HOUSE HEARING ON SUPPLEMENTAL RETIREMENT PROGRAM 23 FEBRUARY 1984

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000300110006-4
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 86
• Document Creation Date: December 22, 2016
• Document Release Date: February 28, 2011
• Sequence Number: 6
• Publication Date: February 28, 1984
• Content Type: MEMO

STAT
STAT
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28 February 1984
MEMORANDUM FOR THE RECORD
SUBJECT: House Hearing on Supplemental Retirement Program
23 February 1984
1. On 23 February 1984, OLL) and the undersigned attended
a hearing on "Supplemental Retirement System" sponsored by the House E3amnittee
on Post Office and Civil Service chaired by Congressman William D. Ford.
This was the first in a series of scheduled hearings by this committee on
the supplemental retirement issue. The stated purpose of these initial hearings
is to focus on five general areas.
? Comparability Analysis
? General Design
? Eligibility and Inflation Protection
? Financing
? Coverage
In actuality, this meeting served to highlight the basic differences
in philosophy between the House Committee and the Administration on key
retirement issues such as benefit levels, funding, and appropriate retirement
age. The House clearly comes down on the side of maintaining existing benefit
levels while the Administration in the person of Donald Devine (D/OPM) states
categorically that reductions will be necessary. (Parts of the verbal exchange
between Devine and Ford are summarized in paragraph six (6) below.) The meeting
lsf~ll the first time be helpful asregarding
we develop
also served to get the Atretirementrecord
their thinking on supplemental
internal Agency strategy.
2. Hay Associates Respresentatives, which included Edwin Hustead, and Devine
made formal presentations at this hearing. Their prepared statements are attached
and essentially represent the formal testimony presented to the committee.
(Committee representatives included Congressman Ford, Gene Taylor, William
Dannemeyer, Frank Wolfe, Connie Mack, William Clay, Donald Albosta, and
Mary Rose Oakar.)
3. In his opening comments, Chairman Ford said he expected that be hearings
will continue into 1985. He emphasized his view that the "plan in a manner which wilthr He way the
were in essencee excontractisting
Federal Retirement Systems".
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SUBJECT: House Hearing on Supplemental Retirement Program
23 February 1984
and that there was a moral obligation to ensure continued adherance to the pro-
visions. He further stated that the new supplemental plan must be compatible
with existing systems to preclude a situation where employees working side by
side would preceive themselves as being treated differently.
4. Hay Associates representatives provided a general overview of the
many items that must be considered in developing a supplemental retirement
program. Their report which paralled the one provided to the Agency by
Ed Hustead in January, dealt basically with the following issues:
? The types of plans available, i.e., defined benefit versus defined
contribution and the pros and cons of each.
? Social Security Integration - The various formulas (add-on, offset, step
rate, etc.) and methods that could be used to integrate the benefits
were described. It was pointed out that one of the first decisions
on developing a plan would have to be how much of Social Security "tilt"
should be preserved in this integration process.
? Retirement age without reduced benefits.
? Disability and survivors benefits.
? Vesting provisions.
? Indexing.
Hay representatives went on to outline their approach to the design
of a new retirement plan and discussed the basic differences between the current
CSRS system and plans in the private sector. They then elaborated on the
uniqueness of the Federal Government situation, citing Social Security
integration requirements, budget considerations and finding of the existing
systems as examples.
S. Mr. Devine's testimony was basically on oral presentation of his pre-
pared statement (attached--this statement is slightly different than the one
provided to the Agency for review. It does acknowledge special interest of
CIA on page 10). In that statement he touched on the following issues, some
of which became very controversial:
? Comparability analysis and his belief that a "Total Compensation
Comparability" approach would lead to serve cutbacks in Federal employees
pay and benefits. He thus recommended only focusing on the retirement
issued at this time.
? General Design - He appeared to favor a defined contribution approach
because they are fully funded. He cited OPM's survey of Federal
employees and a conclusion that Federal employees do not have a uniform
opinion on how a retirement system should be structured.
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SUBJECT: House Hearing on Supplemental Retirement Program
23 February 1984
? Eligibility and Inflation Protection - He acknowledged these very likely
will be the most controversial and difficult issues. He is convinced
that reforms to the current system will have to be made and cited
the President's 1984 and 1985 budget proposals as the correct approach
to changes. (COLA reductions, increased employee contributions, raising
of retirement age, etc.) Although not stated orally he did have included
in his prepared statement that special arrangements may be needed for
special groups of employees. He included CIARDS and the Foreign
Service retirement system in that category.
? Funding - He highlighted what he thought were significant deficiencies
in the current systems resulting in a $515 billion unfunded liability.
He felt the new retirement plan should be funded on a current basis.
He discussed amoritazation of the current system as necessary to meet
future obligations.
6. A great deal of controversy between Chairman Ford and Devine developed
over the data and statistics used by Devine and the unfunded liability issue.
In answer to a question posed to Hay representatives as to why the unfunded
liability was a problem they essentially stated that it was not a problem for
the government. It is an important aspect in private industry where companies
can easily go out of business, but that was not the case for the Federal
government. Devine contended just the opposite, stating his belief that the
$515 billion unfunded liability was an extreme burden to the taxpayers and an
unfunded obligation was inconsistant with practice in the private sector.
Chairman Ford stated that he thought it was counter productive to include this
as part of the issue on the development of a supplemental retirement program and
further chastized Devine for his scare tactics using the unfunded liability
arguement. Ford stated he disagreed with Devine's statements on benefit com-
parability and saw obvious problems with Devine's information and data. He
thought that Devine's presentation did a disservice to the propose of the
committee and that facts were needed, not a compilation of special interests.
He stated that not withstanding his Administration representation, D/OPM has a
responsibility to provide a work force that meets the needs of the government
and that Devine cannot keep up an adversarial role with the committee. He
considered Devine's efforts as unsound personnel practice. Ford continued that
no conclusions should be drawn from any statistics until Hay Associates finished
their study which incrementally would be in August with final reports in the
November/December time frame.
7. Ford also stated for the record that the House study would be coordinated
with the Senate to avoid duplication of effort, i.e., the studies should
complement each other. He also acknowledged the total complexity of the
retirement issue. In addition to the formal testimony the question and answer
sessions touched on the following:
? Advantages of Social Security to lower-paid short-term employees.
? The increase in capital accumulative plans in the private sector.
? The types of firms used in the Hay Associates survey - 60% industrial;
40% in finance and investment; 1/3 less than 1,000 employees, representation
3
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SUBJECT: House Hearing on Supplemental Retirement Program
23 February 1984
of Fortune 500 companies; broad representation similar to types of
employment intended for the survey.
? Changes in fringe benefits in the private sector - Increased dental
insurance; capital accumulation plan; decrease in medical insurance
coverage to more co-insurance. No major changes in retirement area
except for additional COLA's in the pensions.
In conjunction with discussions on whether the entire supplemental
issue could be studied and resolved by the end of 1985, Hay felt from their
standpoint, that was sufficient time. However, Congressman Wolfe suggested that
a year's extension should perhaps be considered given the fact that there
very likely would be new members of Congress involved after the fall election.
There was no'further discussion on this suggestion but it could become an
issue as the review progresses.
.7. It is clear that Ford does not plan to push for any type of legislation
until early 1985. This appears to be supported by the timing on the availability
of the final Hay report. In any event, it undoubtedly will be several months
before any initial conclusions or decision are made by the committee on the
parameters and the types of plans to be considered.
Attachments: a/s
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24 IL ;~,
STAT
Office of Legislative Liaison
:arson Div:saon
First House Pcst Office and Civil Service
Cc,..rnittee Hearing on Supple? ental Retirer.ent
(23 February 1954)
SiRY: Yesterday the Administration and the Congress, in
the person of the House of Representatives, officially
joined in battle over the subject of supplemental retirement
for new federal employees subject to social security. The
lines of disagreement bet',,een the two were clearly drawn and
both parties, while agreeing that they need to core to some
acreement, are not about to do so over the near term. The
major issues are how unattractive the new system will be,
compared to the existing systems, and what, if anything,
will be done to reduce benefits to participants of the
existing systems (in our case, the Civil Service Retirement
System and CIS-RDS). The House appears willing to support
the existing level of federal employee retirement benefits,
or something very nearly the same, while the Administration
clearly is driven by a desire to reduce federal retirement
costs
1. Attached for your information and use is a complete
set of documentation resulting from the subject hearing
yesterday. It includes the witness list and prepared
statements of all participants. Also included is a summary
of the questions and answers, albiet not a complete one I am
afraid, that were exchanged between members of the Committee
and the people testifying.
2. It is interesting to note that the testimony of Mr.
Devine, Director of the Office of Personnel Management (CPM)
did not get through the legislative clearance process within
the office of Management and Budget (OMB) in a timely
fashion. In speaking with a House Post Office and Civil
Service Committee staffer on Wednesday afternoon, the day
before this hearing, he stated that the Committee had not
received Mr. Devine's testimony and that the Committee was
being told by GPM that it (the testimony) was being held up
by OMB. In fact, Mr. Devine apologized to the Committee at
the begining of his testimony for not delivering his
testimony on a timely basis (48 hours prior to the hearing)
and acknowledged that he had had some problems with OMB.
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Tared the
3. As a result of this exchange, I have corrr~
draft testimony that we received from OMB with the testimony
actually given by Mr. Devine yesterday. While the bulk of
the changes are editorial in nature, a few substantive
charges do seem to have been rode. You will note at the top
of page 5 of the final statement actually given by Mr.
Devine that the first six lines have been added. Trey
amplify on the point that the unfunded liability of current
federal retirement syste.s is inconsistent with the law
(ERISA) that requires private sector companies to fully fund
their retirement plans on a current basis, and that if the
gc,?err:m,er;t were held to the sarre private sector retire-ent
law, that the current retirement costs for the federal
government would be over 55% of payroll costs for a full 40
years, as opposed to something on the order of 14% in the
private sector. At the top of pare 10 of the final
testimony, OMB added the phrase "...as well as the persons
covered by the foreign service and CIA retirement
systems, ...". Further down on page 10, in the forth line of
the FUNDING paragraph, GMB has added the phrase on a
dynamic basis.. after the number $515 billion. While this
may appear insignificant, it has great meaning to a
budgeteer.
4. The principal value of the hearing, it seems to me,
was twofold. First, it was knowing formally for the first
time where the Administration was coming from on the issue
of supplemental retirement. Secondly, it was the exchanges
that took place between Chairman Ford (D,MI) and Mr. Devine
and Congressman Frank Wolf (R,VA) and Mr. Devine. Both
Members of the Committee were strongly pro-federal employee
in their statements and questions, while Mr. Devine was
strongly pro-"we need to reduce the cost of federal
retirement programs because they are too great a burden on
the taxpayers compared to retirement costs in the private
sector". In his opening remarks, the Chairman stated that
he viewed existing federal retirement benefits for current
(pre 1 January 1984) employees as a part of a binding
contract that existed between the federal government and its
employees that could not be breeched because there has been
performance on the part of the exployees, and that unless
his recollection of his "Contracts 101" course in college
was faulty, a contract in fact existed. The attached
question and answer summary will give you an additional
flavor of their exchanges.
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5. I am, also attaching a copy of Mike Causey's column
in this morning's Washington Post beca,.:se it is, in my
judgient, a fairly accurate sucmary of some of what
tray;spired yesterday.
6. The next scr,eduled hearing on this subject by this
cc-rmittee is 01 March 19`4. At least three more are pianr,ed
d,,ring March. I will attend and report on them as
appropriate
Attachrents:
As stated
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The following sumrarizes the questions asked and ans.+ers
provided during the course of the House Ccmrittee on Post
Office and Civil Service hearing on supplemental retirement
on 23 February l3S4. It is not a complete suurrary, but
rather is ir;ter)ded only to provide a flavor of the exchan;es
,e
that LC,C~: ~'-~a~
Ch:ir:n Ford (D,X I): is the unfunded liability problem that Ci-M
talks about really a problem?
Hay/HuDgins (a House Post Office%Civil Service Committee paid
Consultant}: It is not a real problem. Father, it is a
the: retical problem that would exist only if the
federal gcvernr,ent were a corporation in the private
sector and subject to the EPI SA law that governs the
the funding and a:rministrat ion of private sector re-
tireuent and pe p'ar:s. public sector, it
rasion ~ In the
would only be a problem if one anticipated termin-
ating the federal retirement progra;:s that have
a ccur:.,ulated this "unfunded liability", and no one
is seriously considering doing that. Rather, it is
merely a scare tactic that has no technical merit
unless one plans to terminate one or lore of the ex-
isting plans. My gosh, the Social Security system
=sas an "unfunded liability" of sore $6 trillion,
but you don't hear the Administration crying wolf
about this one.
Chinn Ford: I understand that capital accumulation plans are
becoming very popular in the private sector. Would
you tell us something about them?
H_y;'Huggir.s: Thrift/savings plans are the most popular type
of capital accumulation plans in the private sector.
l~:e witness went on to describe a thrift plan in
more detail.
Chmn Ford: Is a low paid or is a high paid employee better
off with Social Security?
HayjrlL,C ins: A lcw paid employee is much better off, in re-
tirement, with Social Security because of the built-
in tilt that Congress intentionally incorporated into
the system. Also, a short term employee is better
off in Social Security than is a long term employee.
