) provides that a fiduciary may not maintain the
indicia of ownership of any assets of the Thrift Savings Fund out-
side the jurisdiction of the district courts of the United States.
Subsection (c)(1) provides that a fiduciary shall not permit the
Thrift Savings Fund to transfer assets to a party in interest, ac-
quire property by a party in interest, or exchange services with a
party in interest, except for adequate consideration.
Subsection (c)(2) provides that a fiduciary will not deal with
assets in the Thrift Savings Fund in his/her own interest or for his
own account. A fiduciary will not act in any capacity in a transac-
tion involving the Thrift Savings Fund on behalf of or representing
a party whose interests are adverse to the interests of the Thrift
Savings Fund or the interests of its participants or beneficiaries. A
fiduciary will not receive any consideration for his/her own person-
al account for any party dealing with sums in the Thrift Savings
Fund in connection with a transaction involving the Thrift Savings
Fund.
The committee deliberately liberalized permitted transactions
with parties in interest vis-a-vis the Employee Retirement Income
Security Act of 1974. This was done to avoid some of the overreach-
ing in the ERISA statute. However, the committee retained the
strict prohibitions against self-dealing. The committee is cognizant
of the potential pitfalls of liberalizing the general rules but feels
that effective enforcement by the Labor Department of the self-
dealing prohibitions should protect against most, if not all, undesir-
able arrangements.
Subsection (d) clarifies that a fiduciary may receive any benefit
he/she is entitled to receive as a participant, former participant or
beneficiary. It also provides for a fiduciary to be reasonably com-
pensated for services rendered or reimbursement of expenses in-
curred in carrying out fiduciary duties. This subsection also pro-
vides that a fiduciary may serve as an officer, employee, agent, or
other representative of a party in interest.
Subsection (e)(1)(A) provides that a fiduciary who breaches the re-
sponsibilities prescribed in subsection (b) or violates subsection (c)
shall be liable to the Thrift Savings Fund for any resulting losses
and must restore to the fund any profits made by the fiduciary
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through the use of assets of such fund. The fiduciary shall be sub-
ject to other relief as a court considers appropriate, including re-
moval of a fiduciary.
Subsection (eX1XB) provides that the Secretary of Labor may
assess a civil penalty against a party in interest engaging in a pro-
hibited transaction. The amount of the penalty shall be equal to 5
percent of the amount involved in each transaction for each year
the transaction continues as defined in section 4975(fX4) of the In-
ternal Revenue Code, except in a case where the transaction is not
corrected within 90 days after notice to the part in interest in vio-
aation, in which case the penalty may not amount to more than 100
percent of the amount involved.
Subsection (eX1XC) provides that a fiduciary shall not be liable
for a breach of fiduciary responsibility committed before becoming
a fiduciary or after ceasing to be fiduciary.
Subsection (eX1XD) provides that a fiduciary shall be liable for a
breach of fiduciary responsibility of another fiduciary in addition
to his/her own liability under subparagraph (A) if the fiduciary
knowingly participates in or attempts to conceal an act or omission
of another fiduciary, knowing such an action or omission is a
breach; by the fiduciary's failure to comply with subsection (b) in
the administration of the fiduciary responsibilities, if the fiduciary
has enabled another fiduciary to commit such a breach; or the fidu-
ciary has knowledge of a breach by another fiduciary and does not
make efforts to remedy the breach.
Subsection (e)(1XE) provides for the Secretary of Labor to pre-
scribe by regulation the procedures for allocating fiduciary respon-
sibilities among fiduciaries including the investment managers. It
also provides that any fiduciary who, based on such procedures, al-
locates to a person any fiduciary responsibility shall not be liable
for an act or omission of such person unless such fiduciary violated
subsection (b) with respect to the allocation or implementation of
the Board procedures or such fiduciary would otherwise be liable in
accordance with subparagraph (D).
Subsection (eX2)(A) provides that the Secretary of Labor may
bring a civil action in the district courts of the United States to de-
termine and enforce a liability under paragraph (1XA) of this sub-
section, to collect any civil penalty under paragraph (1)(B) of this
subsection or to enjoin any act or practice which violates section
8491(dX2) or (e).
Subsection (eX2)(B) provides that the Secretary of Labor, a partic-
ipant, annuitant, former participant entitled to a deferred annuity,
other beneficiary or fiduciary may bring a civil action in the dis-
trict courts of the United States to enjoin any act or practice which
violates any provision of subsection (b) or (c) or obtain any other
appropriate relief to redress a violation of any such provision.
