BENEFIT LEVELS OF NONFEDERAL RETIREMENT PROGRAMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00530R000400730006-7
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 34
• Document Creation Date: December 22, 2016
• Document Release Date: August 27, 2012
• Sequence Number: 6
• Publication Date: February 26, 1985
• Content Type: REPORT

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eneral Accounting Office
Benefit Levels Of Nonfedera
Retirement Programs
_____.
his report estimates the levels of benefits
available from nonfederal retirement pro-
grams using selected studies and data
bases. Social security, pension plan, and
capital accumulation plan benefits are
shown for different categories of age and
years of service and at varying final salary
levels. The purpose of the report is to assist
the Congress in its efforts to design a new
retirement program for federal employees
covered by social security.
~~,~~ D ST,9 ~~`
J ~~,_ J.
n ... u:
2 j . ?~.1 u
GAO/GGD-85-30
FEBRUARY 26, 1985
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UNITED STATES GENERAL ACCOUNTING OFFICE
WAaHINGTON. D.C. lA64t
OQi~IlAL OOVtflNM~KT
pV1~lON
The Honorable William V. Roth, Jr.
Chairman, Committee on Governmental Affairs
United States Senate
The Honorable Ted Stevens
Chairman, Subcommittee on Civil Service,
Post Office, and General Services
Committee on Governmental Affairs
United States Senate
The Honorable Thomas F. Eagleton
Ranking Minority Member
Committee on Governmental Affairs
United States Senate
The Honorable Jeff Bingaman
Ranking Minority Member
Subcommittee on .Civil Service,
Post Office, and General Services
Committee on Governmental Affairs
United States Senate
This is our second report prepared in response to your
joint request of August 5, 1983, which asked for information on
retirement programs in the nonfederal sector. Our earlier
report, entitled Features of Nonfederal Retirement Programs
(GAO/OCG-84-2, June 26, 1984), depicted the prevailing features
of nonfederal retirement programs as shown by selected studies
and/or data bases. This report supplements that effort by esti-
mating the levels of benefits at retirement that selected non-
federal programs provide to employees at various ages, years of
service, and salary levels. It uses the same six data sources as
used in our earlier report. (See pp. 1 and 2 of appendix I for a
description of them.) Post-retirement adjustments are addressed
in our earlier report. We did not assess survivor benefit or tax
issues in our analysis nor make comparisons with benefit levels
of the civil service retirement system.
The details of our analysis are included in appendix I to
this letter, along with a description of the sources and method-
ology we used in making the analysis.
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B-214421
Benefit formulas vary considerably among nonfederal pension
plans. Not only do the benefit accrual rates differ, but the
approaches to recognizing social security benefits and the early
retirement reduction provisions differ from plan to plan. Thus,
we could not identify one formula as being representative of all
plans. Instead, we calculated the benefit amounts produced by
the formulas as a percentage of final salary. In this manner,
the average benefit levels provided by the plans in each study
could be determined.
Several observations can be made from our work that the
Congress should find useful in designing the new retirement
program to supplement social security benefits for federal
employees hired after December 31, 1983.
--There was little difference in the average pension plan
benefits available to retirees at age 65 and age 62 when
years of service and salary levels were equal.
--Private sector pension plan benefits for employees
retiring at age 55 with 30 years of service ranged from 72
to 84 percent of the benefits they would have received if
they had been age 62 with the same years of service and
salary levels. This reflects the fact that most plans
reduce accrued benefit amounts when employees retire at
age 55. Similarly, in state government pension plans, the
age 55 benefits were, on the average, 85 percent of the
benefit amounts at age 62, with the same years of service
and salary levels.
--State government pension plans provided higher average
benefits than private sector pension plans at virtually
all ages, years of service, and salary levels.
--The capital accumulation plan component of a typical
private sector retirement program can add substantial
amounts of retirement benefits to participating
employees. The most common of these, a thrift plan,
generally provides for a 50 percent employer match of
employee contributions of up to 6 percent of pay. p,
30-year career employee who contributes to the plan during
that entire period at just one-half the 6 percent rate and
earning 7.5 percent interest can supplement his/her
pension and social security benefits by 16 percent or more
of final annual salary. States generally did not match
employee contributions in their plans, therefore, we did
not calculate any thrift plan benefits for them. Thus,
combined benefits for state employees were less than those
received by private sector employees who participate in
thrift plans.