The same is true of a married person as opposed to a
single person, all because of the policy decisions
the Congress made when they designed the Social
Security system.
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Chmn, Ford: Hcw does the private sector typically integrate
its retirement/pension plans with Social Security?
Hay/'Huggir:s: A company typically decides w;-,ether o r not it
wants to chance th-he built -- in t ilts in Social Security
or not. If it does, there are vario?s a}s of doing
so, and of doing so to varying degrees. With respect
to disability, typically social security picks up
disability payments if the disability occurs before
an employee retires or reaches retirement age, wY,ere-
as the company retirement plan will typically cover
the disability if it occurs at retirement age.
Chan Ford In the annva1 Pay survey of private sector
retirement plans, at is the average size of the
firms surveyed?
Pay/Puggins: Approximately one-third have less than 1,000
employees, some 60% are in the industrial sector,
with the remaining 4C% or so in the financial/
services sector.
C?-.rrn Ford: Is W.R. Grace Co. included in your survey?
Ha y/~Huggins: No, it is not, but to the extent that the
company makes its retirement information public,
we will be glad to collect it for you and cor,.-
pare it with any other system you may want.
Chrrn Ford: Good. Please do so. We will be hearing from
Mr. Grace at a later point during these hear-
ings.
Cong. Wolf (R,VA): Do you really think that the Congress
can get a new retirement plan enacted in 1985?
Hay;'Hug9 rs: I think so. You will have a lot of data
available from which to design and debate the
ultimate system, but I think there is time.
Cong. Wolf: Do you talk to federal employee groups
formally in the conduct of your work for this
Committee?
Hay/Huggins: Not normally, but we can do so if the Comm-
ittee desires that we do so.
Chmn Ford: I do not think that this would be appropriate
because the federal employee groups can and do
express their wants and complaints directly to
the Committee, and should continue to do so,
rather than to our consultant.
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Cang. Wolf: How do you do job coa.parsor,s and compara -
bility s tudies between the private and public
sector?
nay -29ir,s: We do it at the macro rather than the micro
level. We do not compare individual jobs so much
as we do large occupational series and types of
industries
Cong Wolf: w'..,at are you doing in your work for this Ccu.r.-
ittee to protect current employees from losing
any of their current retirement benefits?
~ayHgYou are the people who will do that, but we
will propose policy alternatives to you. There
are at least two ways to do this, both having to
do with funding. You can choose to amortize in-
creased costs over a 20 or 30 or 40 year period,
or you can choose to comingle contributic.ns from
the new system with funds from the old (Civil Ser-
vice) system so that there is no disruption of the
cash flow.
Cong. Wolf: Is the latter the best way to give present
employees a warm feeling that their current benefits
are safe?
j y'Huggins: Probably, but that is a political question that
requires a political action.
Chinn Ford: Have there been any fringe benefit irmprovements
in the private sector in the last three years or so?
;,ay; Huggins: Jot much. There have been some gains (dental
and ortho(3entia coverages are better, more capital
accumulation plans are available, and COLA protection
is generally better), but there have also been some
losses (mainly a greater sharing by the employee of
continually escalating hospitalization and medical
costs). The net effect has been about break-even.
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Cor:g. Wolf: Will the eventual supplerental retirerent system
be better or worse than the existing system?
Hay;'Huggir.s: T ,rat)on tha' could
the ha.k~m nd iE. the q-.;estiun of sc,r,,edav go out of b_s nesr But he
what, if anv^h;ng, ril; be dune with said that isn't expect tc botome a
the present svs'em, which covers pr,oblen for the L' S gc.ernment 'it
4C.K)0 we-leers it this area ,the unfunded l:8bilit\j would on!v
Ne fede ai hirer paV int. `,,6al be imp''taxt if there was a threat
Securit\ as wel! as the Civil tie-vice re? that Cuba ,x,.-~Wd take 0`?er and `end
tirer.,ent system Congress ha' until us intc harkruptcy'," Ford said.
the end. of next year U. up with a Office of Fersor,nel ?vla age rent
pr ate ctcr style pension pr,, am Director Donald Devine said that
that tae 1r t( 8(c:.unt dl a fw''.Trens tih:le the lr?!r. ! d1atE F 1F 8 supple
tG. 87id `iE?ne:'its from the FYc.e.^.:5. mFn~.a plan for new wvrkErs atten,
Federal w;,-1,ers hired before this ticn m.,st be paid to the rep_ar C:vii
year remain under the regular Civil Service pr-~; am Devine said the pro.
See i,e ret rer.,ent stern and have g-am is si,!:ent. but has built up an
a jested interest In an Chinges that 17if i Ided l ability` of g~ 1v hl ii: n, "e-
might b~E made in it The Reagar ad- sent'all\ ob!;gat ng tmbines Sxial q,,(-,-u-
and Civil Service pav'ments and
benefits-Congress will also make
changes in the regular Civil Service
svst.em. Those changes include raising
the retirement age to 65, and requir-
ing emplo es to put up to u percent of
sala.r into the retirement fund.
At vesterday's session, committee
Chairman Rep. William Ford tD-
Mich.! made it clear that he thinks
present Civil Service retirement ben-
efits should be protected. Ford be.
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21 FEB 1984
MEMORANDUM FOR: Deputy Director of Personnel for Special
Programs
Deputy Director or Personnel for Policy,
Analysis, and Evaluations
STAT FROM:
Liaison Division
Office of Legislative Liaison
SUBJECT: Director Office of Personnel Mangagement
Testimony to House Post Office and Civil
Service Committee on 23 Februray 1984
1. Attached for your information and use is a copy of
the letter sent from the House Post Office and Civil Service
Committee, over Chairman Ford's (D,MI) signature, to the
Director of the Office of Personnel Management (OPM)
requesting his testimony at an upcoming hear on supplemental
retirement. It is this letter request that prompted the
draft OPM testimony that you reviewed last Friday.
2. The only reason that this letter is useful is that
it completes the loop between the House Committee and the
OPM and ensures that we have complete privity into at least
the public record on the subject of supplemental retirement,
at least for now.
STAT
Attachment:
As stated
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WILLIAM D. FORD, MICH., CHAIRMAN
MOMIS E WALL ARLZ DIN[ TAYLON. MO
WILLIAM OnU CLAY MO BENJAMIN A GILMAII, N V
RATRiCIA ICwRO(DE4 COLO TOM CONCORAN ILL
RWIR' GARCIA NY. JAMIS A COUNTER NJ
MKK(Y LELAND. TEX. CMAALIS FASMAYAN. JR. CALIF_
DONALD JOS(PN A JOSTA MICK WILLIAM I. DANN(MEYIR. CALIF.
GUS YATRON -A DANKL I. CNANL ILL
MANY NOSE OAAAIL ONTO FRANK P. WOLF. VA
NATI( MALL IND
GAMY SKONSK1. MINN
TMOMAS DASCMLL S OAR
RON Of LUGO. V I
CMAALIS I SCMVMIN N.Y.
DOUGLAS M SOSCO, CAUF.
gouge of Repregentatibei;
Committer on Vogt Office
anb Cibir berbice
Mastjington, M.C. 20515
January 25, 1984
Honorable Donald J. Devine
Director
Office of Personnel Management
1900 E Street, N.W.
Washington, D. C. 20415
On February 23, 1984, the Committee on Post Office and
Civil Service will commence a series of hearings related to the
development of a new retirement system for Federal employees
who are subject to Social Security. The purpose of the
hearings is to elicit the views of interested parties on the
key issues involved in the design-and objectives of the new
retirement system. We would appreciate your appearance before
the Committee on February 23 to discuss these important issues.
While the Committee intends to consider all of the many
complex issues relevant to the development of a new retirement
system, we are particularly interested at this time in having
your views on the following matters:
Comparability Analysis
In designing the new Federal retirement system, the
Committee will, of course, refer to the practice in other
sectors of the economy. The Committee would particularly be
interested in your view on the range of compensation elements
to be considered in such analysis as well as the survey base.
Should consideration be limited strictly to retirement systems
or expanded to include other fringe benefits and cash
compensation so that retirement can be placed within the
perspective,of total compensation?
General Design
In developing a new retirement system the overall design
of the retirement system is important. The two major types of
retirement systems are the defined contribution and the defined
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benefit systems. Many employers in the private sector today
use a combination of these systems to develop their total
retirement programs. Within each major type there are designs
that ignore the effect of Social Security, thus accepting
the full Social Security income distribution, and plans
which offset the effect of Social Security through various
mechanisms, thus reducing the Social Security tilt. Which
type of plan should the Federal Government use and within each
type how far should the Government go in offsetting the Social
Security benefits either explicitly or implicitly?
Eligibility and Inflation Protection
In addition to the question of overall design there is the
question of the adequacy and equity of individual benefits.
Prior studies show that the current Federal retirement system
replaces about the same level of income as the retirement
systems of large employers after a full career at age 62 or 65.
The Federal retirement system costs more than the typical
private sector system because it permits retirement at earlier
ages; benefits are fully indexed after retirement; and the rate
of disability among Federal employees is greater than in the
private sector. Studies also show, however, that these costs
are more than offset by shortfalls in other benefits such as
health and life insurance. In developing a new retirement
system, should the inflation protection provisions of that
system be structured to reduce costs in order to offer new or
improved benefits under that system? For example, could
indexing of benefits be capped or otherwise limited in exchange
for an employer-sponsored thrift plan?
Financing
The current funding is less stringent than the funding
imposed on the retirement systems in private sector by Federal
law and regulation. However, the funding is more advanced than
the Social Security system because the Government does build up
reserves for employees while they are working. In the area of
funding, do you believe that the current funding level is -
appropriate or should it be strengthened or reduced? Should
the retirement system for new employees be financed through the
same fund, and same financing provisions, as the current
system? Should the new plan be non-contributory? If the
current and new systems are separated what steps, if any,
should be taken to strengthen the current system financing to
avoid depletion of the fund in the future?
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Coverage
Should participation in the new Federal retirement system
be limited to those employees who are subject to Social
Security or should provisions be included to encourage pre-1984
appointees to opt into the new system? What kinds of
incentives could be provided as encouragement?
The hearing will begin at 10:00 a.m. in room 311 of the
Cannon House Office Building. In accordance with Committee
rules, we would appreciate your providing 100 copies of your
written testimony at least 48 hours in advance of the hearing.
We look forward to your appearance.
With kind regards,
WILLIAM D. FORD
Chairman
WDF:rlp
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OPENING STATEMENT OF CHAIRMAN WILLIAM D. FORD (D-MI)
February 23, 1984
Today we begin hearings into the development of a
supplemental retirement plan for those Federal officers and
employees who, effective January 1, 1984, are covered by social
security. I expect these hearings will continue at least into
next year.
The Committee faces a difficult task. As a result of the
the Social Security Amendments of 1983, there are now two
distinct groups of Federal employees for retirement purposes--
those covered by social security and those who are not. For
those not covered, existing Federal retirement systems remain
an appropriate and essential part of the compensation package.
But for those who are covered by social security, existing
systems are inappropriate. Accordingly, we must develop a
supplemental retirement plan to coordinate with social
security.
In my view there are two paramount principles which should
guide us as we proceed to develop a supplemental plan. First,
this plan must be designed in a manner which will not threaten
in any way the integrity of existing Federal retirement
systems. Benefits earned must be protected. Second, the
Gam"
supplemental plan, as coordinated with social security, must be
/Mn./ bG~
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compatible with existing systems to preclude a situation where
employees working side by side would perceive themselves as
being treated differently.
In this first series of hearings we hope to focus on five
general areas: (1) comparability analysis; (2) general design;
(3) eligibility and inflation protection; (4) financing; and
(5) coverage. Our witnesses will include representatives
of the Administration and the Postal Service, employee
organizations, and experts from the private sector. During
today's hearing we will hear from representatives of Hay/
Huggins Incorporated, the private sector benefits consulting
firm the Committee has engaged to assist in this project, and
the Director of the Office of Personnel Management.
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Statement of
Hay/Huggins, Incorporated
a member of
The Hay Group
by Kenneth Shapiro, F.S.A., MAAA
Before the
Committee on Post Office and Civil Service
of the
United States House of Representatives
February 23, 1984
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February 23, 1984
TESTIMONY FOR THE
COMMITTEE ON POST OFFICE AND CIVIL SERVICE
Mr. Chairman, and members of the Committee, my name is
Kenneth Shapiro, President of Hay/Huggins consulting actuarial
firm. I have with me Mr. Edwin Hustead, Vice President of Hay/
Huggins, and Mr. Gregori Lebedev, Director of Governmental Con-
sulting Services of Hay Associates. We are honored to appear
before the Committee on Post Office and Civil Service to lead
off the public hearings on the development of a new retirement
system for Federal employees who are also covered by Social
Security. As you are aware, Hay/Huggins is involved in an
extensive analysis of this issue for the Committee and we look
forward to working with you in designing the new retirement
system. This new retirement system should not only well serve
the retirement needs of Federal employees, but also could become
a model for employers outside the Federal Government.
Background
First some background. Public Law 98-21, enacted in April
of 1983, lead to the need for the establishment of a new Federal
retirement system for certain employees. That law provided that
all new employees hired after January 1, 1984 would be covered
by Social Security. The legislation also requires the coverage
of a few specific people, such as the President and Members of
Congress--even if they were covered by the Civil Service
Retirement System before 1984. The law itself did not require
a new system, but because of it a new system clearly is needed.