Subsection (eX2)(C) provides that any participant, annuitant,
former participant entitled to a deferred annuity or other benefici-
ary may bring suit in the district court of the United States to re-
cover benefits due, enforce his/her rights, or clarify his/her rights
to future benefits.
Subsection (eX3) provides that an action brought about under
paragraph (2) concerning a fiduciary's breach of responsibility
under subsection (b) or violation or subsection (c) may not begin
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after the earlier of 6 years after the date of the last breach or vio-
lation or, in the case of omission, the latest date on which the fidu-
ciary could have cured the breach or violation or 3 years after the
earliest date the plaintiff knew of the breach or violation, except in
cases of fraud or concealment in which case the time period is 6
years after discovery.
Subsection (e)(4)(A) provides that district courts of the United
States shall have exclusive jurisdiction of civil actions except those
under paragraph (2)(C) which shall be under the concurrent juris-
diction of State and district courts of the United States.
Subsection (e)(4)(B) provides that an action under this subsection
may be brought in the District Court of the United States for the
District of Columbia or a district court of the United States where
the alleged breach occurred or in the district of a defendant.
Subsection (e)(5) provides that a copy of the complaint or petition
filed other than by the Secretary of Labor shall be served by certi-
fied mail on the Director, Executive Director, Secretary of Labor
and the Secretary of the Treasury. Any of these officers may inter-
vene in any action. If the action is brought by the Secretary of
Labor, he shall notify these officers.
Subsection (f7 provides that the Secretary of Labor may prescribe
regulations to carry out this section including exemptions.
Subsection (g) provides that the Secretary of Labor in consulta-
tion with the Comptroller General shall establish a regular pro-
gram to audit compliance with fiduciary requirements.
Section 8198. Bonding
This section provides for bonding of officials and financial insti-
tutions of the Thrift Savings Fund and specifies the officials and
conditions under which they must be bonded.
Subsection (a)(1) provides that each fiduciary and person who
handles funds or property of the Thrift Savings Fund shall be
bonded with the exception referred to in (2).
Subsection (a)(2)(A) provides that a fiduciary shall be exempt
from the bonding requirement if the fiduciary is a corporation op-
erating under the laws of the United States or any State, is author-
ized under these laws to exercise trust powers or conduct insurance
business, is subject to Federal or State authority, supervision and
examination and has at all times a combined capital and surplus in
excess of a minimum of not less than $1 million as set by the Sec-
retary of Labor.
Subsection (a)(2)(B) provides that banks or other financial institu-
tions which meet bonding requirements under State law which are
equivalent to Federal requirements, as determined by the Secre-
tary of Labor, may be exempt from the bonding requirements
under this section under several conditions. These are banks or
other financial institutions which are exempt from bonding re-
quirements based on application of subparagraph (A), authorized to
exercise trust powers, and not insured by the Federal Deposit In-
surance Corporation or the Federal Savings and Loan Insurance
Corporation.
Subsection (b) provides for the Secretary of Labor to set the
amount of a bond at the beginning of each fiscal year. The amount
of the bond shall be no less than 10 percent of the amount of funds
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handled or an amount no less than $1,000. The maximum amount
shall be $500,000 except when set at a greater amount by the Sec-
retary of Labor after due notice. It also provides that the amount
of funds handled during the preceding fiscal year or the estimated
amount during the current fiscal year will determine the amount
of the bond as provided in regulations prescribed by the Secretary
of Labor.
Subsection (c) provides that a bond shall include the terms and
conditions the Secretary considers necessary to protect the Thrift
Savings Fund against loss. It also provides that a bond have as
surety a corporate surety company which is an acceptable surety
on Federal bonds under authority granted by the Secretary of the
Treasury and shall be in a form or of a type approved by the Secre-
tary of Labor.
Subsection (d) provides that it shall be unlawful for any person
covered by subsection (a) to receive, handle, disburse or exercise
custody or control of funds of the Thrift Savings Fund without
being bonded. It also provides that it shall be unlawful for any fi-
duciary or other person with authority to direct the performance of
functions in paragraph (1) to permit the performance of such func-
tions by any person who does not meet the bonding requirements
as provided in subsection (a).
Subsection (e) provides that a person required to be bonded under
subsection (a) shall be exempt from any other provision of law
which would require bonding for handling funds or property of the
Thrift Savings Fund.
