STATEMENT OF THE CHAMBER OF COMMERCE OF THE UNITED STATES ON CIVIL SERVICE PENSION REFORM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89-00066R000100070014-2
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: April 22, 2010
• Sequence Number: 14
• Publication Date: October 23, 1985
• Content Type: OPEN SOURCE

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Statement
of the
Chamber of Commerce
of the
United States
ON: CIVIL SERVICE PENSION REFORM
T0: HOUSE POST OFFICE AND CIVIL
SERVICE COMMITTEE
BY; JOHN N, ERLENBORN
DATE; OCTOBER Z3, 195
The Chamber's mission is to advance human progress through an economic,
political and social system based on individual freedom,
incentive, initiative, opportunity and responsibility.
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The Chamber of Commerce of the United States is the world's
largest federation of business companies and associations and
is the principal spokesman for the American business
community. It represents more than 184,000 companies plus
several thousand other organizations, such as local/state
chambers of commerce and trade/professional associations.
More than 92 percent of the Chamber's members are small
business firms with fewer than 100 employees, 53 percent with
fewer than 10 employees. Yet, virtually all of the nation's
largest companies are also active members. We are
particularly cognizant of the problems of smaller businesses,
as well as issues facing the business community at large.
Besides representing a cross section of the American business
community in terms of number of employees, the Chamber
represents a wide management spectrum by type of business and
location. Each ma3or classification of American
business--manufacturing, retailing, services, construction,
wholesaling, and finance-numbers more than 14,000 members.
Yet no one group constitutes as much as 29 percent of the
total membership. Further, the Chamber has substantial
membership in all 50 states.
The Chamber's international reach is substantial as well. It
believes that global interdependence provides an opportunity,
not a threat. In addition to the 53 American Chambers of
Commerce Abroad, an increasing number of members are engaged
in the export and import of both goods and services and have
ongoing investment activities. The Chamber favors
strengthened international competitiveness and opposes
artificial U.S. and foreign barriers to international
business.
Positions on national issues are developed by a cross section
of its members serving on committees, subcommittees and task
forces. Currently, some 1,800 business people participate in
this process.
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STATEMENT
on
CIVIL SERVICE PENSION REFORM
before the
HOUSE POST OFFICE AND CIVIL SERVICE COMMITTEE
for the
CHAMBER OF COMMERCE OF THE UNITED STATES
by
John N. Erlenborn
October 23, 1985
Mr. Chairman and members of the Committee, my name is John N. Erlenborn
and I am a partner in the law firm of Seyfarth, Shaw, Fairweather & Geraldson.
I am pleased to appear here today on behalf of the U.S. Chamber of Commerce, the
world's largest federation of businesses, chambers of commerce and trade and
professional associations.
I serve on the Chamber's Labor and Employee Benefits Committee and on
several of that Committee's councils and task forces which develop policy on
labor and employee benefits matters.
As you may know, during my 20 years in the House of Representatives, I
took a keen interest in developing a rational retirement policy for both the
public and private sectors. That interest and involvement have continued
since my retirement in January to practice law as a specialist in employee
benefit issues. Because of my long-standing interest and involvement in these
matters, it is a particular pleasure to share with you our perspective on
reform of the Civil Service Retirement System (CSRS). Congress has quite a
challenge before it to enact by the end of this year a new retirement system
for federal employees hired after 1983.
Chairman Ford and Representative Oskar are both to be commended for
developing a comprehensive proposal (the "Ford/Oskar plan"). In the Senate,
S. 1527, the "Stevens/Roth plan," also addresses the major features of a new
retirement system. These plans seek to address the important questions that
should be decided by year-end in order to keep post-1983 federal hirees from
remaining in limbo regarding their retirement program. While it is important
for Congress to act expeditiously, it also is crucial to develop a system that
balances the need of federal workers to be ensured adequate retirement
coverage and the need of taxpayers to pay for an equitable and reasonably
priced system.