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As with most new retirement systems, the employer, in this
case the Federal Government, has a transition period to consider
and implement the best possible plan. Although there will not
be a large number of retirements under the new system for sev-
eral decades, continuation of the current situation would have
required double contributions from new Federal employees--one
to Social Security and one to an undefined new Federal retire-
ment system. Also, both systems would affect those relatively
few new employees who might die or become disabled in the next
year.
To avoid these near term problems, the Congress passed
Public Law 98-168. This law solves the problem of double con-
tributions or double benefits pending development of a new system.
But PL98-168 expires at the end of the calendar year 1985--
leaving us ample, but not excessive time to create a new system.
The design of the new Federal retirement system will be a
landmark effort. In recognition of both the critical importance
to those who will be covered, as well as the possible extension
of the concept outside of the Government, the Committee has
decided to take a considered and detailed approach to its design.
Hay/Huggins is pleased to assist the Committee along with the
Congressional support agencies--in particular, the Congressional
Research Service.
Basic Concepts
Our purpose this morning is to describe some basic concepts
about the coordination of Civil Service Retirement with Social
Security benefits and suggest the proper approach in designing
a new system., Let me first summarize the various studies that
now are underway.
Hay/Huggins now is conducting two studies that define the
prevalence and type of fringe benefit and total compensation
systems in the public and private sectors. Our study will
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summarize and evaluate each of the important provisions of the
compensation systems with a particular focus on retirement.
The Congressional Research Service has two studies underway
for the Committee. The first will compare cost and other pro-
visions of the CSRS with typical pension arrangements in the
private sector and by State governments. The second CRS report
will analyze program design features, cost, and replacement
rates for several options for the new pension system. We have
been privileged to join with CRS in five briefings to the staff
of the Committee on the concepts and issues involved and antici-
pate quite a few more briefings as the work proceeds.
In addition to the studies being done for your Committee,
the Congressional support agencies have been asked by the Senate
Committee on Governmental Affairs to undertake a coordinated
study of the issues in designing a new pension system. The
General Accounting Office is doing an indepth analysis of
retirement practices both in the private sector and by State and
local governments. To determine exactly how retirement systems
have been set in place, the General Accounting Office is also
interviewing large private sector employers. The Congressional
Budget Office is estimating the budgetary and economic impacts
of proposed changes against the current system's structure,
financial condition, and investment policy.
In addition to the efforts directed by Congress, there are
a number of studies that are taking place both in and outside
of Government. For instance, the Office of Personnel Management
has contracted for an analysis of retirement systems in the
private sector, hoping to apply these findings to development
of retirement options for all employees covered by CSRS. Congress
already has in hand the analysis by the President's Private Sector
Commission on Cost Control and we understand that other business
groups are studying the issue.
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As a result of all these and other studies there will
certainly be enough data and analysis on which to base your
decisions. However, analysis is only helpful if it is brought
to bear on the issue. After the studies are completed, the role
of Hay/Huggins will be to help focus the effort of the Committee.
Our aim is to help sort out all the options, allowing the Commit-
tee to create the most viable system.
In the remainder of today's testimony, we will present basic
information on the issues and discuss the methods that the Com-
mittee might use to develop and implement a fair and equitable
retirement system for new Federal employees.
Social Security and CSRS
One of the major objectives of a new system will be to
combine the benefit design of the current Civil Service Retire-
ment System with the Social Security system. As the Committee
is well aware, these two systems are both necessarily very com-
plex. Integrating them will be difficult.
Our first chart displays the key differences between the
Civil Service Retirement System and Social Security. Here we
will find areas that will be the most difficult to integrate.
Benefit as Percent of Pay
First, the Social Security system is intended to provide a
floor of retirement income to employees. Consequently, although
the Social Security benefit increases as length of employment
increases, it does so at a progressively slower rate. In the
Civil Service Retirement System, on the other hand, the benefit
increases proportionately to salary and more than proportionately
to service.
The results can be illustrated by looking at short and long
service employees. Long service employees under CSRS receive a
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KEY DIFFERENCES BETWEEN THE CIVIL SERVICE RETIREMENT
SYSTEM AND SOCIAL SECURITY
CSRS
Benefit as Percent
of Final Pay
- 35 Years' Service
- 10 Years' Service
Earliest Unreduced Retirement
Age
and
Service
Earliest Reduced Retirement
Disability Requirement
Portability
Family Benefits
Surviving Spouse
Divorced Spouse
Living Spouse
60% to 63%
5% to 15%
55 60 62
and and and
30 20 5
Only for
Involuntary
Retirement
Comparable
Job
Conditional
Vesting
Yes
No
No
Social Security
40% to 19%
20% to 10%
65 to 67
and
10
80% or Less at
Age 62
Any Job
Full
Portability
Yes
Yes
Yes
HAY
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the same 61% of salary at retirement at all salary levels. With
the same amount of service under Social Security, the lower-paid
employees will receive 40% of pay. But the higher-paid will re-
ceive 19% or less of pay as their retirement income. For short
service, CSRS only provides around 15% of pay if the service is
rendered right before retirement. If the service is rendered
in the early part of the career, the benefit looses value over
the years, and the final benefit may be worth 5% or less of the
final pay. Social Security, on the other hand, provides 20% to
10% of pay for 10 years' service. Not as much as for a full
career but still more than the proportionate share of the career.
Retirement Benefit Eligibility
The actual level of benefit provided at retirement under
Civil Service Retirement is typically less than the total benefit
provided for a full career when you add the benefits of private
-
sector plans with Social Security benefits. However, the CSRS
system is more liberal in certain areas. One of the key distinc-
tions of CSRS is its allowance for full retirement benefits at
age 55. But we must keep in mind that the employee needs 30
years of service. Few employees work from age 25 to 55 for one
employer. The other requirements, which are much easier to meet,
are retirement at age 60 with 20 years of service or age 62 with
5 years of service. Social Security now requires an employee to
wait until 65 for full benefits. Under the 1983 legislation,
the retirement age will move gradually up to age 67. Employees
will still be able to retire at 62, but the 20% reduction that
applies now will gradually increase in subsequent years.
Disability
A third area of difference is in the definition of disability.
As with many private sector systems, at least in the short run, a
Federal employee is considered disabled if he or she is unable to
perform a job comparable to the current job. Social Security will
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only pay benefits after six months and then only to people who
are considered totally and permanently disabled to perform any
job.
Portability
Now that Social Security coverage is practically universal
in the United States, benefits are fully portable from employer
to employer. This contrasts sharply with the CSRS requirement
that the employee must serve five years to vest and then that
the benefit will lose value before retirement because there is
no adjustment for inflation. That benefit can even be forfeited
if the employee elects a refund of contributions.
Dependent Definition
A final important difference is in the way each system
defines a dependent eligible for a benefit. Both will pay a
benefit to a surviving spouse or child but, in the case of CSRS
the benefit must be partially paid for by the employee. Social
Security also provides benefits to a divorced spouse who meets
certain conditions. It also pays benefits to living spouses
and other dependents. Neither of these benefits is provided by
Civil Service Retirement.
Categories of Plans
There are three important sources of income. The first
source is Social Security that is required of all private sec-
tor employees and now will be required for all new Federal
employees. The second source is the retirement plan offered
by the employer. The third is the contribution from the sav-
ings of the employees. The general categories of employer
retirement systems are summarized in the following table.
There are two major categories of employer retirement plans
in common use in the United States. Defined benefit plans
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TYPES OF RETIREMENT SYSTEMS AVAILABLE
? Defined Benefit Plan
Add-On
Offset
Step Rate
? Defined Contribution Plan
Add-On
Step Rate
HAY
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provide a promised level of benefit at the point of retirement.
For instance, an employer might promise to provide 1.5% of the
average of the final five years' salary for each year of service
with the employer. Thus, a twenty year employee with a final
five year average of $30,000 would receive 30% of this average
or $9,000 per year. The other approach is to provide a defined
contribution to an investment fund. For instance, an employer
might provide 10% of each year's pay to an employee. This is
placed in a fund, with the fund and its investment income used
to provide a retirement income.
In a defined benefit program, the employer is at risk; he
or she must pay a prescribed benefit--even if the pension fund
has not performed as expected. In a defined contribution plan,
the employee is at risk. He or she gets less than expected if
fund performance is low. In both cases, of course, the converse
is true if the fund performs better than expected.
Currently, of the 854 participants in the 1983 Hay/Huggins
Benefits Comparison, 86% use a defined benefit plan. Most of
these companies are supplementing this plan with an additional
defined contribution program.
The current Civil Service Retirement System operates
strictly as a defined benefit plan. For instance, the current
Civil Service Retirement benefit formula provides 56 1/4% of
high-three average pay to employees who have served 30 years.
Through the use of the increasing pay base, the benefits are
indexed to inflation before retirement, and, through a guaran-
tee of cost-of-living protection, the benefits are indexed after
retirement. Among our survey participants, 84% base the retire-
ment benefits on a percentage of final average pay so the index-
ing before retirement is also covered. But of the 57% of our
survey participants that provided any indexing after retirement,
84% provide it on an ad hoc basis and, in virtually all cases, at
levels below the full rate of inflation.
_Q_
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Advantages and Disadvantages of Defined Benefit vs. Defined
Contribution Plans
Certain apparent advantages of the defined contribution
type of plan have led to proposals to change CSRS to that type
of system. First, the defined contribution plan moves the burden
of inflation from the employer to the employee. For instance, in
the other alternative--defined benefit plan--an employer might be
faced with a period of inflation that pushes salaries beyond
initial expectations. The contribution of earlier years then
provides inadequate funding for the pension payout that is based
on inflated salaries. In the defined contribution plan, employers
know their cost--a flat percentage of salary--with no penalty if
inflation goes higher than expected.
Another advantage of the defined contribution plan is its
simplicity. The benefit is merely the percentage of pay that is
contributed. Thus the benefit that the employee receives depends
on the fund balance, not on some future calculation. Further,
because the plan is based simply on a contribution rate, many of
the complex provisions of the Employee Retirement Income Security
Act and Internal Revenue Service Code are not applicable. This
administrative convenience is thus attractive, especially to the
small employer.
However, the simplicity of the defined contribution approach
imposes a certain rigidity. In a defined contribution plan it is
difficult, but not impossible, to fund reasonable benefits for
people who do not participate for a full career because they die,
become disabled, or otherwise leave employment. In a defined
benefit plan any of these contingencies can be met with a spe-
cifically defined formula.
The choice between the two systems comes from the confluence
of economic, social and administrative considerations. In the
past, larger employers have chosen the defined benefit approach
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to provide the security that the employee perceives from its
guarantee of a certain benefits level. The defined benefit plan
also allows the employer more flexibility in design and funding.
Our 1983 Hay/Huggins survey shows that 86% of employers
provide defined benefit plans. In our 1979 survey, a comparable
number was 91%. This suggests a trend away from defined benefit
plans.
Integration with Social Security
Once the general type of plan is selected, the next question
is: To what degree do you integrate it with Social Security bene-
fits? As the first line of retirement protection, Social Security
is designed not only to provide retirement income based on sala-
ries earned while working, but also to provide a minimum level of
retirement income for all employees. As we have seen, the Social
Security benefit provides a much higher percent of pay for low-
paid employees than for those who are high-paid. As mentioned
above, most Federal employees will retire in the $15,000 to
$45,000 final pay range. At the lower end of the range, Social
Security will provide 40% of pre-retirement income but at the
higher end only 19% of pre-retirement income.
The employer must consider the extent to which the tilt of
the Social Security benefit should be offset by the employer's
pension plan formula. A straightforward approach would be
simply to state that a certain
provided to the employee with
when Social Security benefits
the new retirement system for
percentage
of salary will be
to provide the same 56 1/4% income
30 years of service as under CSRS.
the benefit fully offset if and
become payable. For instance,
employees could be constructed
to employees at age 55 with
When Social Security bene-
fits begin at age 62 these Civil Service benefits would be
reduced dollar for dollar by Social Security benefits. Thus,
the new employees would be covered by a system that was largely
identical to the system for current Federal employees.
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The private sector employer who wants to use such a full
offset is, however, prevented from doing so by Federal regulations.
An underlying philosophy, reflected in rules imposed by the IRS
on the private sector, in return for the privilege of insulating
pension funds from taxes, is that benefits should not be propor-
tionately greater for higher-paid employees than for lower-paid
employees. An exception is allowed to offset some, but not all,
of the Social Security offset tilt. The law and regulations in
this area are very complex, but the practical limit, used by
three-quarters of the employers who have such a system, is to
offset half of the Social Security benefit.
The next chart shows the various methods of integrating a
pension plan with Social Security. The first line differentia-
tion is the benefit from Social Security of 21% of pay across
the range of most Federal salaries. The Committee could simply
accept this differentiation and provide an add-on plan with
employer benefits that are the same percentage for all employees,
thus, preserving the full tilt of Social Security benefits. At
the other extreme, the Committee could offset all of the Social
Security benefit but this would violate Congress' own rules for
the private sector. By using the typical factors in the private
sector, as required by IRS regulations, the Government could use
an offset or step-rate approach to remove half of the tilt, thus,
leaving a 10% difference between the high and low-paid employees.