Subsection (f) provides for the Secretary of Labor to prescribe
regulations to carry out the provisions of this section and to
exempt a person or class of persons from the requirements of this
section.
Section 8.9.9. Exculpatory provisions; insurance
Subsection (a) provides that any provision in an agreement or in-
strument which purports to relieve a fiduciary from responsibility
or liability under this subchapter shall be void. Subsection (b) pro-
vides for the Executive Director to require agencies to contribute
not more than 1 percent of the amount contributed to the Thrift
Savings Fund under section 8421(b) to purchase insurance to cover
potential liability of persons serving in a fiduciary capacity with re-
spect to the Thrift Savings Fund.
Section 101 (b) amends the table of chapters at the beginning of
part III of title 5 to insert after chapter 83 the following:
"84. Federal Retirement System ................................................................................. 8401.,,
TITLE II-AMENDMENTS RELATING TO SOCIAL SECURITY
Section 201 amends section 210(a)(5) of the Social Security Act to
cover prospective service performed by an employee who was sub-
ject to CSRS who opts to transfer to the FRS.
Section 202 amends section 3121(b)(5) of the Internal Revenue
Code of 1954 to tax the wages of an individual described above.
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TITLE III-MISCELLANEOUS AND CONFORMING AMENDMENTS
Section 301 extends the Federal Employees' Retirement Contri-
bution Temporary Adjustment Act of 1983 from January 1, 1986
until January 1, 1987.
Section 302(a) amends section 8331 of title 5, United States Code,
to limit coverage under the CSRS for District of Columbia govern-
ment employees to those first employed before January 1, 1987.
Section 302(b) amends section 8332 of title 5, United States Code,
by adding a new subsection excluding participants in the FRS from
receiving service credit under the CSRS, except in certain limited
situations affecting participants retaining entitlement in the CSRS
under section 8472.
Section 302(c) amends section 8333(b) of title 5, United States
Code to modify the requirement that an employee or Member must
complete at least one year of creditable service as a participant in
the CSRS out of the last 2 years before separation to be eligible for
an annuity based on that separation. The modification provides
that service in the FRS will also count toward the one out of the
last 2-year rule under CSRS. It also amends section 8333(c) by
making the contribution requirements of Members applicable only
to service performed while not a participant in the FRS.
Section 302(d) amends section 8334(a) of title 5, United States
Code, relating to deductions from an employee's pay for both CSRS
and Social Security coverage. An employee who was covered by the
CSRS on December 31, 1983 and who was subsequently covered by
Social Security will continue in the CSRS at a reduced contribu-
tion. The contribution to CSRS will be equal to the excess of the
employee's normal CSRS contribution over the OASDI portion of
the Social Security tax.
Section 302(e) amends section 8339 of title 5, United States Code,
to provide that when an annuity to an individual is based on serv-
ice that includes service covered by Social Security and by deduc-
tions withheld as described in section 8334(a), the annuity will be
reduced at age 62 by an amount equal to the value of the Social
Security benefit attributable to that period of service.
Section 302(f) amends section 8348(a) of title 5, United States
Code, to clarify that the Civil Service Retirement and Disability
Fund is available to pay benefits and administrative expenses for
both chapters 83 and 84 of such title.
Section 303 amends section 1005(d) of title 39, United States
Code, to include officers and employees of the Postal Service for
coverage under the provisions of chapters 83 and 84 of title 5.
Section 304(a) amends section 8901(1)(E) of title 5, United States
Code, to limit coverage under the Federal Employees' Health Bene-
fits Program for District of Columbia employees to such employees
first covered before January 1, 1987.
Sections 304(b) and (c) amend sections 8901(10) and 8905(c) of title
5, United States Code, to incorporate health benefit plan eligibility
requirements for former spouses as a result of P.L. 98-615; section
304(c) also amends section 8905(b) to permit a family member of a
deceased employee or annuitant who was enrolled in a health bene-
fits plan to continue that enrollment.
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Section 305 amends section 2105(c) of title 5 to provide that chap-
ter 84 does not apply to employees of certain nonappropriated fund
instrumentalities.
Section 306 amends paragraph (7xD) of section 6103(1) of the In-
ternal Revenue Code of 1954 to permit disclosure of earnings
records for the purpose of administering the FRS disability benefits
program.