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We are pleased to share our thoughts on the Ford/Dakar plan for the
development of a new retirement system for recently hired workers. At the
outset, I should state that the center of the Chamber's position on the
federal retirement system is the concept that it should be modified to
approximate more closely its private-sector counterpart.
.~ As a leading supporter of the private pension system and a principal
author of ERISA, the Employee Retirement Income Security Act of 1974, I
believe much can be learned from the private system for constructing a
reasonable and financially sound federal retirement structure. In at least
two respects -- cost-of-living adjustments (COLAs) and early retirement -- the
CSRS differs substantially from the private-sector retirement system. These
are the two issues upon which my remarks will mainly focus.
In large part due to the COLA and early retirement features of the
CSRS, most federal retirees receive more generous benefits than those received
by most private-sector retirees whose tax dollars substantially support the
federal retirement system. It is stated often that federal retiree benefits
are made intentionally more generous than those in the private sector because
other aspects of federal employee compensation are inadequate. However, this
is no basis for setting federal personnel retirement policy. Where federal
pay for a particular job is inappropriate, it should be corrected on the basis
of the value of that job -- establishing an overly generous Qensian-gyrtem---_
only perpetuates a problem.
Cost-of-Living Adjustments (COLAs)
COLAs were first authorized for federal pensions in 1962. The original
civil service pension COLA was triggered when inflation exceeded three
percent. Since 1962, the federal pension COLA has been on a veritable roller
coaster.
The COLAs in the federal retirement system have been indexed fully to
increases in the Consumer Price Index (CPI) since 1966. By contrast, the
private pension system does not match these cost-of-living increases. In the
private sector, a defined benefit pension plan provides exactly what its name
suggests--a definite benefit amount--frequently with no adjustments for
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inflation. Some private plans do contain inflation adjustments, and other
companies increase benefits voluntarily. Social Security also adjusts for
inflation. However, a U.S. Department of Labor survey indicated that in 1982
only three percent of all private plans contained automatic inflation
adjustments. Moreover, these adjustments were limited generally to three
percent per year, rather than the open-ended adjustment that the federal
government pays its retirees.
There is no question that basic benefits should be increased during
periods of inflation, but retired persons should not receive greater
cost-of-living protection than working people. Yet, that is what has happened
and will happen again this coming year as federal pay is frozen and pension
benefits rise.
LL In 10 0~ the years from 1971-1983, persons drawing federal retirement
benefits received larger annual increases than wage earners gained in union
negotiations in private industry. While these working Americans realized an
average annual gain of 60 percent of the CPI increases in their paychecks, the
retired federal worker gained 100.
The full CPI adjustments paid to federal pensioners also result in the
anomalous situation that some retirees can receive more in annual federal
retiree benefits than the salaries earned by the individuals filling the
positions formerly held by the retirees. We must restore economic equity
___ -___
_._ ... -_
between working and nonworking generations. The Ford/Dakar plan, which
increases the COLA by the amount of the CPI increase, does not meet this
objective.
How then should Congress deal with COLAs, which in large part are
responsible for the explosive growth in spending on all federal pensions from
$L.7 billion in Fiscal Year 1970 to over $23 billion last year? One way might
be to consider something akin to the "COLA Stabilizer" which I proposed in the
FAIR (Federal Annuity and Investment Reform) civil service retirement
legislation I introduced in the 98th Congress. Representative Rod Chandler
(R-WA) has introduced very similar legislation, H.R. 2869, this year. This
proposal bases the COLA on the lesser of the increase in the general schedule
increase or the CPI. This reference amount is then applied to the first
$10,000 of pension, an amount roughly equal to the maximum benefit a new
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social security recipient would receive in 1985. Amore limited COLA
adjustment is then granted on pension amounts above $10,000. Another
alternative is indicated in the Stevens/Roth plan whereby annual COLAs would
be paid at two percent below the rate of inflation as measured by the CPi.