The analysis done by Hay/Huggins and the Congressional
Research Service will fully examine the effect of differentiation.
While a full offset may be desirable to be consistent with the
current plan, and the Congress could except the plan from IRS
rules, Congress may believe that such an exception is not politi-
cally or morally desirable and may thus want to focus on the par-
tial offset options.
The choice of the degree of differentiation between the
benefit for the high and low-paid employees will center primarily
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ILLUSTRATION OF DOLLAR BENEFITS UNDER AVAILABLE
RETIREMENT SYSTEMS
Social Security
Add-On Formula
Offset Formula
- Unreduced Benefit
- Offset
- Total
Step-Rate Formula
- For Pay Under $15,000
- For Pay Over $15,000
- Total
Final Pay Final Pay
$15,000 $45,000
$ 6,000 $ 8,750
$ 4,800 $14,400
$ 7,200 $21,600
$ 3,000 $ 4,375
$ 4,200 $17,225
$ 4,200 $ 4,200
$ 0 $13,200
$ 4,200 $17,400
-HAY
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ILLUSTRATION OF REPLACEMENT INCOME UNDER AVAILABLE
RETIREMENT SYSTEMS
Current CSRS Plan
Social Security
Add-On Formula
Offset Formula
Step-Rate Formula
Final Pay Final Pay
$15,000 $45,000
61% 61%
40% 19%
72% 51%
68% 58%
68% 58%
HAY.
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on two facts. First, the existing Civil Service Retirement
System provides all employees with the same age and service with
the same percentage of pay from the total retirement system. On
the other hand, studies have shown that low-paid employees actu-
ally need a much higher proportion of retirement income than
high-paid employees to maintain their existing standard of liv-
ing. For instance, the President's Commission on Pension Policy
showed that a 15% differentiation between the high and low-paid
employee is needed to continue comparable standard-of-living
levels after retirement. This is primarily the result of the
favorable tax treatment of income to the elderly--particularly
on Social Security income.
Plan Details
Settling the questions of what type of plan to use and how
to integrate it with Social Security are the first steps in
developing a complete retirement system. Each of the following
important plan provisions are also critical. These include:
o Definition of full career retirement
o Definition of early retirement
o Benefit for early retirement
o Eligibility for disability benefits
o Amount of disability benefit
o Eligibility for survivor and family benefits
o Amount of survivor and family benefit
o Eligibility for vested benefits
o Amount of vested benefit
o Inflation protection
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Full Career Retirement
As we have noted, a key provision of the current Civil
Service Retirement-System is full retirement at age 55 with 30
years of service. This has become the focus not only of con-
cerned Federal employees who at mid-career are anticipating
retirement at age 55, but also of critics who point to this as
an atypically low retirement age. The Committee needs to care-
fully consider what a career is in the terms of the Federal
Government and when full "retirement" should occur. When
reviewing this matter with the Committee, we will look not only
at the retirement ages in the private sector but at recent analy-
ses such as that of the Quadrennial Review of Military Compensa-
tion (QRMC). This review suggests that different career patterns
make sense in different environments.
Early Retirement
Although full private sector retirement benefits often are
not payable until age 62 or age 65, age 55 is commonly the ear-
liest age at which reduced benefits are available. But age 55
retirement in the private sector virtually always involves a
reduced benefit, commonly between 33% and 50%.
The other benefits areas address the fair and equitable
treatment of employees who do not complete a full career. If
the absence of a full career is due to an unexpected occurrence
beyond the control of the employee, primarily death or disability,
there is often a need to alter the usual eligibility requirements
and adjust the amount of the benefit. The Civil Service Retire-
ment System currently includes a number of provisions that
address this social desirability of providing reasonable benefits
upon either death or disability. However, because many of these
benefits are provided in the Social Security system, the new sys-
tem may need to provide less.
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Disability
In the event of disability, it is essential not only to look
at the disability benefits of the pension plan, but also at sick
leave and other disability programs. The current Civil Service
Retirement System does provide benefits to some people who would
not meet the Social Security definition of disability. However,
employers often achieve the same results by offering a separate
long-term disability plan; typically the benefits provided are
substantially higher than other Civil Service Retirement. The
Committee should look at the full range of benefits--from all
disability programs as well as from the sick leave program. To
provide a continuous and equitable level of income for people
who are truly disabled, it is important that all of these pro-
grams dovetail. Options also exist to differentiate the benefits
for employees who are unable to perform their current job from
those who are so severely disabled that they cannot perform any
work.
The second major type of unexpected occurrence is death.
If an employee dies before a full career, to what extent should
the employee's surviving spouse and children be provided addi-
tional benefits? As with disability, much of this type of pro-
tection is provided through the Social Security system and
through programs such as the Federal Employees Group Life Insur-
ance program.
The new system design also needs to respond to changing
family characteristics. Both the CSRS and Social Security, as
well as most private sector systems, were originally designed
to provide benefits to a male employee with a nuclear family.
In recent years this pattern has changed dramatically; often
both parents work and many people are married more than once
during their working career and/or after retirement. The needs
of each of the current and former spouses must be considered.
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Vesting and Portability
While the retirement system should provide reasonable
income for every career employee, and those who die or become
disabled in service, it should also provide reasonable income
for a partial career. When a partial-career benefit is combined
with benefits from other employment, the total retirement income
should meet expectations and needs. This goal is met through
appropriate vesting and portability conditions. In examining
various service career patterns, we must look at the effect of
a common cause for career interruption: pregnancy and subsequent
childrearing responsibilities. It is thus particularly important
that the total benefit over a lifetime be adequate for employees
with shortened or split careers.
Inflation Protection
The final important need is to develop some degree of pro-
tection against inflation after retirement. In theory, a level
of income that is considered reasonable at retirement should be
indexed to guarantee a consistent standard of living after
retirement. Private sector employees receive Social Security,
which is fully indexed, and, as mentioned above, most of the
employers in our survey provide ad hoc inflation protection.
A study of the Congressional Budget Office shows that as a result
the average private sector retiree receives benefit increases
equal to 70% of inflation.
Approach
Hay/Huggins' effort to assist the Committee is consistent
with the approach we would use with a large private sector
employer. The next chart summarizes that approach. When an
employer is installing or redesigning a retirement system, it
is important to look at all of the factors that will affect the
employer and the employees.
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APPROACH TO THE DESIGN OF RETIREMENT PLAN FOR FEDERAL
EMPLOYEES COVERED BY SOCIAL SECURITY
? Survey Plans Provided by Competitor Organizations
? Survey All Compensation Elements Provided by Competitor Organizations
? Analyze the Effect of Each Plan Design
- Cost to Employer
- Benefit to Employee
- Effect on Workforce
- Ease of Understanding
? Focus All Data and Analysis to Produce Most Desirable Plan
? Implement Plan
HAY
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Competitive Analysis
Our starting point for the Committee, as with a private
sector employer, will be to look at prevailing practices among
various types of employers. It is important to have a total
compensation system, including a retirement system, that allows
the employer to attract, retain and motivate the type of employee
that will best serve the organization. The retirement system
should also allow the employer to move employees through the
workforce both to maintain continuity and to provide the best
employees with opportunities to move ahead.
To address the question of attracting, retaining and moti-
vating good people, it is essential to look at the compensation
practices provided by other employers. To gather this broad
perspective we will use data from all of the employers in our
data base; 854 in the Hay/Huggins Benefits Comparison (HHBC)
and 1,249 in the Cash Compensation Comparison. We will examine
the total cash compensation of comparable positions within each
organization and then convert all of the benefit packages to
cash equivalents to arrive at figures that allow us to compare
total compensation practices. This unique overall picture allows
the employer to see the total compensation package from the point
of view of the people that the employer is seeking to attract and
retain.
We will augment the total compensation overview with an
analysis of each individual compensation element. In particular,
we will focus on the value of the retirement system both in the
general context of the plan and for each specific provision--
such as benefits provided for full career retirement, disability
or death.
After viewing the options available, the Committee will meet to
look at the cost of each option. An employer may well wish to
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have a plan that will attract and retain the best employees and
ensure that the employees are paid salary and benefits that are
comparable with the competition. But this same employer may be
unable to afford the package. It is also important to consider
allocation of costs between the parts of the total compensation
package. For instance, an employer may well wish to encourage
career employees to stay for 30 years or more; therefore, empha-
size benefits at the expense of cash compensation. Within the
benefits package, the employer may wish to emphasize retirement.
Benefits to Employees
The final step in the background analysis will be to look
at the range of benefits provided to different categories of
employees. The employer may well set a benefit package that has
the desired overall cost and level of competitiveness. But this
may result in paying certain employees too much and others too
little. It is important to look at employees in different salary
levels, examine short and long service careers, and compare disa-
bility and death benefits to those offered at retirement.
Although there may be justifiable differences in benefits among
employee groups, these differences should be fully understood by
the employer.
Effect on Workforce
It is important to design a plan that will attract, retain
and motivate those employees necessary to perform the tasks of
government employment. For example, a different plan would be
installed if it was desirable to attract short versus long serv-
ice employees.
Simplicity of Formula
Finally, it is important to keep the benefit formulae as
simple as possible to promote employee understanding and minimize
administrative costs.
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Plan Design
After the information is gathered and presented to the
Committee by Hay/Huggins and the Congressional Research Service,
we will help the Committee use this information to develop a
retirement system. A wealth of this data will be gathered both
on pension practices in the United States and the application of
these practices to the Federal Government. However, this data
must be distilled and put in the perspective of the Federal Gov-
ernment. We envision a series of discussions and hearings to
develop the most viable system for new Federal employees.
A. with a private sector employer, the first question will
be the appropriate type and mix of pension plan or plans and
Social Security. Any retirement system must build on the base
of the Social Security system and integrate with that system to
the extent desired by the Government and needed by the employees.
The retirement dollars might best be shared between a defined
benefit and defined contribution plan. This would result in
shifting some of the risk of inflation to the employee, without
putting the total risk on him or her. It also would encourage
the third leg of retirement income--the employee's own savings.
In designing this new system, Hay/Huggins will help the
Committee to bring together three distinct analytic processes.
First is the comparison of the program to the programs available
among competitors in the private and public sectors. Second is
the overall analysis of cost to the Government; and third is a
valuation of the replacement income that will be available to
various individuals. A less data intense, but vitally important,
analysis will subjectively consider the effect of a new system
on the attraction and retention of the Federal workforce.
Comparison to Private Sector
The next chart illustrates the result of the decisions made
by the 854 firms in our survey. When all sources are considered,
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COMPARISON OF RETIREMENT BENEFITS:
CIVIL SERVICE AND PRIVATE SECTOR
CSRS
35 Year Benefit as Percent
of Pay
Earliest Unreduced Retirement
Age
and
Service
60% to 63%
55 60 62
and and and
30 20 5
Earliest Reduced Retirement
Disability Benefits
Cost-of-Living Protection
Supplementary Capital
Accumulation Plans
Contribution
Only for
Involuntary
Retirement
Minimum of 40%
of Pay from
Pension
Full
None
7% to CSRS
Private Sector
80% to 66%
62 or 65
and
10
50% to 70% of
Full Benefit at
Age 55
60% to 75% of
Pay from Pension,
Insurance, and
Social Security
Full for Social
Security;
Partial for Half
of Pension Plans
Half have Plans
7% to Social
Security Plan;
3% to Capital
Accumulation
HAY
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private sector firms typically provide a full career benefit of
66% to 80% of final pay--this by combining the private sector
pension and capital accumulation plans with Social Security.
Retirement Age
The private sector plans are split evenly between those
that permit the earliest full retirement age at 65 and those
that use age 62. However, 89% of the employers allow retirement
at age 55 usually with a requirement of 10 years of service.
Thus, the general practices are not much different than the Civil
Service Retirement System. However, in the private sector the
early retirement benefit at age 55 is usually reduced from one-
third to fifty percent of the full benefit.
Cost-of-living increases are granted in full under the
Social Security system. In the private sector, over half of
the larger employers provide ad hoc cost-of-living increases
which typically are 3% per year of retirement. The combination
of these increases protect employees against approximately 70%
of inflation.
Disability
In the area of disability benefits an employer will typi-
cally rely on a range of plans. The employer will use a sick
leave or short-term plan to take care of the short-term disa-
bilities and a long-term disability plan and/or the pension plan
to provide long-term income. Of course, they all have an under-
lying Social Security program that provides 40% to 19% of pay
for those who are disabled.
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Post-Retirement Survivor Benefits
In the area of survivor benefits, the private sector firms
do provide insurance to employees; often this continues into
retirement, as it also does in Federal Employees Group Life
Insurance. However, private sector employers generally leave
the basic survivor and family benefits to the Social Security
program. Although annuitants are free to select a survivor
benefit in the pension plan, usually they have to pay the full
cost of this benefit through reductions in their retirement
annuities.
Uniqueness of Federal Government Situation
While the private sector perspective is important, it should
not mask the unique aspects of the Federal environment. Primary
among these is the fact that the Federal Government is selecting
a design to fit around Social Security for the first time.
Employers in the private sector have not been faced with the
need to design a new system to fit around Social Security for
over forty years.