Section 307 amends section 8113 of title 5, United States Code, to
provide that compensation payable under this subchapter to an in-
dividual entitled to benefits under the FRS will be reduced by the
amount of benefits which are or upon application would be payable
under title II of the Social Security Act based on the individual's
service under the FRS.
Section 308(x) amends section 8701 of title 5, United States Code,
to limit coverage under the Federal Employees' Group Life Insur-
ance program to District of Columbia employees first covered
before January 1, 1987.
Section 308(b) amends section 8704 of title 5, United States Code,
to provide that FRS participants who elect to make a contribution
under section 8418(c) and are covered by the Federal Employees'
Group Life Insurance program who die in service are eligible for a
benefit equal to approximately two times salary.
Section 308(c) amends section 8705 of title 5, United States Code,
to permit an individual entitled to receive the basic life insurance
benefit based on the death of an FRS participant to elect to receive
it in monthly payments over a 2-year period.
Section 308(d) amends section 8708 of title 5, United States Code,
to authorize payment of the Government's share of the life insur-
ance premium for employees who, after December 31, 1989, elect to
continue insurance while receiving an annuity or workers' compen-
sation.
Section 308(e) amends sections 8706, 8714x, 8714b, and 8714c to
permit continued coverage for up to 12 months for an employee
who enters on active military duty or active duty for training in
the same way coverage is continued for other nonpay status.
Section 309 amends section 376 of title 28, United States Code,
section 7448 of the Internal Revenue Code, and sections 1567 and
1568 of title II of the District of Columbia Code to modify the judi-
cial survivor annuity benefits payable under these sections for indi-
viduals who first become eligible for annuities on or after the effec-
tive date of this Act. The net effect is to increase both contribution
rates and benefit formulas.
TITLE IV-AUTHORIZATIONS, APPLICATION, AND EFFECTIVE DATES
Section 401 provides for payment of the fiscal year 1986 and 1987
expenses of the Federal Retirement Thrift Investment Board from
appropriations.
Section 402 requires OPM to take appropriate action during
f"ISCal years 1986 and 1987 to make available the information de-
scribed in section 8469 of title 5, United States Code, and author-
izes $1 million to be appropriated for this purpose.
Section 403 provides that except for the provisions of subchapter
VII of chapter 84 of title 5, as added by section 101(x) of this Act,
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and the amendments made by title III of this Act, nothing in this
Act shall reduce the accrued entitlements of current and retired
Federal employees and their families to future benefits under the
CSRS or any other Federal retirement and disability system.
Section 404 provides that this Act takes effect January 1, 1987,
except for subchapter VIII of chapter 84 (relating to the Federal
Retirement Thrift Investment Management System) and sectin 301
(relating to extension of the Federal Employees' Retirement Contri-
bution Temporary Adjustment Act of 1983) which take effect on
the date of enactment, and the loan program required by section
8426(e), which must be established not later than January 1, 1988.
III. EVALUATION OF REGULATORY IMPACT
Paragraph 11(b)(1) of Rule XXVI requires each report accompa-
nying abill to evaluate "the regulatory impact which would be in-
curred in carrying out the bill." S. 1527 will have a regulatory
impact.
S. 1527 establishes a board to invest the moneys and administer
the provisions of the thrift plan. Moneys available for non-Federal
investment will be invested through fixed income contracts with
private sector entities and through a common stock index fund.
Those private sector entities involved in the management or in-
vestment of the Thrift Plan moneys will be subject to ERISA like
fiduciary standards and obligations regulated and enforced by the
Department of Labor. For the most part these groups will already
be subject to ERISA standards.
IV. ESTIMATED COST OF LEGISLATION
U.S. CONGRESS,
CONGRESSIONAL BUDGET OFFICE,
Washington, DC.
HOn. WILLIAM V. ROTH, Jr.,
Chairman, Committee on Governmental Affairs,
U.S. Senate, Washington, DC.
DEAR MR. CHAIRMAN: In accordance with Section 403 of the Con-
gressional Budget Act of 1974, the Congressional Budget Office has
prepared the enclosed cost estimate for S. 1527, the Federal Retire-
ment Reform Act of 1985, as ordered reported by the Senate Com-
mittee on Governmental Affairs on October 2, 1985, and amended
for technical reasons. The estimate represents the budgetary effects
of the bill relative to the CBO baseline.