It should be noted that either proposal would help achieve the goal of
bringing federal employees to the level of private-sector employees. Even
with these changes from the current CSRS, however, federal retirees would have
a more generous retirement plan than is found in the private sector. For most
private-sector retirees, Social Security COLAs are the only inflation adjuster
built into the retirement income formula. Benefit increases in private-sector
plans are typically on an ad hoc basis, depending largely on the available
funds in the plan. Many private-sector retirees have no private pension
coverage at all.
It is important when considering a COLA as part of the new federal
retirement system, to compare the system with prevailing practices in the
private sector -- not with the current CSRS -- because the participants of the
new system will, like their private-sector counterparts and unlike federal
employees hired prior to 1984, have Social Security COLA protection.
Early Retirement
The provision of the CSRS that permits an unreduced annuity for federal
employees retiring at age 55 after 30 years of service often has been in the
eye of the storm of controversy surrounding federal pensions. Therefore, an
explanation of the early retirement features of private pension systems is in
order to develop a workable and fair early retirement feature.
In the private pension system, early retirement is more commonly
available at ate 62 than at a_r~e 55, and even then, the retirement benefit
generally is reduced for each year the retiree is under age 65. This also is
the case with Social Security benefits.
No one can argue reasonably that individuals who have worked hard and
who have looked forward to the comfort and security of retirement years should
be denied the benefits they have earned. However, the only adequate
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explanation for the discrepancy in retirement ages between federal and
nonfederal retirees is that the availability of full benefits at age SS is a
powerful incentive for federal employees to retire at this early age. This
practice denies the federal government the services of some of its most
capable and experienced workers and requires the taxpayers to subsidize
pensions for lengthy periods.
Phasing-in reduced benefits for retirees between the ages 5 and 65
would bring the federal retirement system into closer alignment with private-
sector retirement practices. The Chamber supports this reform and urges the
----
Congress to do li ewise. -~
-~ fh s~oint a discussion of some of the myths and facts of retirement
age in the federal sector is in order so that the early retirement features
may be understood better and put into proper perspective. Some dismiss the
matter of early retirement as inconsequential since they believe that federal
employees retire at close to the retiring age of private-sector workers. The
Federal Government Service Task Force, a Congressional caucus, claimed in a
fall 1984 report that "both private and federal workers retire, on average, at
___-___ _
age 61." The Task Force quoted Office of Personnel Management (OPM) figures
~--~--
showing that in 1982 CSRS retirees on the average left at age 60.7 with 28
years of service.
Unfortunately, these figures do not tell the entire story. But let us
not lose sight of the forest by looking at the trees, debating statistics when
the policy of unreduced early pensions is the problem. If the policy of early
retirement is a privilege paid-for mainly by taxpayers and yet not enjoyed by
them, then where is the equity in continuing that policy? Indeed, it federal
retirees retire later than assumed, why oppose change?
For the record, certain points should be made about the retirement age
issue. First, the Bureau of Labor Statistics' Office of Employment and
Unemployment S_ t_ atistics does not collect data on average private-sector
~- _ _
retirement ages due to definitional problems (for example, is a rehired
annuitant retired?); thus, there is no reliable private-sector average
retirement age data published by the government.
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Secondly, let us beware of averages that mask significant data. The
average age of retiring federal em 1~ oyees from 1973 to 1982 was 61.1 years,
according to Table 15 on page 31 of the Congressional Research Service (CRS)
report, Background on the Civil Service Retirement System. What this Table
does not state is that, according to OPM, about 39% of retiring federal
employees retire within one year of attaining age 55 with at least 30 years of
service.
Further, the 61.1 age refers only to optional retirement (those with
age/service of 55/30, 60/20, and 62/5). It does not include retirement ages
for disability, involuntary, deferred, mandatory, or special retirement
situations (hazardous, Member of Congress, etc.).
The figure quoted by the Task Force is only for optional retirement.
It represents 69.3% of the 85,000 retirees in 1982. As a matter of fact, 2~
of the 1982 CSRS retirees left federal service at an average age of 52.
The question again, arises, how best do we correct the early retirement
features of the civil service retirement system?