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The following chart illustrates the average benefit levels
in the nonfederal retirement programs we studied for employees
retiring on January 1, 1983.1 The levels depict the average
rates as a percent of a $30,000 final salary (which is approxi-
mately the average preretirement salary of federal employees)~for
individuals retiring with 30 years of service (approximate aver-
age career length) at ages 65, 62, and 55 (ages when full or
partial social security benefits are available and earliest age
when pension benefits are generally available). The benefits are
those available from pension plans, social security, and thrift
plans. The thrift plan amounts assume the employee contributed 3
percent of pay during all working years with a 50-percent match-
ing contribution by the employer and interest earnings of 7.5
percent a year. This illustration assumes employee contributions
of 3 percent of pay-since studies have shown that employees often
contribute less than the maximum amount allowed by the plan for
employer matching..
1This date was used because the pension data bases were for
1982, the most current data at the time of our review.
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Benefits As A Percent Of Final Salary Of $30,000
Age 65 and 30 Age 62 and 30 Age 55 and 30
ears' service years' service years' service
Pension Tota Pension Total Pension Total
Sources Plan benefits plan benefits plan benefits*
Bureau
31.3
79.2
29.3
68.5
21.6
37
6
of Labor
Statistics
Bankers
31.2
79.1
30.5
69.7
23.4
.
39.4
Trust
Hay
34.7
82.6
32.9
72.1
24.5
40.5
Hewitt
32.6
80.5
31.5
70.7
22.9
38.9
Wyatt
33.8
81.7
34.1
73.3
27.9
43.9
State**
43.5
71.7
42.3
63.2
36.1
36.1
*Does not include social security benefits of 19.4 percent which
are available at age 62.
**Does not include thrift plan benefits.
As requested by your offices, we did not obtain comments on
this report. As arranged with your offices, copies are being
sent to the Office of Management and Budget, the Office of
Personnel Management, and other interested parties.
illiam J. Anderson
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APPENDIX I APPENDIX I
BENEFIT LEVELS OF
NONFEDERAL RETIREMENT PROGRAMS
OBJECTIVE, SCOPE, AND METHODOLOGY
The objective of this review was to estimate the average
benefit amounts that selected nonfederal retirement programs
would provide to employees at various ages, years of service, and
salary levels. The purpose of our work was to assist the
Congress in designing a new retirement program for federal
employees who were covered by social security on January 1, 1984.
The sources we used in our analyses were:
--Department of Labor's Bureau of Labor Statistics (BLS),
Employee Benefits in Medium and Large Firms and the data
bases supporting the report. This report is prepared
annually by BLS on the basis of its analysis of retirement
and other benefit programs in the private sector estab-
lishments used in the federal pay comparability process
for salaried employees. Therefore, it is not necessarily
representative of the entire private sector. We used the
1982 report which covered a survey universe of about 21
million employees, of whom an estimated 84 percent, or 17
million employees, participated in pension plans. A total
of 976 pension plans was included in the BLS survey. The
BLS survey universe included establishments employing as
few as 50, 100, or 250 full-time employees, depending on
the industry surveyed.
--The Bankers Trust Company, Cor orate Pension Plan
Study--A Guide for the 1980s. This stu y inc uded 325
retirement plans in 240 companies, of which the Bankers
Trust Company characterized 216 as "large" and 24 as
"small." Retirement plans in the 240 companies covered
8.2 million employees.
--Hay Associates, 1983 Hay-Huggins Noncash Compensation
Comparison. This study included 781 private sector
retirement plans. The study report did not indicate the
number of employees covered by the plans, but Hay
Associates representatives said that about one-third of
the plans surveyed covered 1,000 or fewer employees.
--Hewitt Associates, Salaried Employee Benefits Provided by
Major U.S. Employers in 1982. This report covered 678
private sector retirement plans. The report identified
the companies involved but gave no information on the
number of employees in the plans.
1
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--.~
--The Wyatt Company, A Survey of Retirement, Thrift, and
Profit-Sharing Plans Covering Salaried Employees of 50
Large U.S. Industrial Companies as of January 1, 1983.
The report did not contain information on the number of
employees in the plans.