Mainly because employees now covered by the civil service re-
tirement system could select a different retirement plan, S. 1527
would reduce the budget deficit in 1991 by an estimated $1.6 bil-
lion. But much of this effect depends upon the on-budget retention
of tax-deferred savings plan contributions. Beginning in 1997, how-
ever, both the annual employee and matching agency contributions
could be invested in marketable rather than special U.S. securities.
If, as would be possible in 1997, all 1991 contributions were invest-
ed in marketable securities, outlays would increase and the bill's
estimated deficit reduction of $1.6 billion would change into an es-
timated deficit increase of $1.7 billion.
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If you wish further details on this estimate, we will be pleased to
provide them.
With best wishes,
Sincerely,
1. Bill number: S. 1527.
2. Bill title: Federal Retirement Reform Act of 1985.
3. Bill status: As ordered reported by the Senate Commitee on
Governmental Affairs on October 2, 1985, and amended for techni-
cal reasons.
4. Bill purpose: The Federal Retirement Reform Act of 1985
would create a new retirement system for Federal civilian employ-
ees. S. 1527 would encourage individuals to save for their retire-
ment, facilitate career mobility, and increase financial planning op-
tions for each employee with respect to retirement. The bill also
would require agencies' operating budgets to reflect the future cost
of pensions for certain federal workers, including nearly all new
hires.
If enacted, S. 1527 would allow some 2.2 million Federal workers
hired before January 1984, including approximately 510,000 U.S.
Postal employees, to select among three retirement systems for
their remaining years of Federal employment: The civil service re-
tirement (CSR) system that they currently participate in, and two
options that build upon Social Security's old-age and disability
(OASDI) programs. (Regardless of the individual's choice, the bill
would protect CSR benefits earned up to the selection date.) Nearly
all employees hired after January 1984, who by law are covered by
Social Security, could select only between the two options that
build upon Social Security.
Three tiers of benefits form Option 1 and Option 2: Social Securi-
ty, atax-deferred savings plan, and adefined-benefit plan based on
years of service and average annual earnings over 5 years. The dif-
ferences between the options involve the level of employee contri-
butions and the relative size of benefits available from the savings
plan and from the defined-benefit tier. Option 1 has no mandatory
employee contributions except the Social Security payroll tax but
would encourage participation in the voluntary savings plan
through its dollar-for-dollar agency match on employee contribu-
tions up to 5 percent of pay. The Social Security tax for the OASDI
programs is now 5.7 percent of annual earnings up to $39,600. The
5.7 percent rate will rise eventually to about 6.1 percent.
Option 2 requires a 7 percent contribution, including the Social
Security tax, and graduates the voluntary savings plan's match:
dollar-for-dollar on the first 1 percent of pay contributed, 50? on
the dollar for the next 2 percent of pay contributed, and 25Q on the
dollar for any employee contributions between 3 and 6 percent of
pay. (An individual saving 6 percent of salary under Option 2
would receive a government match equal to 2.75 percent of salary.)
Option 2's less generous savings plan and its higher mandatory em-
ployee contributions would offset additional defined-benefit costs in
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two areas: early retirement at age 55 after 30 or more years of
service, and better protection against post-retirement inflation.
5. Estimated cost to the Federal Government: The estimated
near-term budgetary impacts of S. 1527, set forth in this cost esti-
mate, consider the old-age retirement provisions of the bill. They
do not address benefit differences concerning various survivor and
disability provisions nor special provisions for certain select groups
of employees. In addition, CBO has no basis to determine the costs
associated with either the bill's loan program for which details
have yet to be established, or its administrative requirements, in-
cluding those for private-sector contractors who may manage the
long-term disability (LTD) program. Thus, no budgetary cost is esti-
mated in these areas through 1991.
Assuming enactment of S. 1527 prior to January 1986, Table 1
shows the budgetary effects through 1991 relative to the CBO base-
line. During that period, on a cumulative basis, revenues would fall
by $4.5 billion; offsetting receipts-including all U.S. Postal Service
payments and voluntary employee contributions to savings plans-
would increase by $13.9 billion; and outlays would grow by some
$2.5 billion. The operating expenses of Federal agencies would rise
in accordance with the bill's accrual cost requirements. Higher op-
erating expenses, this CBO estimate presumes, would require
larger annual appropriations of budget authority. This additional
budget authority for 1987-1991 would exceed $14 billion but would
not affect the size or timing of federal outlays. (See Table 2 for de-
tailed budgetary estimates.) The estimated revenue loss derives
from lower withheld mandatory employee contributions for Option
1 participants and from both of the voluntary savings plans that
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