A second unique aspect is the place of the retirement
accounts in the Federal budget. In the private sector the
employer allocates money each year during the employee's work-
ing career to pay for the retirement benefit. This is the bot-
tomline cost of the employer's budget. Within the Unified Bud-
get of the Federal Government, however, money cannot be isolated
effectively from the budget before the employee retires and
receives the benefit. The effect on the budget in each year is
the income received from employees less the retirement income
and refunds paid. Thus, the typical private sector approach is
important as a relative cost but is not the key budget item.
Finally, the employees hired before January 1, 1984 and
annuitants are understandably concerned about the financing of
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the current system. The current CSRS financing was constructed
in 1969 to provide enough income on a going concern basis. As
long as new employees enter the system, the payments will be
sufficient to cover future benefits. However, if the current
system is closed, this flow of fresh money will cease and the
fund will disappear before all of the promised benefits are paid.
Fortunately, there are solutions to the funding problem
that will not have important budgetary consequences. First of
all the new law could simply be set up as a separate plan within
the current law. The current law already covers five different
subsystems and there are annuitants who retired under many dif-
ferent prior subsystems. Therefore, there are already a number
of different benefit categories within the CSRS system.
Similarly, the new benefits could be covered in the current CSRS
financing system through a simple change in the current law.
A second approach to stabilizing the funding that would not
have any effect on the budget would be to simply amortize the
current unfunded liability in time to avoid depletion of the fund.
Because under the Unified Budget payments from general revenues
to the trust funds are intragovernmental transactions that do not
affect the deficit, this could be done without affecting the
deficit or surplus.
I appreciate your attention and look forward to working
very closely with the Committee in the future.
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 STAT
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EBRI
Statement of
Dallas L. Salisbury*
President
Employee Benefit Research Institute
Before the
United States House of Representatives
Committee on Post Office and Civil Service
Hearing Related to the Development of a New Retirement System for
Federal Employees Who are Subject to Social Security
~~Iarch 13, 1984
* The views expressed herein are those of Mr. Salisbury and should not be
attributed to EBRI, its Officers, Trustees, Sponsors or Staff.
03/07/84 EMPLOYEE BENEFIT RESEARCH INSTITUTE
.. - knv~c..:.e ca.1Iu;.,.1.:.....,,., nC' lTP1-6 .- (7071 659.0670
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RETIREMENT BENEFITS AS A HI.MAN RESOURCES TOOL
COMPARABILITY ANALYSIS
3
GENERAL DESIGN
7
Plan Design
7
Plan Type
9
Plan Characteristics
Comparing Defined Benefit and Defined Contribution Plans
12
Multiple Plan Sponsorship
16
17
Conclusion
ELIGIBILITY AND INFLATION PROTECTION
FINANCING
COVERAGE
TABLES
Table 1 Summary of Qualifications and Terminations
1939-1983
Table 2 Pension Plan Growth
Table 3 Pension Plan Creation and Growth by Type of
Plan for Years 1955 to 1983
Table 4 Pension Plan Growth by Type of Plan
1956-1983
Table 5 Corporate and Self-Employed Pension Plan
Qualifications Terminations and Net Plans
Created 1956-1983
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Introduction
Mr. Chairman, it is a pleasure to appear today on this most important
subject of retirement income provision for Federal employees who are subject
to Social Security. The studious approach being taken by this Committee is
to be applauded as one that should always be followed by the Congress when
economic security is at stake.
I appear today in my capacity as President of the Employee Benefit
Research Institute, a Washington? DC based nonprofit, nonpartisan public
policy research organization dedicated to increasing knowledge of employee
benefits through research and education. EBRI does not take pro or con
positions on public policy proposals or make policy recommendations. EBRI
does provide information that will assist those who must make policy
decisions.
Today I will attempt to be responsive to the major issues raised in your
invitation letter of January 25, 1984, without duplicating what you have
heard before. You raised five primary questions:
(1) Comparability Analysis
(2) General Design
(3) Eligibility and Inflation Protection
(4) Financing
(5) Coverage
I will review each issue in turn, but first I want to briefly review why
employers sponsor retirement programs. These purposes should provide a
benchmark for your work.
RETIREMENT BENEFITS AS A HUMAN RESOURCES TOOL
Retirement income programs are created to help meet the economic security
needs of the elderly. Employer sponsored programs have developed because
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2
both employers and employees value them. Employers have found that
retirement programs meet moral and social needs as well as corporate business
needs.
o Management of work force size and composition is made easier by
retirement programs. Older workers can leave employment with
income and dignity. Younger workers can move up the ladder.
Productivity and morale may be enhanced.
o Management of taxes for both the employer and employee is
enhanced by retirement programs. Contributions to plans, like
wages, are a deductible business expense. Unlike wages, they are
not treated as current income to the employee and income tax on
fund earnings is also deferred until the employee actually
receives a cash benefit.
o The quality of labor-management relations can be enhanced by the
provision of retirement income programs. Pension programs are so
widespread that employees now expect them to be provided. As a
result, they are valuable in attracting and retaining employees.
o Economic efficiency can be obtained from the group nature of
pensions due to lower administrative costs, the ability to
integrate plans into the total compensation package, and as a
means of assuring that employees have funds to augment Social
Security.
All of these factors tend to advantage both employers and employees.
COMPARABILITY ANALYSIS
The private sector generally approaches planning on the basis of total
compensation assessments--all cash and non-cash benefits being considered.
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3
For this purpose employee benefits are generally valued at current year
cost. In addition, when a consulting firm is asked to do a comparability
assessment relative to other companies, the benefits delivered are compared
as well as the cost of those benefits.
This "quality" assessment is undertaken since a relatively new company
with retirees can promise a given benefit at a lower cost than an older
company that has many retirees. I make this point in order to stress that
any comparisons must be made with care. A new retirement system for new
hires may require a lower total cost to produce equivalent benefits to an
older system. Therefore, if a total compensation approach is used, both
costs and benefits must be considered.
GENERAL DESIGN
As you are aware, two major types of pension plans exist today in the
United States. These programs make up two "legs" of the retirement economic
security "stool": (1) employer pensions and (2) structured individual
savings. These complement Social Security and personal savings/assets.
o Defined benefit employer pensions - those that promise a given
benefit upon retirement with the contribution fluctuating and the
employer bearing the risk of poor investment returns. Investment
gains may or may not be passed on to the retiree. These include
multiemployer plans where several employers provide benefits
through a single pension plan. A multiemployer pension plan is
one in which:
o more than one employer is required to contribute;
o is maintained under one or more collective bargaining
agreements;
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o must cover a substantial number of employees in an industry in
a particular geographic area; and
o employers' contributions to a single fund are set forth in a
labor agreement.
o Defined contribution employer pensions - those that promise a
given contribution with the ultimate benefit generally being the
final account balance. The employee bears the risk of poor
investment returns and receives the benefits of good investment
returns. Profit-sharing plans are one form of defined
contribution plan. Some defined contribution arrangements allow
the employee to purchase an annuity which provides a guaranteed
stream of income.
o Individual pensions - generally defined contribution in approach
- with the employee making contributions, and bearing the risk of
poor investment returns, and receiving the benefits of good
investment returns. This includes individual retirement accounts
(IRAs) and Keogh plans for the self-employed.
An individual retirement account (IRA) is an individual pension plan that
can be set up by any worker regardless of employer pension provision. IRAs
are offered by many types of financial institutions, including commercial and
thrift banking institutions, mutual funds, life insurance companies, and
credit unions. The IRA permits an individual to contribute up to $2,000 per
year to an account, and take a personal federal income tax deduction equal to
3/ See James H. Schulz and Thomas D. Leavitt, Pension Integration:
Concepts, Issues and Proposals (Washington, DC: Employee Benefit Research
Institute, 1983) for a complete discussion of integration.
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5
the amount of the contribution. In addition, earnings on the total assets in
an IRA are tax-deferred until retirement, when distributions from the account
are taxed at regular rates. A person with an unemployed spouse may
contribute an extra $250 per year to an IRA.
Employer pension programs provide several kinds of benefits: early and
normal retirement, survivors, disability and other ancillary benefits. In
addition, many plans coordinate their benefit or contribution structure with
Social Security. These plans are said to be integrated with Social
Security .1/
Retirement income programs were initially provided as a gratuity to
reward long service employees. The first private program was established by
the American Express Company in 1875. By 1929, 397 private plans had been
established covering approximately 10 percent of the nonagricultural labor
force.
The creation of plans accelerated during the 1940s as a result of
restrictions on employee cash wage increases during the war. Pensions
provided a way to increase total compensation expenditures without violation
of wage guidelines. Plan growth accelerated further in 1948 when the
National Labor Relations Board defined bargaining over pension plan terms to
be a legal obligation for employers.
By 1950, pension participation had spread to 25 percent of private
nonagricultural workers and by 1959 to 40 percent. By 1979, participation
had grown to approximately 48 percent of all private nonagricultural workers
and over 68 percent of full time workers between 25 and 64 years of age.
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6
The establishment of employer plans, as noted, has been steady since
statistical series began in 1939 (Table 1). By September 30, 1983 there were
nearly 804,000 employer plans in effect.
The greatest number of participants are in defined benefit plans, with
defined contribution plans frequently being provided as supplemental
arrangements. Since 1975, however, defined contribution plans have been the
fastest growing component of the pension universe.
Pension Plan Growth by Type of Plan a/
Percent
Defined Benefit
Percent
Defined Contribution
1956-1966
54.4
45.6
1967-1974
55.3
44.7
1975-1982
24.2
75.8
1983
33.9
66.1
Source: EBRI tabulations from Table 4.
a/ 1983 is for 9/30/83.
The Institute has extrapolated these numbers back to 1956 from 1975 data
collected by the government. 'Table 2 shows the relative absolute growth by
year and the varying annual percentage growth rate of the entire plan
universe. Table 3 provides growth rates since 1956 for each major type of
plan while Table 4 shows the relative percentage split of plan growth by year
1956 to 1983. Table 5 is a summary table based upon EBRI extrapolations from
1956 to 1983.
Only very recently have any major employers begun terminating defined
benefit plans in order to shift entirely to defined contribution plans. A
number of major corporations, however, have always relied entirely on defined
contribution profit sharing arrangements.
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Plan Design
Many, and perhaps most, employers now feel that the primary objective in
maintaining or adopting a retirement plan is to provide future retirement
income to employees. In addition, they have an interest in using such
programs to help maintain the organization's efficiency and vitality. Such
goals require that plans be available for long periods of benefit
accumulation. For career employees who do not change jobs frequently, the
defined benefit plan provides a known result with minimum employee risk.
Plan Type
The adoption of a pension plan does not guarantee that benefits will be
sufficient to support an individual fully during retirement. The defined
benefit approach does, however, allow the employer the ability to design a
plan which attempts to meet stated retirement income objectives.
Defined contribution plans base contributions on predetermined fixed
formulas. There are several types of defined contribution plans. A common
type is profit sharing. In these plans, annual contributions are based on
the sponsor's profitability. Generally, the size of the employer's payment
to the plan is derived from a predetermined formula, although it may be
decided at the employer's discretion. Allocation of the employer's total
contribution is based upon a formula that is usually related to the
employee's compensation.
A second major type of defined contribution plan is the money purchase
pension plan. Annual contributions to money purchase pension plans are
usually based on annual compensation. For example, sponsors may contribute
10 percent of total annual compensation to the plan. A lump sum distribution
may be given of the final account balance. If an annuity is purchased, the
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monthly benefit will vary depending on factors such as age, sex and
retirement date.
A third major type of defined contribution plan is the thrift or savings
plan. These plans typically permit employees to contribute from 2 to 6
percent of their pay voluntarily. Employer contributions are usually a fixed
percentage of employee contributions--most commonly 50 percent, but sometimes
higher. Thrift and savings plans are frequently offered as supplemental
protection when employers also offer other defined benefit or defined
contribution plans.
The Revenue Act of 1978 added provisions to section 401(k) of the
Internal Revenue Code to allow so-called "salary reduction" plans to be
established. These plans are administered by the employer, but are
principally funded by the employee through a reduction in pay. Like thrift
plans, the employer may provide a matching contribution. These plans are
currently the "hottest" growth area for capital accumulation with a
retirement income purpose. 1982 and 1983 saw installation of 401(k) plans by
a very large number of employers.
Stock bonus plans are another form of a defined contribution plan. Stock
bonus plans permit employers to contribute shares of company stock to a
plan. The shares are then allocated to individual participant accounts,
usually based on a percentage of annual compensation. Employee Stock
Ownership Plans (ESOPs), Tax Reduction Act Stock Ownership Plans (TRASOPs),
and Payroll-Based Employee Stock Ownership Plans (PAYSOPs) are the most
common stock bonus plans.
Under most defined contribution plans, there is no way of knowing in
advance how much will be in the employee's account at retirement. The size
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of the account can be affected by the amounts contributed, the impact of
investment gains or losses, or the value of distributed plan forfeitures.
Employers adopt defined contribution plans for a number of reasons:
o The employer may use the plan to supplement an existing defined
benefit plan;
o The employer may view it as a first step toward retirement income
security for his employees;
o The employer wishes to avoid long-term funding and liability
commitments and requirements;
o The employer needs a program that provides for short-term
workers.