--The National Association of State Retirement Plan
Administrators, September 30, 1982, Survey of State
Retirement Systems. This survey included all states. We
used the survey data on general employees (about 2.5
million state employees and about 1.1 million local
government employees who participate in the various state
plans) and did not use the survey data on other employees
such as police,~firefighters, and teachers who are covered
by special provisions.
We used these same sources in preparing our earlier report--
Features of Nonfederal Retirement Programs (GAO/OCG-84-2, June
26, 1984). The studies focused on retirement programs for
salaried employees. Since all the studies did not identify their
survey participants, we could not determine the extent to which
duplication in participant coverage might exist. Also, we did
not verify the accuracy of the data. The studies were not
designed to be statistically representative of all nonfederal
retirement programs. However, their scope, ranging from
companies with as few as 50 employees to those with over 100,000
employees, and the similarities of features in the private sector
plans included in the studies make them an acceptable data base
for depicting benefits available in the nonfederal sector.
As discussed in our earlier report, the data sources showed
that retirement programs in the nonfederal sector typically
consisted of three parts--social security, a pension plan, and
capital accumulation plans.
Social security covers most employment in the United
States. It is based on the principle that the workers of the
nation should be assured that a basic level of family income will
continue when earnings are impaired by disability, old age, or
death. Its benefit formula provides wage-related benefits, but
replacement rates (the ratio of benefits to earnings) are greater
for low-wage earners than for high-wage earners.
Social security is financed by a payroll tax levied on
covered workers and their employers. In 1985, workers will
contribute 5.7 percent of their first $39,600 of wages (the
"maximum covered earnings"), and a matching amount will be paid
by their employers.
2
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Employer pension plans generally use social security as a
base and provide supplementary benefits that are tailored to the
special circumstances of the covered group. Most salaried
employees are in pension plans which consider such factors as
salary level, age, and years of service to compute benefit
amounts.
A pension plan is integrated with social security to the
extent that it recognizes social security in establishing benefit
levels. Because social security benefits as a percent of salary
decrease as income levels increase, integrated plans attempt to
compensate for this decrease. The studies showed that private
sector pension plans were usually integrated with social
security, whereas, state government plans typically used an "add
on" approach and paid pension benefits without regard to social
security amounts. The studies also showed that few private
sector employers require employees to contribute toward the cost
of their pension plan benefits, while most state government
pension plans require employee contributions.
Capital accumulation plans are generally supplements to
basic pension plans. A wide variety of capital accumulation
plans exist, including employee stock-ownership plans, profit-
sharing plans, thrift (savings) plans, and deferred compensation
plans. Some employers sponsor more than one type of plan.
Thrift plans are the most prevalent kind of capital accumu-
lation plans in the private sector. Using such plans, employers
help employees save f_or retirement and other needs by matching
some portion of the employees' contributions to the plan.
According to the studies of private sector plans, the most common
arrangement provided for the employer to match 50 percent of
employee contributions to the plan. Employee contributions of up
to 6 percent of pay were subject to employer matching in most
plans. By contrast, capital accumulation plans in state retire-
ment programs generally do not provide for a matching employer
contribution.
Our calculation of the average benefit amounts covered
employees could receive from each element of the nonfederal
retirement programs studied was based on the assumption that
employees retired on January 1, 1983. Because benefit amounts
are related to salary levels, we developed salary histories
resulting in final year earnings of $10,000, $20,000, $30,000,
$40,000, and $50,000 in order to illustrate benefit levels in the
plans. The salary histories were developed based on changes in
national average earnings between 1953 and 1982, as published by
the Social Security Administration. We then determined for
illustration the benefits that would be paid to employees
retiring at those salary levels at six different age and service
combinations:
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APPENDIX I
Age
65
and
30
years
of
service.
APPENDIX I
Age
65
and
20
years
of
service.
Age
62
and
30
years
of
service.
Age
62
and
20
years
of
service.
Age
55
and
30
years
of
service.
Age
55
and
10
years
of
service.
In calculating social security benefit amounts, we followed
the formulas prescribed by the Social Security Act. In making
these calculations, we assumed that the employees had no earnings
before or after the job from which they were retiring.