My FAIR proposal of the 98th Congress, Representative Chandler's FAIR
proposal, and the Stevens/Roth plan are directed at bringing the early
retirement features of anew federal system into closer conformity with
private-sector practices.
Under my FAIR proposal and the Chandler FAIR proposal, current
employees as well as future employees would be able to retire under the same
age-service provisions as under present law, but the amount of benefits based
on service after the year of enactment would be subject to a reduction factor
of two percent for each year under normal retirement age. The two percent
rule would not reduce the amount of an employee's benefit which is accrued
prior to the year of enactment. This change in the value of future benefits
not yet earned is permissible under the law governing private pensions (FRIBA)
and responds to the arguments that changing the method of calculating benefits
violates an implied contract between federal workers and their employer. The
Stevens/Roth plan also reduces an annuity for early retirement -- reducing
benefits for retirement before age 62. Earlier this year the Reagan
Administration also proposed a phase-in of reduced benefits for retirees
between the ages of 55 and 65.
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I am not suggesting that the reduction factor must be two percent as it
was proposed in the FAIR legislation. I am suggesting that some reduction
factor be considered. Social Security reduces benefits by 6-2/3% for every
year under age 65. CRS reports, on page 42 of its December 1984 study for the
House Post Office and Civil Service Committee, that a full actuarial reduction
would reduce payments by six or seven percent per year. However, private
pension plans often reduce employees' accrued pension benefits by about four
or five percent a year if they retire early.
Employees should not be prevented from retiring early, but neither
should they be encouraged to leave early by an excessively generous
provision. I believe that a proposal to moderate early retirement costs will
work to the benefit of our government and its employees. I urge you to
reevaluate the early retirement feature of the Ford/Dakar plan in light of the
Additional Components of a New Retirement System
As the Committee considers the Ford/Dakar plan and the development of a
new civil service retirement system, there are a number of features of the
system apart from COLAs and early retirement that need to be determined.
Consistent with our policy, the Chamber believes that those features should
approximate common features of the private-sector as much as possible.
In 1983, this Committee and the Senate Governmental Affairs Committee
asked the U.S. General Accounting Office (GAO) to analyze information on
prevailing features of retirement programs in the nonfederal sector. In June
1984, GAO published its exhaustive study entitled Features of Nonfederal
Retirement Programs.
The GAO report used the Department of Labor's Bureau of Labor
Statistics' 1982 study entitled Employee Benefits in Medium and Large Firms.
This study involved 976 pension plans covering 17 million participants. GAO
also used extensive surveys conducted by four private firms and by the
National Association of State Retirement Plan Administrators.
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The GAO report determined that retirement programs in the nonfederal
sector, where they exist, typically involve Social Security, a pension plan
and a capital accumulation plan, such as a thrift or deferred compensation
plan. Within these broad components, specific features of private plans
commonly are found. I would like to enumerate some of these items.
Normal Cost
The employer cost of the current CSRS is an unacceptably high
percentage of the total federal payroll. CRS estimates the cost at 25% of
pay. An independent study conducted for OPM found the cost to be 28% of
payroll, as did the study by the President's Private Sector Survey on Cost
Control (Grace Commission). The Ford/Dakar plan would be 25.5% of_pa~roll.
In the private sector, however, the employer costs are much less. The
same study prepared for OPM, mentioned above, found that private pension costs
were 18% of pay, while the Grace Commission placed the figure at 17%. These
studies looked at the norms in medium and large companies that have pension
plans. Other estimates, including the U.S. Chamber's annual Employee Benefits
Survey and the U.S. Department of Commerce's Survey of Current Business, both
of which look at the entire spectrum of business sizes across the economy,
including those with and without pension plans, revealed the cost of
retirement plans at between four and five percent of payroll.