Plan Characteristics
Because the Federal government is a major employer, comparisons can most
appropriately be made to large private corporations in assessing plan
design. I have drawn information from a survey of 659 major U.S. employers
conducted by Hewitt Associates in 1982. More than 75 percent of the Fortune
100 and 50 percent of the Fortune 500 are included in this sample. You will
receive reports that include data from this survey, and others, from your
consultant.
Defined benefit plans are most common. Characteristics include:
o 96 percent of employers had a defined benefit pension plan.
o 89 percent based benefits on final average pay--5 years or less.
o 93 percent were explicitly integrated with Social Security.
o 6 percent provided unreduced benefits at age 55 with 30 years
service; 16 percent at age 60; 35 percent at age 62; and 39
percent at age 65.
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o 81 percent use 10 year cliff vesting.
o 9 percent require employee contributions.
Capital accumulation or defined contribution plans are also sponsored by
the majority of employers.
o 64 percent sponsor savings plans and 20 percent sponsor profit
sharing plans--both of which could be sponsored by a government
unit.
o 100 percent provide employer contributions.
o 84 percent provide more than one investment option.
These numbers indicate that many employers sponsor more than one plan for
their employees. The most recent data available is from 1979. In that year
59 percent of active participants were in more than one plan provided by
their employer.
Reports that will be made to this Committee by Hay/Huggins and the
Congressional Research Service will report on this survey and several
others. At that time you will see that variations are not significant.
Defined benefit plans calculate the ultimate benefit based upon
formulas. Examples of such formulas are:
o Flat Benefit Pension: $12 a month per year of service (used by 2
percent to 6 percent of plans).
o Career Pay Pension: For an integrated plan the formula might be
one percent of the employee's earnings up to the Social Security
wage base plus 2 percent of such earnings in excess of the Social
Security base for each year of plan participation. For a
non-integrated plan 1.5 percent per year (used by 2 percent to 22
percent of plans).
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o Final Pay Pension: For an integrated plan the formula might be
1.5 percent of the employee's final five-year average earnings
times his years of service (or plan participation) minus one-half
of his primary Social Security benefit. For a nonintegrated plan
the percentage might simply be 1.25 percent (used by 74 percent
to 98 percent of plans).
The flat benefit formula is most frequently found in union-negotiated
plans. The career pay and final pay formulas are more often found in plans
for salaried employees. The latter is most common today.
Although plans are intended first and foremost to provide retirement
income, they must, by law, make some provision for the payment of benefits in
the event of death or preretirernent termination. Most plans provide for the
payment of early retirement and disability benefits as well. To receive
ancillary benefits, employees usually must meet eligibility requirements,
limits for which are prescribed by law. Most plans require that employees
work a specified length of time before they qualify for benefits.
Defined benefit programs normally require longer waiting periods for
employees before they are entitled to benefits, or vested, than defined
contribution plans. Defined contribution plans usually pay the vested
employee's individual account balance in full upon death, termination,
retirement or disability. Defined benefit plans generally distribute the
vested benefit as a stream of level monthly payments, deferred until the
employee reaches normal retirement age.
The more liberal eligibility and vesting requirements under defined
contribution plans serve to make these plans more generous providers of
ancillary benefits than defined benefit plans. Many employees whose age and
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12
service would not qualify them for early retirement, death, termination, or
disability benefits under a defined benefit plan do qualify for such benefits
under a defined contribution plan. Many employees prefer full and immediate
payment under the defined contribution plan to the continuing income provided
by the defined benefit plan.
Comparing Defined Benefit and Defined Contribution Plans 2/
Both defined contribution and defined benefit plans are organized
retirement plans. Without inferring who actually bears the incidence of
program costs, most of these programs are largely supported by employer
contributions. From the employee's perspective either type of plan helps
provide income security in retirement. From the employer's perspective,
either helps in the orderly recruiting, maintenance and retirement of the
necessary workforce.
The defined benefit plan provides a clearly stated retirement income
level generally related to years of service and a measure of salary toward
the end of employment tenure. The defined contribution plan, on the other
hand, provides for specified contributions to an individually allocated
investment account. Without comparing the actual level of benefits provided
to specific individuals under one plan or the other, the two types of plans
can be compared from an equity perspective. In this regard Trowbridge
argues:
That the employer contributes the same percentage of pay for every
covered employee is a philosophical strength of the defined
contribution arrangement. The underlying principle of equity is
that individual workers enjoy benefits of equal value.
This section draws from a paper prepared by EBRI staff in 1982 titled
Defined Benefit or Defined Contribution: Which is Better for the Civil
ervant?
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In defined benefit pension plans, as in most group insurance
arrangements, the principal is one of equal benefits. Equal
benefits are rarely the same as benefits of equal value, because
employees vary as to age, sex, and other risk characteristics.
In summary, defined contribution plans define individual equity in
terms of equal employer contributions and accept the necessarily
unequal benefits that equal contributions provide. Defined benefit
plans define equity in terms of equal benefits and accept the
necessarily unequal employer contributions. 3/
In addition to these equity differences that apply under the ceteris
paribus conditions, there are other differences in the two approaches to
pension provision that arise because other things are not always equal.
These arise partly because of the inherent differences in the two types of
plans, but also because of tradition and the differential treatment of the
plan types under the tax and regulatory code.
The relative desirability of a defined benefit versus a defined
contribution plan depends a great deal on the goals the plan is supposed to
meet. If everyone's goals coincided, then an ultimate plan design could be
arrived at easily. There are several players concerned about the design of a
new federal retirement plan who do not have coincidental goals. Therefore,
they need to evaluate the relative merits of the two major approaches to see
if a consensus can be attained on a general approach. In order to reach such
a consensus, some of the differences in the two retirement plan approaches
should be considered.
Defined benefit (DB) plan are often preferred because they can provide
retrospective credits whereas defined contribution (DC) plans are
prospective. This is especially the case at the time the plan is established
"Defined Benefit and Defined Contribution Plans: An Overview," in
Economic Survival in Retirement: Which Pension Is for You? (Washington, DC:
Employee Benefit Research Institute, 1982), pp. 3-34.
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14
if there are workers with several years of tenure who will be covered by the
new plan. This ability to grant past service credits is particularly
attractive where an employer is offering a pension for the first time. This
is not the case with the federal government but may be important if current
workers are given the option and encouraged to transfer to the new program.
It is also important in the case of benefit enhancements. Under DB plans
such enhancement can be granted on the basis of prior service. With a DC
plan this is far more complicated, if not practically impossible.
An important reason that it is difficult to provide such retroactive
protection under a DC plan is that employers do not typically keep lifetime
historical earnings records on which such a benefit increase would be based.
The most important reason, however, is because of the different funding
procedures used in the two approaches. The DC plan by nature is always fully
funded, although a federally sponsored plan might be somewhat unique in this
regard. To grant retroactive credits under such a plan could require a
crushing contribution to fund such benefits. The DB plan, on the other hand,
would allow the creation of an unfunded liability that could be amortized
over several years. While it is impossible to project the likelihood of
future benefit enhancements in a new federal retirement program, the CSRS has
a long history of gradual benefit improvements that have been granted
retroactively.
A second difference between 1)B and DC plans is that they are structurally
different. This is important because it affects the participants'
understanding and attitudes toward the plan. In the DB plan the participants
can be educated to understand that their benefits will replace a closely
estimated percentage of their final earnings and that the pension in
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combination with Social Security will maintain an estimable portion of the
preretirement standard of living? The DC plan provides a clearly perceptible
growing account balance. A problem that many workers have is in comparing
the relative values of the two types of plans. The defined benefit is stated
in flow terms while the defined contribution is a stock.
The stock and flow differentials in the two plan types can be easily
reconciled by actuaries and economists. For the individual worker the stock
concept may be more easily understood during the period of accumulation, but
it is the flow of income that is important in retirement. A person's
standard of living is largely determined by the flow of goods and services
they can consume over time. While the defined contribution accumulation can
be converted to an annuity at retirement most workers cannot readily estimate
the extent to which their preretirement earnings will be replaced until the
end of their career. In part, this is the result of the arithmetic involved
in converting stocks to flows. It is also the result of uncertain
projections of the stock values which themselves are subject to inflationary
and market forces that are not always understood.
The latter point relates to a third difference between DB and DC plans.
In the defined contribution plan;, investment performance directly affects the
level of benefits. Because contributions and interest accruals relate to
specific persons, the risk of adverse market performance is borne by the
individual worker. Under the defined benefit plan, on the other hand, the
individual is promised a level of benefits related to final salary. Adverse
market performance can reduce the value of the pension portfolio as in the
case of the DC plan. However, the employer has guaranteed the benefit and
has to adjust contributions to make up for bad investment performance.
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There are also traditional differences between DB and DC plans that have
evolved because they are perceived differently by workers. The perceived
accrual of a capital stock in the defined contribution plan raises the
employee's consciousness of the value of accumulating assets. The
accumulated value of the asset is also much more portable than a vested
defined benefit promise. The individually assigned assets can be liquidated
and reinvested in an individual retirement account, making them highly
portable. This combined percept-Lon of a definable asset, along with relative
portability may combine to account for typically shorter vesting in DC
plans. For the highly mobile worker, the defined contribution plan may be
preferred because of its portability characteristics. For the long-term
stable employee, on the other hand, the primary concern is likely to be an
adequate level of benefits to maintain preretirement earnings standards.
This will more likely be assured through a defined benefit plan. Most
defined contribution plans do not have automatic provisons to convert the
accumulated assets to an annuity at retirement. The more typical cash-out
provisions in these plans are often criticized because it is feared the
accumulated funds are often not used for retirement income security purposes.
It is the conflicting goals of different workers, employee groups, employer
and public policy goals that makes selecting one type of plan over the other
difficult.
Multiple Plan Sponsorship
An increasing number of employers believe that the most effective
retirement program is one that provides both defined benefit and defined
contribution plans, making maximum use of the particular cost or benefit
advantages of each.
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An employer could, for example, adopt a defined benefit plan providing a
very modest level of benefits and supplement such benefits under a defined
contribution plan. In this manner, the cost risk under the defined benefit
plan would be minimized and the combined retirement benefits could meet the
necessary standards of adequacy. And, there would be a greater ability for
the retiree to accommodate unanticipated inflation.
Alternatively, an employer with a defined contribution profit sharing
plan could adopt a defined benefit plan solely to guarantee a certain
minimum level of retirement benefits--e.g., 40 percent of final pay--from
both plans combined. In this case, the defined benefit plan is called a
"floor plan." Its purpose is to make up any retirement benefit deficiencies
in the primary defined contribution plan. Minimum benefit objectives can be
met with certainty under this particular combined plan approach, but cost
control is lacking. Even slight deficiencies in expected benefit levels
under the profit sharing plan can result in sharp cost increases under the
defined benefit make-up plan.
Conclusion
The Congress should consider how it wishes the private sector to provide
retirement income in reaching conclusions on plan design. During this period
in which (a) Federal worker benefits are under fire from groups like the
Grace Commission and (b) private worker benefits are being carefully
scrutinized against criteria of tax efficiency and benefit equity--it seems
especially important.
While distinctions between public and private sector employment can
legitimately be made--such distinctions are frequently not recognizable by
voters.
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ELIGIBILITY AND INFLATION PROTECTION
Over the past few years, inflation has brought the financial plight of
the pensioner into sharp focus. Retired employees living on fixed pensions,
or on incomes derived from the investment of a lump sum distribution at
retirement, have been hurt by the declining value of the dollar. The
automatic increases in Social Security benefits provided for by law have
helped, but often not enough for above-average earners.
Most employers are both aware of and concerned about the financial
problems of their pensioners. Few, however, are able to provide automatic
cost-of-living adjustments under their plans because of the prohibitive cost
that would be involved. Surveys indicate that no more than 9 percent of
plans do so. If they are provided, the initial benefit is generally reduced
to balance costs. What many are willing to do, on a voluntary basis, is
grant periodic benefit increases after retirement that take inflation into
account. Surveys indicate that over two-thirds of sponsors have done this
since 1973. Due to the monthly benefit payment approach of defined benefit
plans, adjustments can be made easily, if resources are available.
The employer with a defined contribution plan is likely to have provided
lump- sum settlements to retired employees. The employee may purchase a
partially indexed annuity which would require a reduction of the amount of
the initial benefit.
Assessing the true cost of a Federal retirement program that is fully
indexed for comparison to the private sector demands a comparison based upon
common funding assumptions. The contribution flows required by a pay as you
go funding approach will be very different than for funding of normal cost
plus amortization of unfunded liabilities.
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The Congress must decide how certain it wishes to be about the annual
cost of the retirement program. As we learned during the 1970s,
unanticipated inflation can play havoc with costs.
FINANCING
The normal concept of advance funding a pension program is difficult to
apply to Federal programs if funds appropriated are invested in government
securities. Within the context of the unified budget, we would only escape
the uncertainty of the willingness of future taxpayers fully by investing
Federal retirement program assets in the private sector.
In other words, even a "fully funded" defined contribution program
invested in government securities would be dependent on the willingness of
future Congresses to appropriate funds to honor securities or to raise the
debt ceiling.
For this reason, the Congress could theoretically fully fund the defined
benefit program as well, without actually affecting government cash flow.
Yet, funding does serve a purpose: it makes all parties focus on the
real cost of a retirement program and provides a basis for comparisons. Such
comparisons would be enhanced if Federal retirement programs were required to
meet ERISA funding standards. Since the program for new hires will be a
start up program, this should be easy to accomplish.