To calculate plan benefits, we used all plans that based
benefits on a percent of final average salary except for the
plans in Hay Associate's study. (The Hay Associates study did
not identify the plan formulas, so we contracted with Hay to
provide the benefit amounts.) We also included 42 states whose
employees were covered by social security and based benefits on
final salary. The number of plans we used from each data source
and the benefit levels we calculated are shown in appendix II.
We did not attempt to identify the specific thrift plan, if
any, sponsored by each employer included in the studies. Rather,
for illustration purposes, we calculated the sums that would be
available at time of retirement under the typical plan found in
the private sector (50 percent employer match of employee contri-
butions of up to 6 percent of pay). In calculating the sums, we
assumed the plan earned a rate of return on investments of 7.5
percent over the employee's period of employment. This is the
same rate guaranteed on series EE government bonds when held for
5 years. In recognition of the variability of interest rates, we
also calculated the sums that would be available using a rate 1.5
percentage points above and below the 7.5 percent rate to
illustrate the effect of different interest rates on benefit
levels.
We converted the available sums from the thrift plans at
retirement to annual annuity amounts using actuarial factors from
the 1983 Group Annuity Mortality Tables for males ages 55, 62,
and 65 and a 7.5 percent discount rate. Annuity amounts for
females at the same ages would be approximately 8 percent, 11
percent, and 12.5 percent less, respectively, than for males.
Moreover, the annuities for both sexes, if "purchased" from a
financial institution or insurance company might cost somewhat
more than the sums we calculated due to administrative expenses
and profit margins.
SOCIAL SECURITY BENEFITS
The basic element of virtually all nonfederal retirement
programs is social security. As shown in the following schedule,
4
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APPENDIX I
social security replaces a much higher percentage of final salary
for low-wage earners than for those at the higher salary levels.
Social Security Benefit Levels
Percent of final salar
10,000 $20,000 30,000 40,000 $50,000
Age 65, 30 years' service 51.4 40.2 28.2 21.2 17.0
Age 65, 20 years' service 46.1 35.4 26.6 20.0 16.0
Age 62, 30 years' service 38.4 29.6 20.9 15.7 12.6
Age 62, 20 years' service 32.0 24.0 17.8 13.5 10.8
Age 55, 30 years' service* 36.2 27.0 19.4 14.6 11.7
Age 55, 10 years' service* 20.0 14.6 11.1 8.4 6.7
*Available at age 62 based upon earnings through age 55
PENSION PLAN BENEFITS
The second element common to most nonfederal retirement
programs is a pension plan. There was little difference in the
average benefit available to retirees at age 65 and age 62 when
years of service and salary levels were the same. Our analysis
also showed state government pension plans provide higher average
benefits in almost all instances because unlike most private
sector plans, they do not require reductions to recognize social
security benefits. Details on benefit levels on which the
following graphs are based are shown in appendix II.
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PLAN BENEFIT AS 5~6 OF FINAL SALARY
Aqe 63 - 30 Yearn Service
T-
X20,000 '30,000 ~40,Ou0 (50,000
FINAL SALAR Y
Age 65 - 20 Years Service
=20,000 230,000 'j 40,000
Fi NAL SALARY
Q BLS Plans
+ Bankers Trust Plans
~ Hay Plans
~ Hewitt Plans
X Wyatt Plans
p State Plans
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APPENDIX I
PLAN BENEFIT AS % OF FINAL SALARY
A?~! 52 - 3r1 Years Service
2~
t ~ o,ooo t2o,oo0 ;so,ooo X40,000
FINAL SALARY
~qe 62 - 2Q Ye~rs~ Service
15
310,000
320,000 330,000
FINAL SALPRY
^ BLS Plans
+ Bankers Trust Plans
p Hay Plans
r
30,000
3'0,004
O Hewitt Plans
X Wyatt Plans
p State Plans
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The graphs on the following page show benefits at age 55
with 30 years' service and 10 years' service, the earliest age
when retirement benefits are generally available.