The point is clear. By any measure, the cost of the present federal
retirement system is inordinately high. The new system must seek to bring the
normal cost of the retirement plan into accord with normal costs in the
private sector as a matter of fiscal responsibility toward the taxpayers who
support the system, as a matter of equity between federal and nonfederal
workers and as a matter of honesty toward the federal employees who are
relying upon the ability of the government to pay the benefits they are being
promised. We urge this course of action not as an attempt to reduce the
federal budget deficit by providing inadequate retirement benefits to federal
employees, but, rather, to prevent a too-generous retirement plan from further
aggravating the deficit problem.
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Social Security Integration
The Social Security system replaces a higher proportion of earnings for
people with lower average wages. The U.S. Chamber supports this "tilt" as a
form of social insurance for lower-income earners. Because of this tilt, many
pension plans are "integrated" with Social Security, in that a portion of the
Social Security benefits is deducted from the benefits the pension plan would
otherwise pay under its benefits formula. This deduction tends to equalize
the proportional wage replacement among higher- and lower-paid workers when
pension benefits and Social Security benefits are combined.
The GAO report found, among the surveys it used to compile its report,
that between 64% and 96% of private-sector plans were integrated with Social
Security. The degree to which the Social Security tilt is offset and the
method by which it is done vary among different pension plans. However, the
extensive data compiled by the studies which GAO analyzed clearly suggest that
the integration of Social Security and pension benefits is the predominant
practice in the private sector. To the extent that the new system is not
integrated with Social Security, it is departing from the typical private-
sector practice.
Employee Contributions
Federal employees covered by the current CSRS are required to
contribute to their pension plan. According to GAO data, this i_s clea_rly
contrary to the common practice in the private sector, where between 78% and
~--~ ~_ _ ~ _ r - _
93% of the pension plans are fully paid by the employer. ~~
Employer sponsorship, however, does not preclude the opportunity for
voluntary employee contributions. As discussed above, capital accumulation
plans are a typical feature of comprehensive retirement programs in the
private sector. Whether it is in the form of a salary-reduction 4U1(k) plan
or other type of capital accumulation plan, the new system should encourage
employees who wish to do so to help save for their retirement. This will
provide federal employees the same opportunity which many private-sector
employees enjoy -- to contribute toward their retirement income security --
and will discourage the financial pressure on the federal government in
determining its proper level of contributions.
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The Ford/Dakar plan, by requiring employee contributions to the defined
benefit plan (albeit, contributions that are reduced by OASDI employee
contributions), departs from the common features of private-sector retirement
programs. However, the opportunity for employees to contribute to a capital
accumulation plan is consistent with an increasingly popular and important
trend, which we commend.
Vesting
In the CSRS, employees are vested after five years. The GAO report
demonstrates that an overwhelming number of private-sector pension plans
provide for "cliff" vesting after 10 years. A small percentage of plans
provide for either "cliff" vesting after a period other than 10 years or
graduated vesting. The Committee should be aware that the five-year vesting
feature of the defined benefit portion of the Ford/Dakar plan is not the
prevalent practice in the private sector. In the absence of any evidence
showing that vesting rules should differ for the private sector and the
federal government, the new federal system should align itself more closely
with the typical private practice.
CONCLUSION
Our Nation's private-sector pension system provides an ideal model for
Congress to use in developing a pension system for newly hired federal
employees. The mandatory inclusion of federal employees in the Social
Security system places them in the same position as private-sector employees
and adds further credence to the notion that a private-sector type of
retirement program should be developed.
Some features of the Ford/Dakar plan resemble common features of
private-sector retirement plans. The Chamber notes and appreciates that
fact. In other respects, the Chamber notes that features of the proposal
differ from common industry practices and encourages the Committee to bring
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the bill closer to conformity with private-sector practices.
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Congress has before it a difficult challenge -- but also a unique
opportunity -- to fashion a retirement system for newly hired workers. The
challenge is to draft a balanced and reasonably priced system. The
opportunity, however, is to create an entirely new system for post-1983 hired
federal employees and, by emulating common features of the private-sector
system, avoid some of the troublesome aspects of the CSRS. I hope my comments
will assist you in meeting this challenge and opportunity.
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