Protecting retirees against inflation is viewed as a desirable social
objective--that may or may not be achievable. If the Federal government
continues to provide full indexation, it should be explicitly costed in the
program. This can only be assured if a uniform funding standard like ERISA's
is being used.
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Some have proposed that a defined contribution program be established and
that the government guarantee a fixed rate of interest. Some have suggested
that a return above inflation be guaranteed. It must be noted that this
would no longer be a fixed percentage of payroll program and from a "funding
uncertainty" standpoint would take on characteristics of a defined benefit
program.
There is a precedent regarding the question of whether or not a new
system should use the same trust as the old. In the early 1970s, the United
Mine Workers split their plans and established a new and different plan for
active workers. The plans have separate trusts and separate funding. The
Committee might wish.to explore why the UMW followed this course and why the
government encouraged it.
COVERAGE
The first priority must be on establishing a retirement program for new
hires which takes Social Security coverage into consideration.
This design process should not be allowed to be made difficult by
considerations regarding the current CSRS: either proposals to expand or cut
back the CSRS.
For the longer term, the Federal government should seek to provide all
employees with the most soundly designed and funded retirement program. That
may or may not mean changes in the CSRS for current workers. Since there are
such strong feelings on both sides of that question, it might best be left
for another day.
Private retirement income programs began to develop in the last century.
The government provided explicit legal recognition in 1921. Since that time
the number of plans in operation has grown to over 800,000.
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The most prominent type of plan in terms of the number of covered and
participating workers are of the defined benefit type. Most major employers
also sponsor defined contribution plans for workers. Only recently have
there been signs of a movement to total provision through defined
contribution plans following termination of a defined benefit plan.
Design of retirement plans has revolved around a number of common issues
for many years.
Employer Role--Traditionally employers have designed programs and
have directly made most contributions to plans.
Individual Roles--Direct employee contributions have generally been
restricted to savings plans and are now expanding to 401(k) salary
reduction arrangements.
Flexibility--Employee choice regarding whether or not to participate
in defined benefit plans or primary defined contribution plans
(profit sharing or money purchase) has not been common. Choice has
been restricted to decisions regarding how heavily to participate
financially in savings or salary reduction plans.
Vesting--For defined benefit plans, ten year vesting has been common
since passage of ERISA. For defined contribution programs, some
vesting is generally provided after 2 or 3 years and full vesting
between 6 and 10 years.
Portability--Employees have generally had the ability to carry
benefit credits with them when they remain with the same employer if
in a single employer plan or within the same industry if in a
multi-employer plan.
Retirement Ages--The normal retirement age has generally been
maintained at 65 years. :Provision for retirement at earlier ages
has been subject to employer and industry variations tied to
particular worker or industry economic circumstances.
Disability--There is generally provision for payment from the plan
in the event of disability in coordination with separate disability
income insurance and Social Security.
Survivor Benefits--All defined benefit plans must offer a survivor
benefit option with payment provided for in the event of death after
age 55 or earlier if the worker has retired and has begun drawing a
pension. Defined contribution plans provide for vested account
balances to go to a named beneficiary in the event of death.
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Indexation--Private defined benefit plans have generally not
provided for automatic benefit adjustments in recognition of
inflation due to the problem of unanticipated cost. Most employers
have provided for ad hoc adjustments in recognition of a portion of
inflation increases.
These design decisions have been made and agreed to for specific
reasons. They have been explicitly and implicitly supported by Federal law.
Comparability Analysis. General Design. Eligibility and Inflation
Protection. Financing. Coverage.
EBRI is prepared to help in any way that we can.
I thank you for the opportunity to work with you today.
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SIDMARY OF QUALIFICATIONS AO 713WINATIONS
1939-1983
Period
Ending
NL=ber of
Qualification
Rulings to Date
Number of Net Number
Terminations of Plans
to Date in Effect
Increase in Net
Number of Plans
Over Previous Period
1
Annual
Growth
30
a
---803943
,
Dec.~30,
1982
906,071
140,258
765,813
70,200
10.1
9
Dec. 31,
1981
820,720
125,107
695,613
68,095
10.
Dec. 31,
1980
739,183
111,665
627,518
56,063
9.8
Dec.
31,
1979
669,841
98,386
S71,455
46,036,
8.8
6
Dec.
31,
1978
612,964
87,545
525,419
50,398
10.
4
3
Dec.
31
1977
547,280
72,259
475,021
19,601
.
Dec.
,
31,
1976
511,864
56,444
455,420
10,007
2.2
Dec.
31
1975
485,944
40,531
445,413
21,931
5.2
8
Dec.
,
31,
1974
455,905
32,423
423,482
54,601
14.
17
7
Dec.
31,
1973
396,520
27,639
368,881
55,475
.
17
1
Dec.
31,
1972
336,915
23,509
313,406
45,815
.
16
2
Dec.
31,
1971
287,580
19,989
267,591
37,329
.
15
1
Dec.
31,
1970
246,916
16,654
230,262
30,268
.
Dec.
31,
1969--
214,342
14,348
199,994
26,346
15.1
14
8
Dec.
31,
1968
186,267
12,619
173,648
22,339
.
14
5
Dec.
31,
1967
162,485
11,176
151,309
19,214
.
14
7
Dec.
31,
1966
141,964
9,869
132,095
16,973
.
12
2
Dec.
31.
1965
123,781
8,659
115,122
12,496
.
11
6
Dec.
31
1964
110,249
7,623
102,626
10,667
.
2
5
Dec.
,
31,
1963
98,541
6,582
91,959
10,250
1
.
12
9
Dec.
31,
1962
87,397
5,688
81,709
9,359
.
13
6
Dec.
31,
1961
77,179
4,829
72,350
8,652
.
7
3
Dec.
31,
1960
67,792
4,094
63,698
9,399
.
1
c. 31,
1959
57,835
3,536
54,299
6,792
551
6
4.2
0
16
Dec.
31,
1958
50,569
3,062
47,507
,
.
4
7
Dec.
31,
1957
43,615
2,659
40,956
6,074
1
.
6
5
Dec.
31.
1956
37,190
2,308
34,882
4,944
1
.
Dec.
31,
1955
31,943
2,005
29,938
1,769b/
290
3
6.3
13
2
June 30.
1955
30,046
1,877
28,169
,
204
4
.
20.3
June 30,
1954
26,464
1,585
24,879
,
June 30
1953
22,069
1,394
20,675
3,657
21.5
,
June 30,
1952
18,289
1,271
17,018
2,347
16.0
June 30,
1951
15,899
1;125
14,671
2,517c/
20.7
June 30,
1950
13,899
--
--
Jwne 30,
1949
12,86S
711
12,154
896
8.0
1
Jizie 30,
1948
11,742
484
11,258d/
1,888
20.
Aug. 31,
1946
9,370
--
9,370a/
1,584
20.3
Dec. 31,
1944
7,786
--
7,786x/
5,839
300.0
0
Sept. 1
1942
1,947
--
1,9473/
1,288
195.
.
Dec. 31,
1939
659
--
659x/
549
--
SOURCE: Charles D. Spencer Associates for 1939 to 1975, EBRI tabulations of IRS data for 1976
to 1983.
a/ 9 month period, January 1, 1983 to September 30, 1983
V Six month total
c/ Increase from June 30. 1949
Z/ 28 month period based on an average of 2,507 plans per year
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Year
Net Total
Plans
Created
Defined
Benefit
Defined
Contribution
Total Plans
Total Plans
% Growth
1956
4,944
2,983
1,961
34,882
16.5
1957
6,074
3,347
2,727
40,956
17.4
1958
6,551
3,659
2,892
47,507
16.0
1959
6,792
3,554
3,238
54,299
14.2
1960
9,399
4,711
4,688
63,698
17.3
1961
8,652
4,545
4,107
72,350
13.6
1962
9,359
4,712
4,647
81,709
12.9
1963
10,250
5,399
4,851
91.959
12.5
1964
10,667
6,072
4,595
102,626
11.6
1965
12,496
6,983
5,513
115,122
12.2
1966
16,973
9,521
7,452
132,095
14.7
1967
19,214
10,690
8,524
151,309
14.5
1968
22,339
12,224
10,115
173,648
14.8
1969
26,346
13,824
12,522
199,994
15.1
1970
30,268
15,370
14,898
230,262
15.1
1971
37,329
20,888
16,441
267,591
16.2
1972
45,815
26,520
19,295
313,406
17.1
1973
55,475
31,608
23,867
368,881
17.7
1974
54,601
30,002
24,599
423,482
14.8
1975
21,931
10,769
11,162
445,413
5.2
1976
10,007
-4,180
14,187
455,420
2.2
1977
19,601
1,616
17,985
475,021
4.3
1978
50,398
5,103
45,295
525,419
10.6
1979
46,036
12,488
33,548
571,455
8.8
1980
56,063
14,552
41,511
627,518
9.8
1981
68,095
19,253
48,842
695,613
10.9
1982
70,200
23,146
47,054
765,813
10.1
1983 a/
38,130
12,912
25,218
803,943
5.0
SOURCE: IRS Disclosure Data; EBFtI tabulations.
NOTE: Total plan figure includes the number of pension plans dating before
December 31, 1939. Yearly record keeping for the number of defined
benefit and defined contribution plans began in 1956.
a/ 9-month period, January 1, 1983 to September 30, 1983.
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PENSION PLAN CREATION AND GROWTH BY TYPE OF PLAN FOR YEARS
1955 to 1983
Yearly
Number
Created
Cumulative
Number
Created
%
Growth
Yearly
Number
Created
Cumulative
Number
Created
%
Growth
Yearly
Number
Created
Cumulative
Number
Created
Growth
1955 a
16,226
13,712
29,938
1956
2,983
19,209
18.4%
1,961
15,673
14.3%
4,944
34,882
16.5%
1957
3,347
22,556
17.4
2,727
18,400
17.4
6,074
40,956
17.4
1958
3,659
26,215
16.2
2,892
21,292
15.7
6,551
47,507
16.0
1959
3,554
29,769
13.6
3,238
24,530
15.2
6,792
54,299
14.3
1960
4,711
34,480
15.8
4,6 88
29,218
19.1
9,399
63,698
17.3
1961
4,545
39,025
13.2
4,107
33,325
14.1
8,652
72,350
13.6
1962
4,712
43,737
12.1
4,647
37,972
13.9
9,359
81,709
12.9
1963
5,399
49,136
12.3
4,851
42,823
12.8
10,250
91,959
12.5
1964
6,072
55,208
12.4
4,595
47,418
10.7
10,667
102,626
11.6
1965
6,983
62,191
12.6
5,513
52,931
11.6
12,496
115,122
12.2
1966
9,521
71,712
15.3
7,452
60,383
14.1
16,973
132,095
14.7
1967
10,690
82,402
14.9
8,524
68,907
14.1
19,214
151,309
14.5
1968
12,224
94,626
18.8
10,115
79,022
14.7
22,339
173,648
14.8
1969
13,824
108,450
14.6
12,522
91,544
15.8
26,346
199,994
15.2
1970
15,370
123,820
14.2
14,898
106,442
16.3
30,268
230,262
15.1
1971
20,888
144,708
16.9
16,441
122,883
15.4
37,329
267,591
16.2
1972
26,520
171,228
18.3
19,295
142,178
15.7
45,815
313,406
17.1
1973
31,608
202,836
18.5
23,867
166,045
16.8
55,475
368,881
17.7
1974
30,002
232,838
14.8
24,599
190,644
14.8
54,601
423,482
14.8
1975
10,769
243,607
4.6
11,162
201,806
5.9
21,931
445,413
5.2
1976
-4,180
239,427
1.7b/
14,187
215,993
7.0
10,007
455,420
2.2
1977
1,616
241,043
.7
17,985
233,978
8.3
19,601
475,021
4.3
1978
5,103
246,146
2.1
45,295
279,273
19.4
50,398
525,419
10.6
1979
12,488
258,634
5.1
33,548
312,821
12.0
46.036
571,455
8.8
1980
4,552
273,186
S.0
4
354,332
13.3
56,063
627,518
9.8
1981
19,253
292,439
7.0
48,842
403,174
13.8
68,095
695,613
10.9
1982
23,146
315,585
7.9
47,054
450,228
11.7
70,200
765,813
10.1
1983c/
12,912
328,497
4.1
25,218
475,446
5.6
38,130
803,943
5.0
a/ Data for the year 1955 are cumulative. Prior to 1956, record keeping for
3efined benefits and defined contribution plans was not established. Data for
the year 1955 reflect pension plan growth beginning in 1935. The number of
defined benefit and defined contribution plans for those years is an estimate
based on the average of the percentage of pension plans that were either defined
benefit or defined contribution for the ten year period between 1956 and 1965.
b/ Represents a percentage decrease in defined benefit plan growth.
c/ Represents a 9-month period, January 1, 1983 to September 30, 1983.