8
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APPENDIX I
PLAN BENEFIT AS ~5 OF FINAL SALARY
%?qe ~3 - 30 '~ e~~rs' Service
~~7
3B
36
34
~ 32
30
t~~-
11 0,000
f t 0,000 120,000 130,000 1.0,000 30,000
FINAL SALARY
X40,000
Aqe 'SS - 10 Years SCrnce
r
320.000 330,000
FI NAI. SALARY
^ BLS Plans
+ Bankers Trust Pla^s
Q Hay Plans
p Hewitt Plans
x Wyatt Plans
p State P1~ns
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APPENDIX I
APPENDIX I
We found that the average private pension plan benefits for
employees retiring at age 55 with 30 years of service ranged from
72 to 84 percent of the benefits they would have received at age
62 with the same service and salary. Similarly, in state
government plans, the age 55 benefits were, on the average, 85
percent of the benefit amounts at age 62. The following schedule
shows the above analysis.
Percent Of Age 62 Benefits
Available At Awe 55
(30 years' service)
Final salar
Sources $10_ ,Upp $20,000 30,000 $40,000$50,000
BLS 76 75 74 75 73
Bankers
Trust 78 77 77 76 76
Hay 79 77 74 73 73
Hewitt 75 74 73 72
72
Wyatt 84 83 82 81 81
States 85 85 85 85 85
THRIFT PLANS
While most thrift plans in the private sector provided for
employer matching of at least 50 percent of employee
contributions up to 6 percent of pay, surveys2 have shown that
employees often contribute (participate) at a lower level.
Therefore, to illustrate the potential benefits available from
these plans, we calculated benefits at both half participation (3
percent employee contribution) and at full participation. We
also computed the benefit levels assuming a 6.0, 7.5, and 9.0
percent rate of return on investments to recognize the
variability of interest rates.
The benefits from these plans vary by the number of years of
participation and age at retirement. The schedule on p. 11 shows
25alaried Em to ee Benefits Provided b Ma'or U.S. Em to ers in
1983, Hewitt Associates; and 1984 Survey of Flexible Com ensa
tion Practices of Nearly 800 U.S. Employees, Massachusetts
Mutual Life Insurance Company.
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APPENDIX I
the benefit levels available to male retirees at varying
retirement ages and years of service.
Thrift Plan
Benefit Levels
3$ Employee Contribution*
Interest. 30 years of service
rate Age 55 Age 62 Age 65
6.0 11.1 1-2.9 14.1
7.5 16.0 18.3 19.7
9.0 23.0 25.8 27.6
20 years of service
6.0 7.0 8.2 8.9
7.5 9.3 10.6 11.4
9.0 12.2 13.7 14.7
10 years of service
6.0 3.6 4.2 4.6
7.5 4.5 5.1 5.5
9.0 5.4 6.1 6.5
*Benefit levels at a 6 percent employee
contribution rate are double these
amounts.
BENEFIT LEVELS FROM
TOTAL RETIREMENT PROGRAM
To show the total retirement benefits available to private
sector employees, we combined benefits from social security,
pension plan, and a capital accumulation (thrift) plan. For
retirees in state programs, we combined only social security and
pension plan benefits because states generally did not match
employee contributions and we have no data on levels of employee
participation. Because employees do not always participate at
the full amount matched by employers, benefits from the thrift
plan are calculated on half participation (3 percent employee
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contribution) and 7.5 percent earnings on investments. The
graphs on the following pages show total benefits at various
retirement ages and years of service. The graphs for age 55 show
benefit levels at age 62 when social security becomes available
as well as the levels available at age 55 without social
security. Details on the levels on which the following graphs
are based are shown in appendix III.
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,~pP?:3DIX I
COMBINED BENEFITS AS '~ OF FINAL SALARY
q,,~e Fg - .~Q ~rea~z' ~.d~.,i,,e
5 ~J
~ I n,Op~~ '~20,~~U0 =30,000 X40,000 550,000
FINAL SALARY
?:,~e g'3 - c0 Ye~rs~ S~rnnce
^ BLS Plans
+ Bankers Trust Plans
p Hay Plans
p Hewitt Plans
X Wyatt Plans
p State Plans
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COMBINED BENEFITS AS ~5 OF FINAL SALARY
?:qe 52 - 30 Y~ears~ ~er?: ~ ~-
~~
30
~ ~ 0,000 ;20,000 1i 30,000 '~a0,000 ;!~C,Onn
FINAL S!~LARY
'^~ M
ti 2
r 11 `~
.~qe 62 - 20 "r'e~]r3~ Serve~t
~2
~ ~J
38
~7
3~
~ t 0,0! i0 320,000
~ ~- i
~30,~~Q~J 1j~0,000 I