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PENS ION PLAN GROWTH
By TYPE OF PLAN
1956-1983
Year Defined Benefit % Defined Contribution %
1956
60.3
39.7
1957
55.1
44.9
1958
55.9
44.1
1959
52.3
47.7
1960
50.1
49.9
1961
52.5
47.5
1962
50.3
49.7
1963
52.7
47.4
1964
56.9
43.1
1965
55.9
44.1
1966
56.1
43.9
1967
55.6
44.4
1968
54.7
45.3
1969
52.5
47.5
1970
50.8
49.2
1971
56.0
44.0
1972
57.9
42.1
1973
56.9
43.1
1974
54.9
45.1
1975
49.1
50.9
1976
0
100
1977
8.2
91.8
1978
10.1
89.9
1979
27.1
72.9
1980
26.0
74.0
1981
28.3
71.7
1982
33.0
67.0
1983 a/
33.9
66.1
SOURCE: IRS Disclosure Data; EBRI tabulations.
a/ 9-month period, January 1, 1983 to September 30, 1983.
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CORPORATE AND SELF-EMPLOYED PB SION PLAN QUALIFICATIONS
TERMINATIONS AND NET PLANS CREATED
1956-1983
Defined Benefit Plans
Defined Contribution Plans
Year
Plans
Qualified
Plans
Terminated
Net Plans
Created
Plans
Qualified
Plans
Terminated
Net Plans
Created
Total Net
Plans
Created
1956
3,175
192
2,983
-'2,072
111
1,961
4,944
1957
3,527
180
3,347
2,898
171
2,727
6,074
1958
3,883
224
3,659
3,071
179
2,892
6,551
1959
3,824
270
3,554
3,442
204
3,238
6,792
1960
5,011
300
4,711
4,946
258
4,688
9,399
1961
4,919
374
4,545
4,468
361
4,107
8,652
1962
5,188
476
.4,712
5,030
383
4,647
9,359
1963
5,840
441
5,399
5,304
453
4,851
10,250
1964
6,581
509
6,072
5,127
532
4,595
10,667
1965
7,495
512
6,983
6,037
524
5,513
12,496
1966
10,124
603
9,521
8,059
607
7,452
16,973
1967
11,292
602
10,690
9,229
705
8,524
19,214
1968
12,896
672
12,224
10,886
771
10,115
22,339
1969
14,692
868
13,824
13,383
861
12,522
26,346
1970
16,512
1,142
15,370
16,062
1,164
14,898
30,268
1971
22,493
1,605
20,888
18,171
1,730
16,441
37,329
1972
28,265
1,745
26,520
21,070
1,775
19,295
45,815
1973
33,830
2,222
31,608
25,775
1,908
23,867
55,475
1974
32,579
2,577
30,002
26,806
2,207
24,599
54,601
1975
15,319
4,550
10,769
14,720
3,558
11,162
21,931
1976
4,790
8,970
-4,180
21,130
6,943
14,187
10,007
1977
6,953
5,337
1,616
28,463
10,478
17,985
19,601
1978
9,728
4,625
5,103
55,956
10,661
45,295
50,398
1979
15,755
3,267
12,488
41,122
7,574
33,548
46,036
1980
18,849
4,297
14,552
50,493
8,982
41,511
56,063
1981
23,789
4,536
19,253
57,748
8,906
48,842
68,095
1982
28,189
5,043
23,146
57,162
10,108
47,054
70,200
1983 a/
18,393
5,481
12,912
34,087
8,869
25,218
38,130
SOURCE: IRA Disclosure Data; EBRI tabulations.
a/ 9-month period, January 1, 1983 to September 30, 1983.
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13 MAR 15b i
Office of Legislative Liaison
Liaison Division
Fourth House Committee on Post Office and
Civil Service Hearing on Supplemental
Retirement; 13 March 1984
SUMMARY: The fourth of five scheduled House Committee on
Post Office and Civil Service hearings on supplemental
retirement was held today. Five additional federal employee
unions and one employee benefits consultant testified. The
most noteworthy event was the Chairman taking the unions to
task for being too passive and submissive on the entire
supplemental retirement issue. He implored them to be
creative and imaginative and forceful in leading their
federal employees on this issue, rather than just rolling
under the Administration and its protestations about the
need to cut the deficit, at whatever cost to federal
employees.
1. Attached for your information and use is a complete
set of documentation freulting from the subject hearing
today. The attachments include the witness list and the
prepared statements of all participants. Also included is a
summary attempt at recreating the questions and answers that
were posed and offered at varying times during the hearing.
2. The fourth of five scheduled House Committee on Post
Office and Civil Service hearings on supplemental retirement
was held today. With Mr. Ford (D,MI) in the chair and Ms.
Oakar (D,OH) and Mr. Wolf (F:,VA) in attendance, the
following union viewpoints were recorded:
National Association of Retired Federal Employees;
Federal Managers' Association;
Senior Executives Association;
Professional Managers Association; and
Federally Employed Women..
In addition, the President, Employee Benefit Research
Institute (EBRI), testified. EBRI describes itself as a
Washington, D.C.-based, nonprofit, nonpartisan public policy
research organization dedicated to increasing knowledge of
employee benefits through research and education. As an
aside, it presented an equally professional, but more
detailed paper during the second Senate Governmental Affairs
Committee retirement forum, held on 16 February 1984 and
reported to you on 22 February 1984.
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3. The most noteworthy event of the day was the
Chairman taking the presidents of the Professional Managers
Association and Federally Employed Women unions to task for
being too passive in their testimony and in their
philosphical approaches to supplemental retirement
legislation. He made the point, quite strongly, that the
Congress, and therefore all interested parties, had a unique
opportunity to recreate federal retirement system law, at
least prospectively, and that all involved should look at
this as a positive opportunity to start all over and to be
as creative as their imaginations would allow them to be.
He opined that the only time the Congress ever did anything
with federal employee retirement laws was when they were
under attack. He further opined that such was not the case
now, that everyone now had the opportunity to craft the best
federal retirement system imaginable, and that not to do so
would be tragic. He stated his view that the current
federal retirement systems are not the overly generous
creatures that they are made out by the Administration to
be, but rather are really rather pedistrian when compared to
the systems available in the private sector. He chastised
all federal employee unions for being too passive and
submissive on this issue and implored them to rise to the
opportunity to do something positive rather than just roll
over and accept the Administration's rhetoric as trusims.
He completed this lengthy statement by describing the
process the House Committee on Education and Labor (of which
he is an active member) went through in developing and
untimately enacting the ERISA statute in 1974. He likened
that effort, which took years and millions of dollars in
consultant support to research, debate, craft, and pass, to
this supplemental retirement situation. Coupled with his
second reference to the fact that the interim Stevens bill,
that expires 31 December 1984, may well have to be extended,
Mr. Ford is perhaps suggesting that the Congress should take
as much time as necessary to enact the proper supplemental
retirement bill and not worry about how long it takes it to
do so. I will follow up on this next week with appropriate
Committee staff personnel.
Attachments:
As stated)
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Distribution:
Original - Addressee w/att
1 - DD/PERS w/att
1 - DD/PERS/SP w/att
1 - DD/PERS/PA&E w/att
1 - DDA w/selected att
1 - D/OLL w/selected att
1 - C/LD/OLL w/selected att
1 - LEG/OLL w/selected att
1 - TBC Chrono w/o att
1 - TBC Subject w/att
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The following summarizes the questions asked and answers
provided during the course of the House committee on Post
Office and Civil Service hearing on supplemental retirement
on 13 March 1984. It is not a complete summary, but rather
is intended only to provide a floavor of the exchanges that
took place.
Ms. Oakar (D,OH): With respect to the public sector/
private sector pay and benefits comparability issue,
if the comparability analysis was done between the
federal government and a comparably-sized private sec-
tor firm, would the issue go away to everyone's satis-
faction?
National
Association of Retired Federal Employees (NARFE):
There
is
no comparably sized private sector firm
with
which
to
compare pay and benefits of the federal
govern-
ment.
It
seems to me that so long as you do the
compar-
ison
of the federal government with an aggregrate of very
large
private sector firms, that the results will be the
best
possible.
Mr. Ford (D,MI: Chairman) We need to remenber that large
employers have retirement needs for their work forces
that are very different from small employers. One of the
results of these differences is that the benefit and pay
levels are correspondingly different. Just as you cannot
equitably compare the benefit levels of large and small
firms and expect to get a meaningful result, neither can
you compare the federal government retirement needs with
small private sector firms and expect to get a meaningful
result, because they are just too different.
Mr. Wolf (R,VA): Would you comment further on the need to
retain the CSRS Trust Fund for use with both the current
CSRS and whatever new supplemental retirement system we
enact?
NARFE: It is very important, principally because it ensures
a steady inflow of funds, and thus ensures the financial
integrity of the existing fund.
Mr. Wolf: Should new federal employees who come back to the
government with some prior federal service be allowed to
join either the old (CSRS) or the new retirement systems?
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NARFE: We have a thorough study underway on that very issue,
but the study is not yet complete and so I am not able to
answer you now. We will provide the results of our study
when it is completed if you want. (Yes).
Mr. Albosta (D,MI) comment: If the new retirement system is
not combined with the old one (CSRS), then there will be
two trust fund administrators and invariably a compe-
tition will develop between the two, probably to the det-
rement of both systems. I suspect that the benefits of
the CSRS participants may well be jeprodized.
Mr. Ford: The Office of Personnel Management, in a written
publication, says that the CSRS Trust Fund in the year
2000 will have an asset balance of some $350 billion.
Mr. Devine, on the other hand, goes around saying that
the CSRS has an unfunded liability of some $515 billion.
This latter statement is, of course, ludicrous. Is your
membership concerned by these statements of Mr. Devine's?
NARFE: Mr. Devine has succeeded in convincing a majority of
NARFE members that at least some of their retirement
benefits are at risk because of this problem.
Mr. Ford comment: The Grace Commission and Mr. Grace are
still, at every occassion, saying that federal employees
retire at age 55, whereas employees in the private sec-
tor don't retire until age 65, and thus if federal em-
ployees were forced to work until they were 65, such
tremendous savings would be realized and the federal
workers wouldn't be the privledged class that they are
now. In fact, as I stated during our last hearing, the
actual retirement ages for the private and public sectors
are nearly identical:
private sector - 61.8 years of age
public sector - 61.3 years of age
As a matter of interest, what is the average age of the
NARFE membership?
NARFE: The average age of our membership is somewhere around
age 71.
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Mr. Ford comment, upon completion of the Professional Mana-
gers and Federally Employed Women testimony:
I'm having trouble understanding your two sets of
testimony, because if I am hearing you right, you are
telling this Committee that you are willing to accept
a new retirement system that is less advantageous to
your members than the current federal retirement sys-
tems. If this is the case, your shortsightedness is
tragic. Neither you nor most of the rest of the union
representatives that this Committee has heard from so
far seem to realize that the Social Security Act amend-
ments made by the Congress last year presented us with
the first real opportunity to recast federal retirement
law in scores of years. Usually when we are tinkering
with the federal retirement laws we are reacting to some
allegation and are forced to limit our focus to the
specific issues involved.,
Here, though, we are presented with the opportunity to
reshape, in very large measure, the entirety of federal
retirement law. You know, there is not just one federal
retirement law and system, there are something on the
order of 38 or more, even though we usually talk about
the Civil Service Retirement System (CSRS) as though it
is the only federal system. And all I hear you people
talking about is ducking, keeping your heads down, trying
to ensure that, in a supplemental retirement environment,
that your members don't get too much less than they are
now getting in the current system. I deplore such repre-
sentation on your parts. You are doing your members a
severe disservice.
I sit on the Committee on Education and Labor, and was
totally involved in that committee's creation and passage
of the ERISA statute. It took us years of exhausting and
deliberate work, all very detailed and time consuming.
In the process, we spent well over a million dollars just
in consulting fees, all to ensure that the law we ended
up with was the right one. I think that experiences
since it was enacted suggest that the law was a nec-
essary one, a good one, and very beneficial to private
sector employees whose pension rights before ERISA were
ever at risk. Such is absolutely not the case now. I
draw a parallel between the ERISA efforts and the
current supplemental retirement issues. We cannot
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rush into some half-baked bill just to meet some arbi-
trarily-imposed completion date (31 December 1985). I
would much sooner extend that date for a year or more
than try to rush this issue. It is nearly as complex
and perhaps more contentious. My point is that we can't
rush this subject. We have got to do it in a detailed
and orderly fashion.
For all of the above reasons, don't you rush your con-
sideration of this issue. Don't agree or let your
membership agree so early in the process that you can't
get as much out of the Congress as you and they might
want. Don't assume that the very best that you can do is
to obtain parity with the current system (CSRS). None of
us knows that yet. I start this endeavor on the assump-
tion that the current system isn't nearly as good or as
generous as the Administration would have us and you be-
lieve. It may have been so 15 years ago, but it has been
picked away at too much in the intervening years, and the
private sector has been very creative and imaginative
during this same time. The result is that the current
federal retirement laws aren't nearly as good as every-
one thinks they are. Therefore, my goal is to obtain
for federal employees the very best retirement system
that I can, because it would be money very well spent.
There are many of us here in the Congress, my good
friend in the Senate Mr. Ted Stevens included, who
think that the quality of the federal workforce is
every bit as important to this country's national
security as rebuilding the DOD's infastructure. Since a
competitive retirement system is an attractive magnet to
quality employees, what better way to protect our
national security.
Get some fire in your proposals. We in the Congress
can't do our jobs here if you all are asking for less
than we are inclined to try to get for you.
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